How does the Help to Buy Equity Loan work?

16th July 2018

By Kurt Wood

Buying a home for the first time isn’t easy in today’s market. House prices have shot up exponentially in recent years, with the average deposit required reaching £33,000. For many, a first time home could seem like a pipe dream. 

The Government’s Help to Buy Scheme helps first-time buyers get on the property ladder by offering additional loans that mean first time buyers don't need to raise as much of a deposit. 

Here's everything you need to know about the Help to Buy Equity Loan.

What is the Help to Buy scheme?  

There are two schemes with Help to Buy in the name, and it's easy to get the two confused. One is the Help to Buy Equity Loan, and the other is a savings account, the Help to Buy ISA. 

This includes the popular Help to Buy ISA, a savings account available through many banks and building societies. The government gives you a bonus of 25% of what you save, up to a maximum bonus of £3,000. 

The Help to Buy Equity Loan is a loan offered by the government to reduce the amount you have to save up for a deposit. The government pays a portion of your deposit to your mortgage lender, and you pay the government back over time. 

Shared Ownership also falls under the Help to Buy umbrella. This is a scheme that allows you to buy part of a house and pay rent on the rest of it. Again, this means you can buy with a smaller deposit. 

This scheme is designed to give aspiring homeowners a chance to own their own home, and the proportion of first-time homeowners in the UK has increased by 44% since the launch of the scheme in 2013. 

As property prices continue to increase, the hardest part of being a first-time buyer is getting a large enough deposit together. 

What is a Help to Buy Equity Loan?

Not to be confused with home equity loans from banks and lenders (only available to existing homeowners), the Government Help to Buy Equity Loan is available for first-time buyers who do not have a property yet.  

It is designed to make buying a house more affordable, giving you the opportunity to borrow up to 20% of the property’s equity with no fees for the first five years. The term ‘equity’ refers to the value in the home and by borrowing a percentage of the value, your mortgage and deposit will be more affordable.  

Buying a home for the first time without the Help to Buy Equity Loan would mean that you would have to save a much bigger deposit. For some people, getting together a 20% deposit may seem impossible. Additionally, if you were to get a loan elsewhere, you wouldn't benefit from the five years without fees. 

How do Help to Buy Equity Loans work?

When you buy a house through the Help to Buy Equity Loan, the government pays most of your deposit to your lender, so you only have to raise a smaller portion of the deposit. You then repay the government over time for the amount they lent to you The Government will lend you up to 20% of the property’s value, you will need a deposit of 5%, and your mortgage will need to cover at least 75%.  

For example, if you’re looking to buy a property for £200,000 with a small 5% deposit, you would need a:  

- £10,000 deposit  

- £150,000 mortgage  

- £40,000 equity loan  

One of the main benefits of a Help to Buy Equity Loan is that you won’t be charged any borrowing fees for the first five years. After that period ends, you will pay a fee of 1.75% of the total loan (rising each year), though you can pay off the loan whenever you want, including within the first five years. 

If you choose to sell your property in the future, you will be required to pay off the loan in full. This also applies if you finish paying off your mortgage.  

Am I eligible for a Help to Buy Equity Loan?

To apply for the Help to Buy Equity Loan scheme, you will need to be aged 18 or over. Not only is the scheme available for first-time buyers, but it is also available for existing homeowners looking to move to a new area. 

The property you’re buying needs to be: 

- A new build property  

- No more than £600,000 in value (£200,000 in Scotland) 

- Your main residence  

What to remember when considering a Help to Buy Equity Loan

A Help to Buy Equity Loan could be the answer for anyone who is struggling to afford their first home. Before you go ahead with any bank loans or Government loans, it’s important to understand the effects of borrowing on your personal finances in the future. 

New build homes only – this scheme is limited to new build properties only. For those who dream of being in a character home or have a desire to live in a particular area, your options may be limited.  

Fees will increase every year – although your first five years will be free of any fees, this will increase thereafter year on year. Starting at 1.75%, going up annually based on the Retail Prices Index plus 1%. Remember that you will be paying off this loan on top of your mortgage payments, so always be sure that you can afford to pay off the loan. 

10% minimum repayments – the entire loan will need to be paid off when you sell your home, pay off your mortgage, or in 25 years (whichever comes first). If you would like to pay off parts of the loan before then, the minimum payment will be at least 10% of the total value.  

Your loan amount changes with the market – you could end up paying more or less than your original loan amount based on the housing market rising or falling. If you take out an equity loan of 20% on a £200,000 property, the loan will be £40,000. If, when you sell the house, it is worth £250,000, you will repay £50,000 (20% of the current value).  

What other government schemes are available?

As well as the Help to Buy Equity Loan, the UK Government also offer the following schemes for first time home buyers: 

Help to Buy ISA

The Help to Buy ISA is available through many banks and building societies. Offering a £50 bonus for every £200 saved, the maximum bonus per person is £3,000. It is open to individual first-time buyers, rather than per household, so couples saving to buy together can receive a bonus of up to £6,000 towards their mortgage deposit. 

Shared Ownership Scheme

If you can’t afford to buy 100% of your property value, this scheme allows you to buy a share of your home and pay rent on the remaining share. The share amount you can buy is anywhere between 25% and 75%. You will have the option to buy a larger share of the property in the future. 

Find loans for home improvements  

Before taking out any loan, it’s important to review your personal finances. Whether you get a Government-backed loan or borrow from your bank, your credit profile will be checked to see your financial history. Get a snapshot of your profile in minutes with our free online credit report

For smaller home improvements, personal loans can be a great option. You can compare different personal loans quickly and easily with our online loan comparison tool.  

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