How Does a Help to Buy Equity Loan Work?
22 August 2017
The UK Government funded Help to Buy equity loan is designed to help people who are buying new build houses. Mortgage lenders assume that a new house will be valued at a premium, as people will be willing to pay more for a brand new house, but as soon as it is ‘second-hand’ it may decrease in value. As a result mortgage lenders are rarely willing to lend more than 75% of the property value of a new build house to account for this depreciation.
So if you only have a deposit that is worth 5% to 10% of the property value, you would be unable to buy a new build home. This will limit the market for developers planning to build new houses. To encourage builders to create more new homes, the government set up the Help to Buy scheme so that if you cannot afford the 25% deposit, the government will loan you the difference (up to 20% of the property value or 40% in Greater London).
How Can You Get a Help to Buy Loan?
To get a Help to Buy loan there are eligibility criteria that must be met:
- You cannot own any other property
- The new house must be under a certain value (£600,000 in England, £300,000 in Wales)
- You must be able to afford the mortgage and your income will be assessed to confirm this
- You must provide a minimum 5% deposit
- You must live in the home once you’ve bought it
Most builders will advertise if they have signed up to the scheme. If you have found a home you want to buy under the scheme you will need to look on the government Help to Buy website to find your local Help to Buy agent. If you live in Wales, visit the Help to Buy Wales website.
Your local Help to Buy agent will ask you to complete an application form and provide evidence that you meet the criteria listed above. The agent will then confirm if you have been accepted for a loan and provide you with an offer which will also be sent to your Conveyancer.
It’s worth noting that not all mortgage lenders are willing to offer a mortgage alongside the Help to Buy equity loan. You should check this before making an application to a mortgage lender or incurring costs. It would be advisable to seek independent financial advice in relation to your mortgage options.
You will then need to proceed with your mortgage application and the rest of the Conveyancing process.
On completion the loan will be sent to your Conveyancer and used toward the purchase price. The loan will be registered against the title to the property.
What Happens after I’ve Purchased the New House?
There are restrictions on what you can do with the property and you should familiarise yourself with the terms and conditions of the loan before you proceed.
The loan will accrue interest after 5 years in England and after 6 years in Wales. You will need to repay the interest and the loan will be repayable when you sell your house or within 25 years. The loan repayable will be based on a percentage of the value of your home, not on the original loan amount. For example:
If you have £10,000 you could use this as 5% deposit towards a £200,000 home. You would then get a 75% mortgage (£150,000) and the government may loan you the 20% difference (£40,000).
If you sold your home in 5 years and the value had increased to £210,000, you would need to repay 20% of the sale price to the government (£42,000).