Help-to-Buy Equity Loan

The Help-to-Buy Equity Loan is a government backed schemed now exclusively available to first time-buyers purchasing a new-build homes. The scheme began back in 2013 and was revised from April this year. March 2023 will see the end of Help-to-Buy after nearly a decade of support to the housing market. Help-to-Buy aims to give people a leg-up onto the property ladder by easing mortgage affordability, helping reduce monthly mortgage payments and only requiring buyers to commit a 5% deposit to the purchase of the property. This blog will explore all things Help-to-Buy and from the application process to redeeming the equity loan.

Help-to-Buy provides a contribution towards the property value up to a maximum of 20% (40% in London). When combined with a 5% deposit, this means a 75% mortgage (55% in London) will be required to fund the remainder of the purchase price.

Example on a £250,000 Property:

  • 5% Deposit – £12,500
  • 20% Help-to-Buy Equity Loan – £50,000 / 40% in London – £100,000
  • 75% Mortgage – £187,500 / 55% London – £137,500

Most mortgage lenders will not allow standard 5% deposit, 95% mortgages on new build properties so Help-to-Buy quite literally helps you buy these properties.

To be eligible for Help-to-Buy, you must be a first-time buyer – have never owned a home or residential land now or in the past in the UK or abroad – and buying a new build of course. The April 2021 Help-to-Buy changes saw the introduction of regional price caps for the scheme too. Maximum purchase prices on which Help-to-Buy is available range from £186,100 in the North East to £600,000 in London.

The Help-to-Buy affordability calculation restricts applicants to mortgage borrowing of no more than 4.5x their annual household income to be eligible for Help-to-Buy. As with the mortgage lenders themselves, this amount will often be less is there are credit commitments held by the applicant(s). The application comprises the following stages and is done simultaneously with your mortgage application and the legal process.

  • Property Information Form (PIF) is completed and submitted to Help-to-Buy
  • Help-to-Buy request documents from the applicant(s)
  • Authority to Proceed (ATP) issued by Help-to-Buy
  • Help-to-Buy request mortgage and legal documents from solicitor
  • Authority to Exchange (ATE) issued by Help-to-Buy

The equity loan is interest free for the first 5 years after which interest is payable. From the start of year 6, the interest rate will be 1.75% and this is calculated annually but charged monthly. For each subsequent year, the interest rate will rise in April based on the rate of inflation at the time (according to the Consumer Prices Index) plus 2%. If the rate of inflation is 0% or less, the interest rate will rise by 2%.

To remove the equity loan and avoid paying the interest, most people will look to remortgage between years 5 and 6 and clear the loan, unless they’re selling and moving home. Note, if your mortgage interest rate is more than 1.75%, you will be paying a lower rate of interest on the equity loan balance than you are on your mortgage for year 6 of having the loan. When you do come to remortgage and clear the loan, you must first instruct a RICS valuation of your property. This is required to ascertain the current value of the property which then determines the amount to be repaid on the equity loan. Remember, the equity loan isn’t a normal loan. Whether your property has gone up or down in value, the Help-to-Buy share is a percentage of your properties value, not a fixed amount. Once a value has been obtained, the remortgage can begin. Unless you are clearing the equity loan from alternative funds (eg: personal savings), most people will look to increase their mortgage by the final value of the equity loan. This then releases the right amount of equity from the property that is used to repay the Help-to-Buy equity loan.

Help-to-Buy isn’t just about helping people afford to becomes homeowners. The scheme was designed with another purpose utilizing the simple principle of supply and demand. By making the purchase of new-build homes more financially available to buyers, the demand for new-build homes increased. This gave house-builders confidence to invest in supply – providing more homes across the UK by the thousands year on year. Not only does this help with the ever-increasing demand for housing, it also helps constantly improve the quality of housing available.

While there are many benefits of buying a new-build property, from the warranties to builders’ incentives, modern design and energy efficient homes, having a choice of plot and a blank canvas inside, they’re not for everyone. Some people want to take on a renovation project, prefer the look of older properties or will be looking for something above the Help-to-Buy price caps for their first home. If you’re looking at the Help-to-Buy loan and want to know more before starting the process, or whatever your situation is, we’re here to help with free, professional mortgage advice.