If you’re looking at purchasing a new-build property, you may be eligible for the Government’s Help to Buy: Equity Loan scheme. The scheme has been designed to help first time buyers get onto the property ladder, and existing homeowners looking to move house, who are struggling to save a large enough deposit.
Here’s what you need to know when considering the Help to Buy: Equity Loan scheme.
How does it work?
The scheme allows buyers to take a loan from the Government to boost their deposit. You will need to provide a deposit of at least 5% of the purchase price, and you can borrow up to 20% of the purchase price. You’ll then need to take a mortgage for the remainder, up to 75%.
Do I have to repay it?
The money from the scheme is a loan, and you’ll need to repay it. While you can repay it at any time, you don’t have to repay it until the house is sold or the mortgage is repaid.
When you sell the property or repay the loan, you’ll repay the equity loan, plus a proportion of any increase in value. If you property value has increased by 20% when you sell it or repay, you will repay the loan amount plus 20% of the loan amount. For example, if your equity loan is £20,000 and your property value has increased by 20%, you’ll repay £24,000.
Can I make partial repayments?
You can pay back some of the loan without making a full repayment, but it will need to be a minimum of 10% of the market value of your home.
Will I be charged interest on the equity loan?
During the first five years, you won’t be charged any interest on the Government’s equity loan. In the sixth year, the interest is 1.75%, and from the seventh year onwards this 1.75% rises by RPI plus one percentage point each year.
Can I buy any property using the Government’s Equity Loan scheme?
The scheme is only available for purchasing a new-build property costing up to £600,000.
Is everyone eligible?
The scheme is available to both first time buyers and existing homeowners looking to move.
There are some restrictions on eligibility, such as:
- You must not own another property at the time of purchasing your home with the equity loan
- You will not be able to sub-let the home you have used the equity loan to purchase
- You cannot enter into a part exchange deal on the home you are selling
Why would I consider the Help to Buy: Equity Loan scheme instead of a 95% mortgage?
You may now be wondering why the Help to Buy: Equity Loan scheme is beneficial, as while you will not pay interest on the equity loan during the first five years, the Government will essentially own a 20% share of your property, and this will be reflected when you repay the loan if the value of your home has increased. Another option would be to use your 5% deposit and take a 95% mortgage.
When purchasing a property with a 5% deposit and a 95% mortgage, you are much more susceptible to fluctuations in house prices; because of the risk this carries to the lender, rates on 95% mortgages are generally much more expensive than when you have a larger deposit to put down on the purchase. Through the Help to Buy: Equity Loan scheme, you are now contributing a 25% deposit to the lender (5% from you and 20% from the Government), meaning the lender now only needs to lend you a much more favourable 75%, and therefore interest rates on the mortgage are more attractive.
If you would like to find out more about the Help to Buy: Equity Loan scheme, or which mortgage would be suitable for your circumstances, contact our expert adviser Dee, on