If you are considering utilising the government Help to Buy scheme in purchasing a home, then it’s important to know the facts so you can make the right decision for you and your circumstances.
Here we share our Top 10 Help to Buy Scheme Pros, but first let’s summarise the basics of the Help to Buy opportunity.
Help to Buy – The Basics
Designed by the government to support individuals who are struggling to get their first foot on the property ladder, they introduced the Help to Buy scheme in March 2013.
- Available for properties up to the value of £600,000
- You must intend to live in the property i.e. you can not sublet or use as a second home
- Available for purchase of new build properties only
- You need at least a 5% deposit
- The government offers you a loan of up to 20%* of the property’s value
- You take a mortgage for the remaining value of the home i.e. if you have a 5% deposit and a 20% equity loan then you will have a 75% mortgage
*Please note that <London buyers can borrow up to 40% of the property price from the government rather than 20%.
Help to Buy Equity Loan
Help to Buy ISA
Help to Buy ISAs are available for those wishing to save for a deposit on their first home. The government will contribute an extra £50 (up to a maximum of £3,000) for every £200 saved. For more information see here. https://www.helptobuy.gov.uk/help-to-buy-isa/how-does-it-work/
Forces Help to Buy
Those in the armed forces can borrow up to 50% of their salary interest-free to use for a deposit (with a maximum loan amount of £25,000, repayable over 10 years). For more information see here. https://www.gov.uk/guidance/forces-help-to-buy
Top 10 Help to Buy Scheme Pros
1. You get yourself on/go up the property ladder
With the help of the government, you can buy a property sooner than you otherwise would, giving you that vitally-important first foot up or onto the property ladder.
2. You are more likely to qualify for a mortgage
The fact that you need as little as 5% deposit of the property’s value means that you are more likely to qualify for a mortgage in the first place.
3. You can save for a deposit quickly
You will be able to save a 5% deposit quicker than a 25% deposit and can therefore buy more swiftly.
4. You get an incredible interest-free loan for 5 years
During the first 5 years, you do not pay any interest on your equity loan, which allows you valuable time to repay the loan.
This effectively is a free loan for a set period of time which is like gold dust! So long as you ensure you pay it back in the time stipulated (interest is applied after 5 years).
Please note: your equity loan rises and falls in line with the value of your property i.e. if your house goes up in value then so will your equity loan and vice versa.
5. You access better mortgage rates
Due to the fact that you have that additional 20% towards your deposit contributed by the government (i.e. 25% total deposit), you have to borrow a smaller Loan to Value than you would if you were applying for a 95% mortgage.
To access competitive rates, you normally need a deposit of anywhere upwards of 25%, so the government’s equity loan enables entry to these appealing mortgage rates.
6. Your equity loan rate is cheap after 5 years
After the 5 years your equity loan is charged at a fee calculated at 1.75% plus 1%. The fee rate increases each year in line with RPI. This is an extremely competitive interest rate which allows buyers additional time to repay their equity loan.
Please note: If inflation were to jump, then the interest rate would also jump and that would increase the loan repayable.
7. You get to buy a brand new property
You don’t have to face any leaky bathrooms, cracks in the wall or breakages the moment you move in. With this Help to Buy scheme, you have to buy new builds and therefore everything in the home is brand new.
Additionally, most properties will also come with a set guarantee/warranty period (e.g. all of our homes come with a 10 year structural guarantee).
8. Your repayment plan will make you a master saver
If you do not repay your equity loan within the 5 years or within a modest set period thereafter, you could see that loan amount spiral out of control. As previously stated, it is therefore extremely important that you put a repayment plan in place.
The good news? It will make you a master at saving.
This means that after you have repaid your equity loan, you will be able to save the money you previously had to pay towards your loan. These savings could be put towards a deposit on a
- Buy to let property
- Anything else that you have been dreaming of!
9. You will hold decent equity in your property after just 5 years
After you have repaid the government loan you will hold a sizeable equity in your property (5% deposit + 20% equity loan = 30% equity).
In other words, if you buy a £200,000 house:-
5% deposit = £10,000
20% equity loan = £40,000
If you paid off your equity loan in 5 years, then you would hold £50,000 equity in your home.
10. Your equity loan amount could decrease
Due to the fact that your equity loan rises and falls in line with the housing market and therefore your property’s value, the loan amount you need to repay may increase or it may decrease.
In other words, if during the 5 years your house falls in value by 7%, then so too will your equity loan decrease by 7%. On the flip side, if the housing market inclines, so too will your equity loan increase.
Before making a decision, speak to a good mortgage broker or independent financial advisor.