Are you a first-time buyer struggling to save a big deposit? Do you know that you could benefit from the government’s Help to Buy Equity Loan Scheme? As long as you have a 5% deposit, you could be eligible for financial help to buy a new build home.
We know mortgages and loans can get confusing, so this is our guide to help you make sense of it.
What’s a Help to Buy Equity loan?
A Help to Buy Equity Loan is when the government lends you up to 20% of the cost of a newly built home. You only need a 5% cash deposit and a 75% repayment mortgage to pay the rest. (If buying in London, you can get up to a 40% Equity Loan).
For example, in England and Wales:
The new build flat or house you want to buy costs £200,000.
Your deposit 5% £10,000
Equity loan 20% £40,000
Mortgage 75% £150,000
Scotland and Northern Ireland have different Help to Buy Schemes:
Help to Buy (Scotland) Affordable New Build scheme expects you to pay a minimum of 85% of the homes purchase price, with a maximum price of £200,000. Visit www.mygov.scot/help-to-buy/overview/ for more information.
Northern Ireland’s Co-Ownership scheme enables you to buy the share you can afford between 50% and 90%, and the government covers the rest. Visit https://www.co-ownership.org/ for details.
Can I get a Help to Buy Equity loan?
If you’re buying your first home or moving home, you can apply for an equity loan. Equity loans are not available to borrowers who own multiple properties or want to rent or sublet the property.
What can I buy?
You can only buy a property within set price limits, depending on where you live. In England, you can buy a home costing up to £600,000, and in Wales costing up to £300,000.
Do I pay interest on an equity loan?
For the first five years of owning your home, you don’t pay any interest, but each year you will pay a £1 management fee (£12 per year).
In year six, you pay interest at 1.75%.
From year seven the interest fee rises by inflation plus 1% (based on the Retail Prices Index).
However, an important point to note is that the interest you pay, does not go towards paying off your loan.
How do I pay off the equity loan?
You can pay back part or all your loan at any time, but your payment must be a minimum of 10% of the market value of your home at that time. So, if your home increases in value your loan amount will increase too.
When you sell your home or pay off the mortgage, you have to repay the loan plus a share of any increase in the value of your property. For example:
You bought your home for £200,000
You sell for £250,000
You took out a 20% equity loan at £40,000
Your equity loan repayment would be 20% of the sale value, so £50,000
If your home were to drop in value, then when you sell the loan would be a percentage of that final value.
How do I apply for an equity loan?
If you have saved a deposit and checked that you could afford a mortgage, then you are ready to apply for an equity loan.
In England, contact a local Help to Buy agent who will guide you through the options available. https://www.helptobuy.gov.uk/equity-loan/find-helptobuy-agent/
If you are in Wales, download the Help to Buy Buyers Guide https://gov.wales/help-buy-wales/how-apply to help you through the process.
There are many pros and cons of buying a new build house. You can learn about these and get help finding a home in our help to buy zone.