Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
If you’re struggling to get onto the property ladder, the government’s Help to Buy scheme could help. This guide explains how it works.
The government-backed Help to Buy scheme helps first-time buyers get onto the property ladder even if they don’t have a large deposit.
The new equity loan scheme was launched in England on 1 April 2021 and is open for applications until 31 March 2023. The scheme gives you an equity loan from the government to buy a new build home. The loan is interest-free for five years.
To buy a home, you need to have saved a deposit of at least 5% of the purchase price. The equity loan from the government then covers up to 20% of the price, while a Help to Buy mortgage covers the rest.
For example, if you bought a home for £200,000:
You’d pay a 5% deposit of £10,000
You’d get a 20% equity loan of £40,000
You’d get a mortgage for 75% or £150,000
In London, the equity loan can cover up to 40% instead of just 20%.
You need to repay the amount you borrow from the government within 25 years or when you sell the house, but you can choose to pay it back before then.
If you live in Wales, the scheme works in the same way but with a maximum purchase price of £250,000
In Scotland, the Affordable New Build Scheme has now closed, but the Smaller Developer scheme is still open until the end of the 2021/2022 financial year. This helps first-time buyers and existing homeowners with up to 15% of the purchase price of a new build home
In Northern Ireland, there is no Help to Buy scheme, but you can buy a home worth up to £175,000 through its Co-Ownership scheme
To be eligible for Help to Buy, you must be over 18, and it can only be used:
To buy your first home (not a second property or one you intend to rent out)
With a repayment mortgage, not an interest-only one
In England, you can only use the scheme to buy a new-build home, and you must buy it from a house builder registered with the Homes and Communities Agency.
For the new 2021-2023 scheme, maximum house prices are imposed depending on the region in which you want to buy your new-build home. Here are the price caps ordered from highest to lowest:
South East: £437,600
East of England: £407,400
South West: £349,000
East Midlands: £261,900
West Midlands: £255,600
Yorkshire and The Humber: £228,100
North West: £224,400
North East: £186,100
Help to Buy mortgages come with all the same costs as any other mortgage, but you also have to pay back your equity loan and its fees.
You do not pay back the exact amount you borrowed because your equity loan is calculated as a percentage of your property’s value.
For example, if you bought a property for £200,000, a 20% equity loan would come to £40,000. If you sold your home later for £220,000, you would have to pay back 20% of this to the government, which would come to £44,000.
For the first five years, this loan is interest-free
From the sixth year, you will be charged interest until you have paid back the loan
Interest will start at 1.75% of the amount you owe and is charged each year
The rate will increase every year in April by the same amount as the Consumer Price Index (CPI) measure of inflation plus 2%
You’ll also need to pay a monthly management fee of £1 when you take out the loan until you pay it off. You can pay this by monthly direct debit
You can buy a home with a smaller deposit
You may be able to get on the property ladder sooner
Your equity loan will reduce your loan-to-value and give you access to more competitive mortgage rates
Your loan is interest-free for five years
Your loan will become more expensive over time
If your home goes up in value, you’ll need to repay a larger sum
Not all lenders offer Help to Buy mortgages
You can only buy a new build home
You can only purchase a property up to a set price
You can contact your local Help to Buy agent to:
Find a property
Check your eligibility
Start your application
Find out if you will be accepted for an equity loan
You will also need to find a Help to Buy mortgage to take out alongside your equity loan.
Help to Buy is part of a legal agreement, so any changes to your policy will need to be agreed upon by everyone named on the mortgage and your Help to Buy agent.
You also have to pay any administration fees charged by the scheme and your lender. Check with them how much this will cost.
You can apply for Help to Buy and a joint mortgage with a partner or another person.
If one person moves out, for example, if you split up, you need to contact:
Your lender to remove one of you from the mortgage
Your Help to Buy agent
You will then need to draw up a legal document called a Deed of Release, which formally removes one of you from the scheme and the property.
You can add someone to your mortgage and Help to Buy agreement, but you need permission from your Help to Buy agent and lender.
You still need to keep paying your mortgage and any Help to Buy fees, even if your income goes down. If you’re struggling, contact your lender and Help to Buy agent as soon as possible to discuss your options.
If you bought your home jointly with someone else, ownership of the property can pass to:
The surviving co-owner, who then owns the home in full
Another person named in your will, who could inherit your share in the property
If you own your property by yourself, your share in it is passed to the person named as the beneficiary in your will. They will also be responsible for repaying the rest of the equity loan. They can choose to sell your home or keep it if they can afford the mortgage and loan payments.
This is up to you to decide, but it’s important to weigh up the pros and cons first so that you’re making an informed decision.
If you decide against using Help to Buy, you may still be able to buy a home with a small or no deposit.
The equity loan scheme can be used in London, and the loan can cover 40% of the purchase price instead of 20%.
You can reserve a home before it is built and use the Help to Buy scheme. Make sure your mortgage offer is still valid when the sale goes through.
A mortgage guarantee scheme operating under the Help to Buy banner closed in 2016.
However, a new mortgage guarantee scheme was introduced in England in 2021, designed to encourage more banks to offer 95% mortgages to those who can only stump up a deposit of 5%. Under the terms of the scheme, the government guarantees the portion of the mortgage over 80%, reducing the risk for lenders.
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.
Compare all mortgages that are available with the Help to Buy equity loan or mortgage guarantee scheme so you could buy a home with a smaller deposit.Read More