Some good news to start 2021 – The Help to Buy Equity Loan for First Time Buyers
The Government has released a new Help to Buy scheme for New Build Properties to help first time buyers. So, what do you need to qualify and how does it work?
- You need to be a first-time buyer– therefore, you should never have owned a home in the UK or overseas before. If you are buying as a couple, neither of you should have owned a property, in the UK or overseas.
- It has to a new build property –the property must be a new build with a home builder who is registered with the Help to Buy Equity Scheme.
- You need to put down at least 5% deposit – You must contribute at least 5% deposit towards your new home. You can of course put down more deposit and still take advantage of the loan, so long as your mortgage is not less than 25% of the purchase price.
- Equity loans of between 5% and 20% (40% in London) –The equity loan can be between 5% and 20% of the purchase price of the property. If you live in London the equity loan is between 5% and 40% of the purchase price of the property.
- Maximum Property Price Cap – there is a maximum property price cap depending on where you intend to live:
- London: £600,000
- South East: £437,600
- East of England: £407,400
- South West: £349,000
- East Midlands: £261,900
- West Midlands: £255,600
- Yorkshire and The Humber: £228,100
- North West: £224,400
- North East: £186,100
- No interest paid on the loan in the first 5 years, no interest shall accrue on the Help to Buy Equity Loan in the first 5 years. There is however an administration charge of £1 per month.
- Interest starts in year 6 – Interest is calculated in the 6th year at 1.75%, thereafter interest rates go up each year in April by the Consumer Price Index (CPI), plus 2%. At year 7 the rate will be calculated at 1.75% (year 6 rate) + 0.08% (1.75% x (2.5% CPI + 2%) 1.83% and in year 1.83% (year 7 rate) + 0.08% (1.83% x (2.5% CPI + 2%) 1.91%. This will continue until the loan is repaid in full. This may be reasonable for the first 10 years. However, if you do not repay your loan in the first 10 years or before the end of your mortgage term, the equity loan could end up costing you more than a standard mortgage. This is especially true when coupled with the increase in house prices, the loan might cost you considerably more than simply taking a mortgage for the loan amount.
- You only pay off the interest on the equity loan – you only pay the interest on the loan and no capital is repaid each month like it would with a repayment loan or mortgage.
- You can pay off all or part of the Help to Buy Equity Loan at any time –However, any part payments towards the loan need to be at least 10% of the value of the property at the time the loan is repaid. This could mean that you will need to obtain a surveyor’s valuation of the property if you intend to pay all or part of your loan without selling the property.
- When does the loan have to be repaid– the term of the loan is usually 25 years, the loan will come to an end at the end of the 25 year term or the end of the repayment term of your mortgage. The loan is also repaid if you sell your home or if you breach the terms of the loan agreement.
- How is the repayment amount calculated? The loan settlement amount is calculated based on house price increases and decreases, when to sell or repay the loan. For example, if you purchased your home for £200,000 and your Help to Buy Equity Loan was 20% or £40,0000. If your home valuation at sale was £300,000, your Help to Buy Equity loan repayment would be 20% of the value or £60,000. The same applies if the value of your home decreases. For example, you purchase your home for £200,000, but when you come to sell your home it is now worth £170,000, the 20% Help to Buy Equity Loan repayment would be £34,000, even though your original contribution from the Help to Buy Equity Loan was £40,000.
- What about a mortgage? You will need a mortgage of at least 25% of the purchase price of the home. The benefit of having the Help to Buy Loan as well as your deposit is that the lower the Loan to Value the better the interest rate as opposed to taking a 95% mortgage. However, you may find that the mortgage lenders will charge a premium for mortgages where equity loans are being used.
If you would like more information about the Help to Buy Equity Loan, further information can be found at:
At Gaddes Noble, we like to keep up to date with all the latest property news, if you would like to discuss buying a home through the Help to Buy Equity Loan scheme then get in touch, we would be happy to talk things through with you.