If you’re struggling to afford your first home, then Help to Buy could be the financial lifeline you need. Help to Buy is made up of three different schemes: the Equity Loan, the ISA, and Shared Ownership. These have allowed a huge number of people who would otherwise be priced out of the market to become homeowners, and have been hailed by many people as the solution to the housing crisis. But how does Help to Buy work, and are you eligible to apply?
In this guide, we’ll tell you everything you need to know about each Help to Buy scheme. We’ll cover:
- What is the Help to Buy Equity Loan?
- What is a Help to Buy ISA?
- What is the Help to Buy Shared Ownership scheme?
- When does Help to Buy end?
What is the Help to Buy Equity Loan?
The Help to Buy Equity Loan is a government scheme designed to help first-time buyers and house movers who would otherwise struggle to buy a home. It was introduced in 2013, with the intention of helping buyers get on the property ladder with only a 5% deposit.
When you use the Help to Buy Equity Loan, the government lends you as much as 20% of the cost of a new-build home, meaning you’ll only need a 75% mortgage and a 5% deposit to cover the rest of the purchase. You’ll need to pay interest on the portion that the government lends to you, but not until you’ve owned your home for five years.
Without the Equity Loan, buyers need a much higher deposit in order to be accepted for a mortgage: usually around 10–20%. On the open market, the average deposit paid by first-time buyers in the UK is 16% of the purchase price, or an average figure of £32,899.
Who can get the Help to Buy Equity Loan?
Help to Buy Equity Loans are available for both first-time buyers and those looking to move to a new-build home.
If you already own a home, you must plan to sell it when you move in order to qualify. The Help to Buy Equity Loan is not available for people who want to buy a second home or want to invest in a buy-to-let property, and you’ll be asked to confirm this before you complete the purchase. If you have holiday homes or rental properties, you won’t qualify for the loan. You also won’t be able to enter a part exchange deal on your old home.
As with any mortgage product, you need to satisfy certain lending eligibility criteria before you can get the Equity Loan, including proving your identity, your income, and credit rating. You can learn more about what you’ll need to do to get a mortgage in our guide.
Please note: The scheme is only available in England. The Scottish Government, Welsh Government, and Northern Ireland Housing Executive all offer schemes which work in a very similar way to Help to Buy.
How does the Help to Buy Equity Loan work?
With the Help to Buy Equity Loan, the government helps first-time buyers and house movers by providing up to 20% of purchase price of their chosen home in the form a loan. This reduces the mortgage they need, effectively reducing both the deposit and the monthly repayments.
Step 1: You pay a 5% deposit.
Step 2: The Government lends you up to 20% of the overall property price. If you live in London, the Government will give you an equity loan for as much as 40%.
Step 3: The remaining 75% (or 55%, for London-dwellers) is then covered by a traditional repayment mortgage.
Step 4: After 5 years living in your home, you’ll begin to pay interest on the portion of the loan provided by the government (in addition to your repayment mortgage). The loan must be paid back after 25 years, when the mortgage ends, or when the house is sold. If you sell your home before the full loan is paid off, then the government will take back the loan from the proceeds of your sale.
How much can I borrow with Help to Buy?
You can use the Help to Buy Equity Loan to help you buy a home with a value up to £600,000.
Bear in mind that lenders will still consider your earnings in relation to how much you want to borrow. So, you can only expect to be offered a loan around four or five times your maximum income.
How much deposit do I need for Help to buy?
To be accepted for a Help to Buy Equity Loan, you need a deposit of at least 5% of the purchase price. But, if you want, you can also pay a higher deposit, which will reduce the percentage needed from the government, or even the overall mortgage itself.
If you can afford to save for a deposit of 10% or more, then buying on the open market using a traditional repayment mortgage may be a better choice for you. This way, you’ll be able to access better rates, and you’ll also have the option of remortgaging sooner if you choose a two- or three-year fixed rate product.
Can you get the Help to Buy Equity Loan on old houses?
You can only use the Help to Buy Equity Loan to purchase a new-build property which is registered under the scheme. This is not to be confused with the Help to Buy ISA, which can be used to help save a deposit for both new and old homes.
How to apply for Help to Buy Equity Loan
To apply for the Equity Loan, you’ll need to start by filling in a form to assess your eligibility for the scheme. You’ll also need to find a registered Help to Buy agent, who will be able to guide you through the process.
Here at The Mortgage Genie, we can guide through the process of applying for a Help to Buy mortgage, including finding the right deal, and advising you on how the long-term affordability of the loan. To learn more about how we can help, call 033 33 44 33 72 to speak to a mortgage advisor today.
How long does a Help to Buy Equity Loan application take?
