Help to Buy Equity Loan: Everything you need to know
Help to Buy Equity Loans were introduced by the Government in 2013 as a scheme to help buyers to get onto the property ladder who felt that they were becoming priced out of the market or who were struggling to be able to save up a large enough deposit to buy the home that they wanted with a traditional mortgage product.
Important: The Help to Buy Equity Loan Scheme has ended.
In this article, we explore more about how the Help to Buy Equity Loans work and also have a look at both the positives and the potential downsides to them too, so that you can understand if they are a good option for you.
Please note that there are separate, but similar, schemes operating for Scotland, Wales and Northern Ireland.
What is the Help to Buy Equity Loan Scheme?
This is an equity loan scheme introduced by the Government (Homes England) to help people to buy a new-build home when they don’t have a large enough deposit saved to buy it with a traditional mortgage.
So put simply, you only need a 5% deposit to buy a home, the Government will then give you an equity loan of 20% (or 40% if you’re in London) which boosts your deposit to 25%, meaning that you just need to get a mortgage for 75% of the value of the property.
The Government will own an equity share in your home
The important thing to note is that the Government loan is an equity loan, meaning that they own up to 20% of your property (or 40% in London), so if you are in a position to pay back some of the loan you need to be aware that the total amount you have to repay may be higher than the amount that they loaned to you if the value of your property has gone up.
The equity loan is interest free for the first five years, so it’s worth factoring into your budget the fact that after 5 years you will need to payback the interest on the loan each month on top of paying back your mortgage. You should get independent financial advice when you first take out your mortgage so that you are aware of what these costs might be in the future.
Example of how Help to Buy Equity Loans work:
If you wanted to buy a home for £250,000 under the Help to Buy Equity Loan Scheme, you would need:
| Amount | Percentage | |
|---|---|---|
| Minimum Deposit | £12,500 | 5% |
| Maximum Equity Loan | £50,000 | 20% |
| Mortgage | £187,500 | 75% |
| Total Property Price | £250,000 |
Are there any other costs involved?
In addition to the interest that you pay on the loan after the first five years there is also a monthly management fee of £1 that kicks in from as soon as you buy your home until you have paid back the full amount of the equity loan.
It’s important to be aware that the monthly management fee and interest fees are not capital repayments on your equity loan or your mortgage and so they do not reduce the amount of the loan and mortgage that you owe.
So, is it possible to buy a home with just a 5% deposit?
In effect, yes. You initially only need to save for a 5% deposit, and the Government may lend you another 20% (or 40% if you’re in London) to bring your total deposit up to 25% (or 45% in London) meaning that you then need to get a mortgage for 75% (or 55% in London). But be aware, the 20% Government loan is not free and you will need to pay interest on it from year 6 onwards.
Who is eligible for the Help to Buy Equity Loan?
Under the current equity loan scheme (running until the end of March 2021), equity loans are available to first time buyers as well as existing home owners looking to move. The home you want to buy must be newly built with a price tag of up to £600,000.
You won’t be able to sublet this home or enter a part exchange deal on your old home. You must not own any other property at the time you buy your new home with a Help to Buy Equity Loan.
The maximum you can borrow from Help to Buy in England is £120,000 and up to £240,000 for London. There is no minimum amount.
Buyers cannot use the help to buy scheme if they require a main mortgage more than 4.5 times their household income.
After April 2021 until March 2023, the help to buy scheme will be limited to first time buyers and regional property price caps will be applied (see table further down).
How to buy a home with Help to Buy
Find a home you want to buy
Firstly you need to find a property that is available to buy with the Help to Buy scheme. These will be new-build homes only as the scheme is only available on brand new properties. That doesn’t mean that all new build properties under £600,000 can be bought with a Help to Buy equity loan. The developer has to apply for their property to be available under the scheme. Look for the Help to Buy logo on new developments to indicate that they have homes available under the scheme.
Register with your local Help to Buy Agent
Once you’ve found a home that you like that is available, you then need to get yourself registered with your local Help to Buy agent. These are agents who are appointment by the Government and it’s their job to administer the Help to Buy Equity Loan scheme on a day to day basis. There are three Help to Buy agents across England (the North; Midlands & London; and the South) and they will check that you can afford to buy the home that you want. You’ll need to get approval from them before you can go ahead and buy your home with the Help to Buy Equity Loan scheme. They support you with your application for an equity loan.
Get a mortgage for the remaining amount
You then need to get a mortgage for the amount left after your deposit and the loan. This needs to be a specific Help to Buy mortgage and not all lenders offer them.
Getting a Help to Buy Mortgage
You’ll need to take out a Help to Buy mortgage for the 75% that you'll need to complete your purchase. Not all lenders offer Help to Buy mortgages so you are best to take specialist independent financial advice about who offers these mortgages and which rates and offers are best for you (and the impact of COVID-19 may mean that some lenders are not offering the same mortgage products right now).
Changes to Help to Buy Equity Loans after April 2021
Currently the Help to Buy Equity Loan is available to both first time buyers and existing home owners who are looking to move, and is available on selected new-build properties up to the value of £600,000.
The new scheme is for first-time buyers only
But, be aware that from 1st April 2021 there are changes being made to the loans scheme which means that it will only be available to first-time buyers(defined as those who haven’t previously owned or purchased property), and that there will be the introduction of regional property price caps. This means that depending on where in the country you are buying there will be different maximum prices.
