Help to Buy - Equity Loan
What is a Help to Buy: Equity Loan?
Under this scheme the government will lend you up to 20% of the cost of your newly built home. You will have to provide the 5% cash deposit, and you will be able to get a 75% mortgage to make up the difference. You can also use your Help to Buy: ISA to fund the cash deposit if you like.
The great thing about the 20% loan from the government is that it is interest free for the first five years of owning your home. For most people this gives them 5 years to increase their household earning potential. (note you will pay a £12 admin charge each year)
It’s available to first time buyers and for those looking to move up the rungs of the property ladder BUT it is only available on New Build Homes up to £600k in value.
What are the benefits of an Equity Loan?
The real benefit of the scheme is reduced mortgage payments, for two reasons:
- You don’t pay interest on the money you borrow through the scheme for a period of five years, meaning your monthly repayments are lower than if you paid a 5% cash deposit and needed to borrow the full 95% yourself. In addition;
- The lower the percentage you need to borrow on a mortgage, the lower the interest rates tend to be. As a market snapshot on the 14th August 2019; a two year fixed mortgage deal of a 95% mortgage on a £200k property would get a mortgage rate of around 2.74%. As you would be able to get a mortgage with 75% LTV using the scheme, a 75% mortgage on a £200k property would attract a mortgage rate of around 1.54%. As you can see, the rates are much lower. (Note: These rates do not reflect the market as a whole or the market as it stands today, it is simply here to demonstrate how the mortgage rates change with lower loan to value percentage on a particular lender.)
Our mortgage advisers are on hand to scour the market for you and find a deal that suits you, your circumstances and your budget.
For example a home with a £200k purchase price
- Cash deposit you provide: £10K
- Equity Loan from Government: £40k
- Mortgage needed: £150k
How do I repay the Full Equity Loan?
For most people the loan gets repaid when the property sells at some point in the future. Be advised that the loan will be repaid at the percentage property price you initially borrowed. If you opted to borrow the full 20% initially, then the government will take back 20% of the future resale value.
You can repay the Help to Buy: Equity Loan outside of a property sale, but it must be a minimum repayment of 10% of the property’s current value.
What happens after the five year interest free period?
In year 6 you start paying interest on the loan. Note you will only ever pay interest on the loan, you will not pay anything off the capital of the loan meaning the amount you have borrowed doesn’t reduce. When you come to sell your property in the future the minimum you will owe the government is the amount you borrowed, regardless of how many interest payments you might have made. However, this could be higher if the value of your property has increased as mentioned previously.
In year six the interest fee percentage that is applied is 1.75%, which is a fair interest rate. The rate increases each year after that and is set 1% above the Retail Prices Index (RPI) measure of inflation. Meaning you could see your payments rise significantly in years 6 onward
What this means for homeowners under the scheme is that you must be in a position to afford the additional monthly fee in year 6 onward, or have sold the property and repaid the equity loan in full. On a £200k property this increase in monthly outgoings would be around £60 in Equity Loan Payments. However, if you had maxed out the borrowing under this scheme and took the maximum £120k Equity Loan, this would be an additional £176 per month you would need to afford.
Equity Loan Restrictions
- You cannot sublet the home you purchase through this scheme
- You also will not be able to use this scheme in conjunction with a part exchange on a previous property (where applicable)
- You must not own any property at the time you buy your new home with a Help to Buy: Equity Loan.
- This scheme is available in England only, and there are different criteria for London residents. We won’t go into detail here as all our clients are based in Yorkshire.
How to Apply for an Equity Loan?
The Help to Buy: Equity Scheme is run by Help to Buy Agents that are appointed by the government. They can guide you through the purchase from general information through to actually handling the application. For Preston Baker clients the agent responsible for Yorkshire can be found at this website https://www.helptobuyagent1.org.uk/
The government will lend you a percentage of your home's value so your deposit and mortgage are smaller - but it's only available on new builds.