Help to Buy Equity Loan applications include a lot of documentation, but with the help of a mortgage broker, it shouldn’t take much longer than an ordinary mortgage application. You’ll need to provide supplementary documentation, like proof of ID and your income, so it will help if you have these ready. Take a look at our guide to getting a mortgage to learn more about the sort of things you’ll need.
Can you rent out a Help to Buy property?
The Help to Buy Equity Loan is only intended for those who want to buy a home to live in, meaning you can’t buy a property using the scheme if you plan to let it out. The loan is designed for first-time buyers and those who plan to sell their current residence when before moving, and you’ll need to sign a document declaring this to be true before you complete your purchase.
If you would like to invest in a rental property but need a mortgage to help with the purchase, then you’ll need to take out a buy-to-let mortgage. These products are designed especially for private landlords, and the rules and regulations around buy-to-let mortgages are quite different to ordinary residential mortgages. You can learn more about this in our buy-to-let mortgage guide.
Help to Buy and Stamp Duty
Unless you are a first-time buyer, stamp duty is payable on all house purchases with a value over £125,000. If you are a first-time buyer, then you’ll qualify for stamp duty exemption up to £300,000. These rules apply regardless of whether or not you use a Help to Buy scheme to purchase your home. You can calculate exactly how much stamp duty you’ll need to pay using HMRC’s calculator.
Help to Buy Scheme: the pros and cons of the Equity Loan
The Help to Buy Equity Loan can offer an invaluable financial lifeline to aspiring homeowners who would otherwise be priced out of the market. But are there any downsides?
Here, we’ll run through both the pros and cons of the Help to Buy Equity Loan, to help you get a better idea of whether it could be the right type of mortgage for you.
The pros of the Help to Buy Equity Loan:
- You can receive a loan to cover 20–40% of the property value.
- You only need to get a 55–75% mortgage from a lender, which reduces your loan-to-value ratio and helps you to access much lower mortgage rates than you normally could with a 5% deposit.
- There’s no interest to pay on the Equity Loan for the first 5 years.
- You can repay all or just part of the loan early if you wish. But, you’ll need to have built up at least a 10% stake of the equity before you can do this.
The cons of the Help to Buy Equity Loan:
- You’ll need to pay interest on the Equity Loan after 5 years. This means you could see a very substantial and sudden increase in your payments once the interest-free period ends.
- The Government will own a stake in your home until you pay back the loan. This means that, if you decide to sell the house, they will take back the same percentage of the sale price that they lent you at the start of the loan, regardless of whether or not the property has risen in value. So, if the value of your home has increased in price, then you may end up paying more back to the government than the original value of the loan.
- You’ll be limited to repayment mortgages.
When weighing up your options, you’ll need to remember that your own personal circumstances and finances play a huge role in determining the right sort of mortgage for you. If you need more help working out which mortgage product will be most suitable, contact our team or call 033 33 44 33 72 to speak to a mortgage advisor today.
What is a Help to Buy ISA?
The Help to Buy ISA is form of savings account in which the government tops up your savings by 25%. It was introduced in 2013 to help first-time buyers save up a deposit to buy a home.
That means, for every £200 you put away, you’ll receive a government bonus of £50. You can earn the bonus on savings from £1,600 to £12,000.
You can claim the bonus as soon as you reach the minimum threshold amount. However, you’ll need to apply for the money through a solicitor or conveyancer, and you should remember the Help to Buy ISA can only be used to purchase property.
Help to Buy ISAs are limited to one account for every first-time buyer, rather than one account per household. That means, if you’re buying with a partner who is also a first-time buyer, you can both open ISAs in your own names and effectively double the potential government bonus to as much £6,000.
How does the Help to Buy ISA work?
Essentially, the Help to Buy ISA is a type of ISA which you use to save up money towards a house deposit. The government then contributes £50 for every £200 you save, which is paid through your solicitor or conveyancer after exchange of contracts.
Step 1: You open a Help to Buy ISA with a bank, building society, or credit union of your choice.
Step 2: You save up, setting aside up to £200 a month and depositing it into your ISA. You can start your savings off by depositing a lump sum up to £1,200.
Step 3: After you have found a property you want to buy, you can claim the bonus. You’ll need to close the ISA before your solicitor can apply for the money: you can usually do this online or in person at your bank or building society. You then pass your closure statement on to your solicitor, who will claim the bonus on your behalf. Don’t wait until completion, as this won’t give you enough time to receive the money.
The bonus is included in the in the funds used to complete the transaction, and you’ll need to have exchanged contracts before you can receive the money. That means that you will not be able to use the money as part of the exchange deposit.
If you’ll be relying on the bonus to cover the cost of the deposit, your solicitor may be able to negotiate a lower percentage for the exchange, providing evidence of the ISA as proof that you’ll be able to cover the rest at completion.
What can the Help to Buy ISA be used for?
The Help to Buy ISA has been specially designed to help people who currently don’t own any property, and who would struggle to afford the deposit for a traditional residential mortgage without financial assistance.
