Help to Buy scheme – how does it work?

Year Published: 2013

The ‘Help to Buy’ scheme offers equity loans, available on new-build homes with a value of up to £600,000.  The loans were originally open to only first-time buyers of new build properties, however phase 2 of the scheme has now been released and is available to everyone buying new-build and older properties, with as little as a 5% deposit.

To be eligible for the scheme, you must intend to purchase the property to live in – the scheme isn’t available to consumers wishing to sub-let.

How does the scheme work?

In order to qualify for a Help to Buy equity loan:-

  • You will need to contribute at least 5% of the property price as a deposit;
  • The government will supply a loan for up to 20% of the price;
  • You will need a mortgage of up to 75% to cover the balance.

Please find an example below:

For a property worth £100,000 Amount Percentage
Cash deposit £5,000 5%
Equity loan £20,000 20%
Your mortgage £75,000 75%

If the home in the table above sold for £105,000, you’d get £84,000 (80%, from your mortgage and the cash deposit) and pay back £21,000 on the loan (20%). You’d need to pay off your mortgage with your share of the sale proceeds.

What does it cost?

There are no fees for the first five years of owning your home. In year six, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year. The increase is worked out by using the Retail Prices Index plus 1%.

Before the fees start, your Help to Buy agent will contact you to set up monthly payments with your bank. You’ll also be sent a statement about your loan each year. Fees don’t count towards paying back the equity loan, and you should ensure that you will be able to contribute towards the loan in order to pay it back.

How do I proceed?

If you’d like to buy a home with an equity loan you should contact your local Help to Buy agent in the area you want to live.

Click to find your local Help to Buy agent.

What if I sell my home?

The home will be in your name, which means you can sell it at any time. You’ll have to pay back the equity loan when you sell your home or at the end of your mortgage period – whichever comes first. The equity loan will rank as a second charge on your property, behind your first charge, your mortgage lender.

You can also pay back some of your equity loan without selling your home. You can pay back either 10% or 20% or the total amount, so long as the loan is worth at least 10% of the value of your home.

You will need to talk to your lender and Help to Buy agent if you want to pay the loan back in full.

How things are changing

From 07 October 2013, the Help to Buy mortgage guarantee will help you buy a home with a deposit of only 5% of the purchase price, which is on offer to all home buyers, subject to certain criteria. Again, the scheme is not available to consumers wishing to sub-let the property.

The guarantee is provided to your lender – not to you.

The process of applying and repaying the mortgage is the same as it would be for a standard mortgage and there is little difference for the buyer.

The scheme is intended to increase the availability of mortgages for buyers with a minimum of 5% deposit. The government will guarantee repayment of the mortgage to the lender. This will be dealt with behind the scenes by participating lenders and there will be no additional paperwork or charges for the buyer.

Am I eligible?

To qualify for a Help to Buy mortgage guarantee, the home you want to buy must:

  • Be offered for sale at £600,000 or less;
  • Not be a shared ownership or shared equity purchase;
  • Be either a newly built or already existing property;
  • Be your main residence although there’s no limit on your level of income and you can’t use Help to Buy with any other publicly funded mortgage scheme.

How do I apply?

Applications are now being accepted.

To apply for the scheme you need to go through your local Help to Buy agent.

For further information on the Help to Buy scheme or any other residential property issue, please contact Kim our residential conveyancing team on 0161 475 7676.

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