Getting to grips with the governments ‘Help to Buy’ scheme? An all you need to know guide…
Let’s start with the basics- what are they and who can benefit from them?
At present there are two ‘Help to buy’ schemes running, an equity loan and an ISA. The ‘Help to Buy’ Equity Loan was introduced on the 1st of April 2013 by the government to encourage first time buyers to make that leap and get on the property market. With this initiative, as long as you have a minimum 5% deposit, they would be willing to lend you up to 20% of the property value (40% in some parts of London) and the remaining amount would need to be financed via a repayment mortgage. Please see the example diagram below. The scheme is expected to continue up to 2020/21 dependent on the level of uptake.
The ‘Help to Buy’ ISA was implemented on the 1st December 2015, it enables first time buyers to save some of their deposit in a specific ISA. With this ISA, the government increases the amount saved by 25% (a bonus of up to £3,000) which is redeemed by your solicitor close to the completion of your property. The closing date for opening one of these ISA’s is the 30th of November 2019, with it needing to be redeemed by 1st December 2030.
Let’s start by exploring the ‘Help to Buy’ Equity Loan….
First time buyers only
Minimum deposit of 5%
New Build properties up to the value of £600,000
Residential properties only
You cannot own any other property
When do I need to apply?
You only need apply once you have found a property through a new build company that use the Help to Buy Scheme. At this point you will need to reserve the home you wish to purchase (a reservation fee may be required up to £500).
The builder will then ask you to complete a help to buy ‘Property Information Form’.
The signed property information form and the builders reservation form is then sent to your local help to buy agent.
Once I have applied what next?
Once the relevant paperwork has been received by your local help to buy agent they will check that you can afford your main mortgage before they proceed to issue an ‘Authority to Proceed’. This should take up to four working days.
The ‘Authority to Proceed’ is valid for three months only, past this point a reapplication maybe required.
Once you have received your ‘Authority to Proceed’ you will be able to instruct your mortgage advisor and your solicitor. The mortgage advisor will put forward your mortgage application and your solicitor will be able to start the conveyancing work required for your purchase.
All steps to purchase a property will follow as normal from this point onwards.
How do I repay the ‘Help to Buy’ equity loan?
You do not need to make any repayments on the ‘Help to Buy’ equity loan for the first five years.
Although you do not need to make any repayments during this period you will be required to pay a £1 per month management fee for the entirety of the loan period.
On the 6th year you will have to pay 1.75% interest on the amount that you have borrowed.
Subsequent years will increase by 1% plus any increase in the RPI (inflation). This means that without any inflation on years 8 of the loan you would be paying 3.75%.
In general you would repay the entirety of your loan when you sell your property, the loan will be paid direct from proceeds of sale. However if you were to live in your property for the entirety of your mortgage you would need to pay the equity loan when this was completed.
Is it right for me? Pros and cons
Let’s start with the Pros…
Raising a deposit is hard, but with this scheme you only need to raise 5%, which will be far more obtainable for more people.
When you take out a mortgage with a 25% deposit you are likely to get better rates as the lender is taking a smaller risk.
The interest rate on the equity loan is very competitive, especially as you do not need to pay any repayments for five years.
And the Cons…
Only certain lenders are available to use the scheme.
Your equity loan amount is not fixed, and will be increasingly expensive after the first five years.
When re-mortgaging there are additional fees that are incurred due to extra administration and valuations being required for the ‘Help to buy’ Equity Loan.
Only new builds can be purchased.
You cannot sublet your property.
Negative Equity- what is it and what is the impact on the equity loan?
Negative equity is when the value of your property decreases to below the value of your mortgage and loans secured against a property. Although this is not a good situation to be in, it should be noted that with a ‘Help to Buy’ Equity Loan you have borrowed a percentage not a fixed amount so the value of the loan (not the percentage) will fluctuate with the value of the property if it decreases.
Now onto the ‘Help to Buy’ ISA…
The property purchase price cannot exceed £250,000 (£450,000 in London).
The only home that you own.
Your primary residency.
How do I apply for the ISA and how do I redeem the government bonus
To apply for the ISA you will need to check which banks and building society offer the ISA and simply open an ISA account with one of them.
When you are close to completing the purchase of your property your conveyancing solicitor will apply for the government bonus and once this is received they will add this to the funds required for completion.
Additional things to bear in mind with the ISA
The ISA is not limited to one per household. If you are planning to purchase alongside another first time buyer they would be able to set up their own ISA meaning that potentially the government could provide a bonus of up to £6,000.
The ISA cannot be used for the deposit required for exchange of contracts or to pay any disbursements associated with the purchase of the property.
You can save up to £1,200 in the first month the ISA is open and then £200 per month thereafter.
A minimum saving of £1,600 and a maximum of £12,000 is permitted to obtain the bonus.
The ISA can be used alongside the ‘Help to Buy’ Equity Loan.
The bonus does not need to be paid back.HYou’ve reached the end…
I hope things are now clearer, but if you need any further information a good place to start is by looking at the Help to Buy buyers’ Guide created by the Homes and Communities agency. Alternatively we would recommend that you talk it through with an independent financial adviser.
Click here to talk to Katie Parsonage our mortgage broker who would be happy to help!
Written by Michelle Cheshire, Senior Negotiator Oxted