It can only be used to help you cover the cost of a deposit for a home. It can’t be withdrawn and used to cover other expenses, and it cannot be put towards a deposit to buy an overseas property, a buy-to-let property, or a second home. The loan can be used in conjunction with other government property schemes, including the Help to Buy Equity Loan. You can also use it to apply for a traditional mortgage.
This means that if you own any other properties, you will not be eligible for the scheme. The definition of ‘ownership’ extends to properties that you aren’t living in, or which are currently being let out to tenants. If you live with a partner who owns property, then neither of you will be eligible for the scheme.
Who can open a Help to Buy ISA?
As with any mortgage, you’ll need to fulfil a number of eligibility criteria before you’ll be approved for a Help to Buy ISA. To open a Help to Buy ISA, you must:
- be a first-time buyer.
- be over the age of 16.
- have a National Insurance Number.
- be based at a UK address.
- not have another cash ISA open within the same tax year. If you have, you may still be able to open a Help to Buy ISA, as long as you meet the other criteria.
The property you want to buy using your Help to Buy ISA also needs to meet certain eligibility criteria. It must:
- be located in the UK.
- not be valued at more than £250,000. This figure rises to £450,000 in London.
- be the only home you will own.
- be purchased using a mortgage, instead of cash.
- be the only property you intend to own, and you must plan to live there.
What is the Shared Ownership scheme?
The Help to Buy Shared Ownership scheme allows first-time buyers the chance to buy a share of their home, and then pay rent for the remaining share. If you can’t afford a mortgage to cover 100% of the purchase price, then you can use the scheme to buy between 25% and 75% of the value of the property. You then pay rent (usually subsidised) to a housing association to cover the rest.
You can buy bigger shares, or even the entire home, later on when you can afford to do so, in a process known as ‘staircasing’. Once you own 100% of the equity, you’ll no longer be a shared owner and won’t need to pay rent.
Who is eligible for the Shared Ownership scheme?
As with the Help to Buy Equity Loan, you need to fulfil certain eligibility criteria in order to qualify for the Shared Ownership scheme:
- You must be aged 18 or over.
- You must be unable to afford a home on the open market.
- You need to have a maximum household income of £80,000 a year, rising to £90,000 in Greater London.
- You should have a deposit saved to cover your portion of the mortgage.
- You must be a first-time buyer or, if you own a home, you should be in the process of selling.
- You should be able to prove you are not in arrears with your rent or current mortgage.
Which properties are eligible for the scheme?
You can use the Shared Ownership scheme to purchase either a new-build home, or an existing property through a resale programme from housing associations. You won’t be able to use the scheme to buy a home on the open market.
What else should I consider?
Shared Ownership works in a very different way to a traditional mortgage or Help to Buy Equity Loan, and there are a number of terms, conditions, and extra costs you should consider.
- Shared Ownership is always a leasehold purchase. That means you’ll need to pay ground rent and the other associated costs of living in a leasehold property, including service charges if the property is within a block of flats.
- As your name will be on the deeds, you’ll be responsible for maintenance and repairs, just as you would if you owned the property outright. So, even though you’ll be paying rent to live there, you’ll be liable for any repairs.
- Until you own 100% of the equity, there are a number of limitations on how you can sell the property. The housing association may want to buy your home back from you, or advertise it to other Shared Ownership applicants. So, you’ll need to inform them of your decision, and give them the option of buying back the property before you can sell it.
- You can remortgage a Shared Ownership home after the fixed period ends. But, you’ll need to remember that you’ll be limited in terms of what sort of mortgage products you can get, as not all lenders will offer Shared Ownership deals.
If Shared Ownership sounds like the right scheme for you, you’ll need to contact a local Help to Buy agent to apply. You can also learn more on the government portal.
When does Help to Buy end?
The Government has confirmed that it plans to continue the Help to Buy Equity Loan until at least 2021 (gov.uk). The government may decide to extend the scheme after this, so if you have plans to apply, you’ll want to keep an eye on the news for more updates.
The Help to Buy ISA closes on the 30th November 2019. However, you can continue to pay into an ISA and claim the Government bonus until 1st December 2030. So, even if you don’t have plans to buy a home soon, it’s well worth considering opening an ISA if you think you might like to use to the scheme at some point further down the line.
There are currently no plans to discontinue the Help to Buy Shared Ownership scheme.
Now you know all about how the Help to Buy Equity Loan, ISA, and Shared Ownership schemes work, you should have a better idea of which one is right for you. Applying can be a complicated process, so be sure to consult a mortgage broker before you make any decisions.
Our brokers can offer expert advice, and they’ll be there to take you through every step of the process, from filling out your application to transferring the funds. if you’d like to learn more, contact our advisors for a free consultation today.