The Help-To-Buy scheme set up by the government has two main forms; the Help-To-Buy Equity loan, and the Help-To-Buy Shared ownership. In this blog post we will go through the details of the Help-To-Buy equity loan.
Help-To-Buy Equity Loan
The basics
The basic idea of the Help-To-Buy Equity loan is that you can borrow up to 20% of the value of the home (40% in London) from the government interest free for the first 5 years. There are caps on the value of the property you can buy depending on your region, as listed below:
- East Midlands – £261,900
- East of England – £407,400
- London – £600,000
- North East – £186,100
- North West – £224,400
- South East – £437,600
- South West – £349,000
- West Midlands – £255,600
- Yorkshire and The Humber – £228,100
The first thing to note is that you have to be a first time buyer. This means that you cannot have owned another property previously in any country, and if you are buying with another person they must also be a first time buyer. The second important part is it must be a new build home you are purchasing. Not all new build homes are registered with the scheme so be careful to check this.
To buy the house you have to have a minimum deposit of 5%, (it can be more if you like) then you get a 20% loan from the government to top up that deposit, and apply for a mortgage to fill the 75% gap.
Interest on the loan
The first 5 years of the loan are completely interest free. However, during this period you will have to pay a monthly management fee of £1. If you pay your loan back within these 5 years you will not have to pay any interest at all.
After the five years you have to start paying interest. So in year six the interest rate will start at 1.75%. Every year after that in April the interest rate will increase by the Consumer Prices Index (CPI) measure of inflation and an extra 2%. For example if the CPI was 1.5% then the interest rate in year seven would increase by 3.5% so would be 1.81125%. Breaking down that figure it is 3.5% of the initial 1.75% which is 0.06125, this is then added onto the 1.75% to give the final interest rate in year seven. You will keep paying interest until you pay off your loan in full.
Paying back the loan
You don’t have to pay off your equity loan until you sell your home, or you are at the end of your main mortgage term, whichever comes first. There is an option to pay it off any point before these if you like, remember the longer you wait the more interest you will be paying if its over 5 years!
You don’t have to pay off the full 20% in one go, but the minimum repayment is 10% of the value of the home and it works in 10% intervals. For example if you only had a 15% loan you would have to pay it back in one go. On the other hand if you had a 40% loan you could pay it back in four 10% chunks.
It is important to remember the loan is 20% of the value of your home. If the property value falls then the value of that 20% will decrease and you will have less to pay back. However if the property value rises then you will have a larger loan to pay off. To work out how much you need to repay you need to know the value of your home. This is where Crookshank & Co come in, we can do a Help-To-Buy Valuation on your home to give the government the information they need, to work out how much you need to repay.
The Help-To-Buy Valuations are only considered valid for twelve weeks. It is important not to do them too soon in a selling process, otherwise they may run out before you complete.
More info on Help-To-Buy Equity loans
For more information on Help-To-Buy equity loans visit the government website here.
For more information on Help-To-Buy equity loans from money saving expert click here.
Learn more about the Help-To-Buy Scheme
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