How do help to buy equity loans work and should you take one out?

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If you want to buy a property but you can only get a 5% deposit, what government help is available?  How do help to buy equity loans work and should you take one out?

How do help to buy equity loans work?

You can use a help to buy equity loan to help you buy a property if you can’t get a big deposit.

You must buy a new build property.

  • It has to be from a registered help to buy builder using a government appointed help to buy agent.
  • You can buy a property for up to £600,000 using help to buy.
  • You can’t sub-let the property if you finance it with a help to buy equity loan.
  • You can’t buy a second home using a help to buy equity loan.

How help to buy equity loans work:

You provide a deposit of 5%.

  • You can borrow up to 20% of the property’s price from the government through the help to buy scheme.
  • You’re given a mortgage of 75% of the property’s price.

SAVVY TIP: There’s a special help to buy scheme for London buyers, which lets you borrow up to 40% of the property’s price from the government. You still have to come up with a deposit of 5%.

What help to buy equity loans cost

The help to buy equity loan is interest free for the first five years. But even if you pay it back within that time, it doesn’t mean it’s totally free. And if you pay it back after five years, there are other costs to pay.

  • It’s interest free for the first five years. After this, you’ll pay a fee (effectively interest) of 1.75% of the value of the loan in year six. This will increase by RPI (the retail prices index) plus 1% each year.
  • You have to pay back the percentage of the property’s value that you borrowed. So, if you borrowed 20% of the property’s value and you bought a new build flat costing £200,000, you’d have borrowed £40,000 from the government through help to buy. If the flat was worth £240,000 when you came to sell it, you’d owe 20% of £240,000, which is £48,000. If the flat was worth £300,000 when you came to sell, you’d have to repay 20% of £300,000, which is £60,000.
  • You have to repay the mortgage after 25 years or when you sell your home (whichever comes first).

Help to buy equity mortgage providers

Not all mortgage lenders offer help to buy equity mortgages. Make sure you check out the interest rate that will be charged (and any additional fees).

You may be able to get a competitive deal on your help to buy equity mortgage, but it’s important to do some research on what your options might be once this deal runs out. Not all help to buy equity mortgage providers have mortgage products that they make available to people who are switching from a different help to buy equity mortgage provider. That could mean you have no option but to move onto a standard variable rate mortgage deal.

SAVVY TIP: Be aware that standard variable rates vary between mortgage lenders – by up to 2%.

New build valuations – a warning

The other potential disadvantage of the help to buy equity mortgage is that you can only use it to buy a new build property. There have been some problems in the past with newly built flats and houses being overvalued. Be aware that just because the developer wants to sell a property at a certain price doesn’t mean you’d be able to sell it at that price further down the line – or that it’s really ‘worth’ that.

It can be a particular problem if new developments have sprung up in the area since you moved in, as they’ll have new carpets, kitchens etc, and so could be more appealing to buyers than your ‘second hand’ property.

Useful links:

You can find out more about the help to buy schemes on the Gov.uk website.

Related articles: 

Help to buy ISAs – how do they work and who’s paying the best rate?

How to find a good mortgage broker

Understanding the different types of mortgage. Your guide to fixed rate, tracker, discount, variable and capped mortgages.

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