Help to Buy is a Government initiative designed to help people buy a new build home. Since it was first launched in 2013, it has helped over 313,000 households achieve home ownership.
There have been many iterations of the Help to Buy scheme, but the current initiative is aimed exclusively at First Time Buyers and can be applied for until March 2023.
What is Help to Buy?
With a Help to Buy Equity Loan the Government lends you up to 20% of the cost of your new build home (40% in London) so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged any interest fees on the 20% loan for the first five years of home ownership. There are regional price caps in place on the amount you can borrow.
What are the Regional Help to Buy Price Caps?
North West - £224,400
North East - £186,100
Yorkshire & The Humber - £228,100
East Midlands - £261,900
West Midlands - £255,600
East of England - £407,400
London - £600,000
South East - £437,600
South West - £349,000
How does the Help to Buy Equity Loan Work?
Here is an example based on a £200,000 new build home:
Your Deposit (5% of total) - £10,000
Equity Loan (20% of total) - £40,000
Mortgage (75%) - £150,000
Do you pay interest on a Help to Buy Equity Loan
The loan is interest free for the first five years. After this time interest is applied each year as a percentage of the loan. It increases year on year in line with the Consumer Price Index (CPI) plus 2%.
Years 1 to 5 - No fees
Year 6 - 1.75% of the loan
Year 7 onwards - 1.75% + CPI + 2%
You will also pay a monthly management fee of £1 by direct debit.
What Happens to my Help to Buy Loan when I sell my home?
When you sell your home, or the mortgage is paid off, you will need to repay the loan plus a share of any increase in value of the property. Heres an example:
Home bought for £200,000 and sold for £250,000
Increase in value - 25%
Equity loan repayment - £50,000 (£40,000 loan plus 25% profit)
Mortgage - £150,000 (less any capital repayments)
Your share - at least £50,000 (or more if you've increased your capital repayments)
Your share of the proceeds from the sale could be used as a deposit on a new property.
You can pay back part or all of your loan at any time, with the minimum payment being 10% of the market value of the property.
Whilst there are considerable benefits to utilising the Government's Help to Buy Equity Loan Scheme, there are a number of key areas which are not really explored on the Government Help to Buy website. Below we'll take a look at these and answer some common questions so you can make an informed decision on whether Help to Buy is right for you.
How do you qualify for Help to Buy?
You must be over 18 years of age
The property must be your first home, you cannot have previously owned or inherited a home or land (or part of a home or land) either in this country or abroad
You cannot have had any form of sharia mortgage finance
You cannot be married or in a cohabiting relationship, now or at the time of legal completion, with anyone who owns or has owned a home or land anywhere in the world
Buy a second home
What are the Advantages of Help to Buy?
The key advantages of the Help to Buy scheme are that they enable those who lack a sufficient deposit access affordable mortgages.
Whilst mortgages where a buyer needs only a 5% deposit have come back into the market (£10,000 on a £200,000 purchase), the interest rates available from high street lenders are not very competitive, and are considerably higher than those which can be achieved with a 10% deposit (£20,000 on a £200,000 purchase).
Clearly, there are far more buyers with a £10,000 deposit than £20,000, especially in the buyer sectors of first time buyers and rental tenants.
One of the real attractions of the Help to Buy scheme equity loan is you are able to access high street lenders who offer help to buy mortgages with a 5% deposit and rates starting at approximately 1.5%.
This generally means in the first 5 years of the mortgage with the 20% help to buy loan, your mortgage payments on a help to buy mortgage buying at £250,000 with a £12,500 deposit could be less than buying a second hand home at £200,000 with a £20,0000 deposit. (Note: All these figures are subject to an individual's status and the availability of the mortgages in line with individual credit situation).
This could enable you to buy a much nicer new build home for less than the price of a second-hand house.
One of the misunderstood advantages of paying a far lower interest rate on your mortgage is how much of your mortgage payment goes to paying capital, therefore reducing the mortgage loan.
In the early years, the lower your interest rate - the more capital you repay. So one of the best practical pieces of advice for those who purchase through Help to Buy is to increase the monthly mortgage payment by the amount you are saving by having the interest free 20% equity loan (i.e. pay more than you need to). This will allow you to create more equity in your property and will make it easier to pay off your equity loan in the future and leaving you with a bigger deposit for your next property.
Taking all of these factors into account, whilst some new homes can look like they are outside of a potential buyer's budget, with Help to Buy the actual mortgage payments and cash input into the purchase are considerably less than buying a pre-owned home.
Add in the advantages of a new build property's 10-year insurance backed warranty and the significantly improved EPC ratings keeping utility bills far lower than ageing environmentally inefficient pre-owned stock, buying new can be a far affordable option for first time buyers and rental tenants.
In summary, if you are comparing whether to buy a it should be new home, or a second-hand house consider the following:
Chances are you will qualify for Help to Buy unless you already own more than one property. To see if you do qualify for Help To Buy, call our specialist team on 0161 592 9922 and one of our experts will be happy to advise on
i. whether you can qualify,
ii. what you can afford and
iii. illustrate the comparisons with buying a second hand property
Get a clear cost comparison of buying a new build property against a second-hand property utilising Help To Buy. It will really open your eyes as to what is possible and affordable for you
Look at the comparison of capital you repay in the early years and work out what a difference that will make to your finances
Think about the maintenance of a second-hand property. The following have to be maintained and are usually not under warranty - roof, timber and damp, boiler, central heating, electrics, and new white goods to name a few.