The Help to Buy Equity Loan scheme (HtB) is a government initiative that strives to make purchasing a house more affordable for first time buyers and those looking to buy newly built houses valued at below £600,000.
It makes use of both a mortgage and an equity loan. Initially, all it requires from the buyer is a 5% deposit on the property. It is this low deposit and the long payment free period that makes buying a new property so affordable.
The Loan
In this scheme, the government will offer an equity loan of 10% – 20% of the property value. This loan is interest and payment free for the first 5 years.
After this 5 year time period is over, buyers will have to begin paying fees on the loan. Initially, the fee is 1.75% of the total loan, and does not count towards paying the loan back. For every year after, the fee price will increase based on inflation (worked out using the Retail Prices Index) plus 1%.
Furthermore, being an equity loan, the government will own 10%-20% of your property, depending on how large a loan you take out. This means that the total amount needed to be repaid may increase if the value of your property rises. The small deposit can make this idea very attractive, especially to first time buyers trying to get their foot on the property ladder.
Repayments
The 5 years no repayment gives the buyer room to breathe and settle for several years before having to begin repaying the loan. However, paying off as much of the loan before the 5 years is up will be extremely beneficial as there will be no fees or inflation on the repayments before the start of the 6th year.
Repayments can be made in through what is commonly referred to as staircasing, where the buyer pays back the equity loan in stages. On repayments made after the 5 year payment free period, the fees will drop to reflect the amount that has been paid off.
The equity loan must be paid back in full when either the buyer sells the property or after 25 years. This is likely to coincide with the end of most mortgages which usually need to be paid off within 25 years.
| Pros | Cons |
|---|---|
| Makes it easier to secure a mortgage for the remaining 75% | Has to be on a primary property |
| Only a very small deposit is needed | Cannot sub-let |
| 5 years no loan fees or repayments necessary | Cannot take out a HtB Equity Loan if you own a second property |
| You must pay off all the outstanding loan on selling the property | |
| Can only be used on a house below £600,000 | |
| Government own 20% of the property, so if it rises in value, the overall amount to repay will also rise |
Eligibility
Help to Buy is aimed at first time buyers and homeowners needing to move to a house that can accommodate their household needs, but cannot otherwise afford to. Therefore, there are some eligibility criteria that need to be met.
- The buyers household income cannot exceed £60,000 per annum
- Help to Buy cannot be used to purchase a second property, applicants must be a first time buyer or be in the process of selling their current property
- Buyers must not currently be in any rent or mortgage arrears
- Buyers must not be able to afford a suitable property to meet their households needs
- But they must also show they can afford to pay the regular costs involved in buying and running a property
- Buyers must show they have a good credit history and no County Court Judgements
- Buyers must have easy access to the 5% deposit that has to be put down on the property
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