What is a Help to Buy equity loan?

11th June, 2020

What is a Help to Buy equity loan?

The Help to Buy equity loan scheme was launched in April 2013 in a bid to kick-start the UK property market. Its introduction made it easier for people with smaller deposits to buy their first home or move up the property ladder.

The scheme is currently available on new build properties until 2021, so you can still take advantage. A minimum 5% deposit is needed and the government will provide you with an equity loan of up to 20% (40% in London) of the property value. You will then need a mortgage for the remaining 75% of the property value.

So, if you were buying a new build house for £300,000 with the minimum 5% deposit, you would need:

  • Deposit of £15,000
  • Equity Loan of £60,000
  • Mortgage amount of £225,000

One of the key benefits of using an equity loan is that you only need a mortgage for 75% of the purchase price. The loan offers access to better interest rates. This is unlike 95% mortgages which are limited in supply and have higher interest rates

Are you eligible for an equity loan?

 The eligibility criteria for an equity loan is very straight-forward, you must:

  • Have a minimum 5% deposit
  • arrange a repayment mortgage valued at between 25% and 75% of the full market value of the home (up to 55% in London)
  • reserve a newly built home, being purchased from a registered Help to Buy property developer, up to the value of £600,000
  • be able to evidence that you can afford the repayments on the equity loan and all other outgoings

At the time you buy your new home with a Help to Buy: Equity Loan you must not:

  • own any other residential property, or have your name attached to the deeds of another residential property, in the UK or abroad. The home purchase through an equity loan must be the only home you will own.

Married couples are considered as owning assets (such as property) jointly and therefore, if one owns a property, the other is directly linked to it and is treated as a homeowner.

You will be expected to sell your current home (in the UK or abroad) if moving.

The scheme is not available to assist buy-to-let investors or to own land with planning permission to build residential properties.

  • sub-let or rent the property out after you buy it, without written consent to do so.
  • have a financial interest in any other residential property, even if you do not live there.

If you make a fraudulent claim for a Help to Buy: Equity Loan you may be liable to criminal prosecution. You will also have to pay back the loan immediately.

How do you apply for Help to Buy Equity Loan?

  1. Find your new home

Find a new-build home with a house builder (sometimes called a developer) registered to offer properties for sale through Help to Buy. If you have not yet found a home, you can use the help to buy property search. 

Please be aware the property search results do not list every home available and are specific to the geographical area we cover.

  1. Complete a property reservation form

Reserve your home with the house builder. You will need to complete a property reservation form and will normally pay a reservation fee, up to a maximum of £500.

  1. Seek professional advice

Seek professional support from a financial advisor or mortgage advisor to confirm what you can afford to borrow, without over-stretching yourself.

Please remember, your home may be repossessed if you do not keep up repayments on your mortgage or other loans secured against it.

  1. Complete a Property Information Form

 You will need to complete a Property Information Form (opens in a new window) as part of the application process.

This form confirms the property details, important dates, and agreement that the equity loan funds are paid directly to the house builder.

It’s important that you complete the Property Information Form carefully and check that all the details are correct before you submit it. Any mistakes could lead to delays in the home buying process.

Your Help to Buy agent will review the details you provide on the Property Information Form. They will confirm you are eligible for the equity loan scheme, that you can afford the repayments, and then issue an Authority to Proceed (ATP).

An ATP means that a broker or financial advisor is able to complete a full mortgage application for you and you can progress with your purchase.

  1. Arrange funding

You will need to:

  • arrange a mortgage through a broker or financial advisor
  • be able to pay a 5% deposit on exchange of contracts
  • pay any other applicable fees on completion (such as stamp duty, legal charges, moving costs and any costs associated with your mortgage).
  1. Exchange of contracts 

 Your solicitor or conveyancer will advise you and ensure you sign the sale contract and the Help to Buy: Equity Loan contract.

They will also check that your mortgage offer, the property price, and available funds are the same as the details given in the Authority to Proceed, before they request permission to exchange contracts from your Help to Buy agent.

The Help to Buy agent will issue approval, known as an Authority to Exchange (ATE), to your solicitor or conveyancer so that contracts can be exchanged.

You will have paid a deposit and are now legally contracted to complete the purchase by an agreed date.

How do you repay your equity loan?

You do not pay any interest on the equity loan within the first five years, making home ownership much more affordable.

After five years, you repay the interest each month. This starts at 1.75% and increases in-line with inflation plus 1% each year. The interest is paid alongside your monthly mortgage payments. You only pay the interest each month, so the equity loan will not reduce in size unless you take steps to repay the capital.

We recommend that you speak with your mortgage broker before the end of the interest-free period. It is important to discuss remortgaging as an alternative option to paying the interest each month.

You must repay the equity loan in full if you decide to sell or when your mortgage term ends (typically 25 years), whichever is sooner. At this point, you must pay back the percentage borrowed from the government regardless if this is higher or lower than the original amount borrowed.

If you have not made any provisions to repay the equity loan at the end of the mortgage term, then you may need to sell your home.

If you are interested in buying a new build property then an equity loan is worth considering. To apply for a Help to Buy equity loan mortgage, speak with Help to Buy-recommended mortgage broker, IMS on 01869 248339 or email info@imsinternet.co.uk