Regional Property Price Caps after April 2021
| Region | Property Price Cap (after April 2021) |
|---|---|
| North East | £186,100 |
| North West | £224,400 |
| Yorkshire and The Humber | £228,100 |
| East Midlands | £261,900 |
| West Midlands | £255,600 |
| East of England | £407,400 |
| London | £600,000 |
| South East | £437,600 |
| South West | £349,000 |
Can I put in more than a 5% deposit with Help to Buy?
Yes, 5% is the minimum amount of deposit that you need to have, but if you have managed to save more than this then that it allowed too.
Equally, you do not need to take the full 20% Equity Loan (or 40% in London) if you do not need to borrow that amount of money to top up your deposit.
You need to take out a mortgage for at least 25% of the value of the property, so if you wanted to you could put in a 40% deposit, take a 20% equity loan and then you would only need to take out a mortgage for 40%, but you should always seek independent financial advice to make sure that you are taking the option that works best for you both now and in the longer term.
How and when do I need to repay the Equity Loan?
For the first 5 years you do not have to repay anything on the equity loan. After 5 years you will be charged interest on the loan. The interest is calculated at 1.75% in year 6, and then every year after that the interest goes up by the rate of inflation (Retail Prices Index or RPI) plus 1% each year (you can see the current RPI rate is here).
Here’s an example of what your interest payments on the loan might look like if inflation (RPI) was at 2% per year at you had taken an equity loan of £50,000 (20%of £250,000):
| Initial Value of Equity Loan | Year | RPI | Plus 1% | Interest Percentage to be paid on the Equity Loan | Annual Interest to be paid on the Equity Loan |
|---|---|---|---|---|---|
| £50,000 | 1-5 | n/a | n/a | 0% | £0 |
| £50,000 | 6 | n/a | n/a | 1.75% | £875.00 |
| £50,000 | 7 | 2% | 3% | 1.80% | £901.25 |
| £50,000 | 8 | 2% | 3% | 1.86% | £928.29 |
| £50,000 | 9 | 2% | 3% | 1.91% | £956.14 |
| £50,000 | 10 | 2% | 3% | 1.97% | £984.82 |
So from year 6 onwards you would need to budget for these interest payments on top of your mortgage repayments.
However, remember that you will not actually be paying off any of the loan at this stage, it is just the interest. You need to repay the full loan within 25 years or when you sell the property.
A lot of people may choose to pay the loan back sooner than this, either by saving up or by adding the value of the loan to their mortgage.
The amount of the loan you repay may not be the same as the amount you borrowed
Don’t forget that when it comes to paying back the loan, you are not repaying the amount you borrowed, but you are repaying the value that the equity share is now worth. So, if you borrowed 20% of a £250,000 property (i.e. a £50,000 loan) in 2013, but that same house is now worth £270,000, then you would need to pay back 20% of the current price (i.e.£54,000) on top of the interest that you would have been paying since year 6.
But, if house prices have fallen since you bought, then the value of the loan that you have to repay will also have gone down. So, if the £250,000 property is now worth £230,000 then you would have to repay 20% of £230,000 (i.e. £46,000).
The amount of interest that you repay is calculated on the value of the original loan amount and not the current market value of the equity, even if the price of your property has gone up or down since you originally bought it.
| Initial Purchase Price | Value of 20% Equity Loan when purchased home | Value of Property when come to sell or repay the Equity Loan | Value of Loan to Repay |
|---|---|---|---|
| £250,000 | £50,000 | £270,000 | £54,000 |
| £250,000 | £50,000 | £230,000 | £46,000 |
What other costs do you need to account for each month?
Typically every month, you will need to make payments in addition to your normal monthly outgoings, including:
- Mortgage repayments to lenders
- Initial monthly management fee of £1per month to be paid from the start of ownership until the loan is repaid
- After five years, interest on the Help to Buy equity loan
- Service charges, if you buy a house or flat with shared areas that require maintenance
- Council tax
- Life insurance
- Buildings insurance
- Contents insurance for your belongings
- Utility bills and other costs of occupying the property
There may be other costs that you have to pay depending on your personal circumstances.
Upsides of the Help to Buy Equity Loan
This could be considered a great scheme as the Government gives you an equity loan that allows you to effective put down a cash deposit 25% (or 45% in London) to buy the new build home that you want.
In the first five years you do not have to pay back anything on the loan at all, so it’s a great scheme for people who want to get on the housing ladder, but have not been able to save up a big deposit. As long as you are able to cover the mortgage repayments for the first five years, and then the equity loan repayments on top of that after five years then this could be a scheme worth considering.
This is a good option for anyone who thinks that they will be in a position to remortgage after the first five years and effectively payback the loan with a new mortgage, but of course the mortgage payments may go up at that point instead.
Other things to consider with the Help to Buy Equity Loan scheme
- The scheme only applies when buying a new build property
- Only selected properties are available
- From year 6 onwards, you need to make an allowance in your budget for the interest on the equity loan. Initially, in year 6, the interest rate will be 1.75% of the initial loan amount. After then, the interest rate rises by inflation based on the Retail Prices Index (RPI) plus 1% each year. This is just the interest on the loan, you will not be paying off any of the loan itself
- You can also pay back part or all of your loan at any time, but the minimum percentage you can pay back at any one time is 10% of the market value of your home. So if you bought your home for £250,000 with a 20% Equity Loan, and assuming your house has not gone up in value, then the minimum amount you will need to save to pay back some of your loan is £25,000 at any one time
- The Government owns a stake in your home, and this means you could end up paying them back more than you borrowed. For example if you borrow £50,000 (20%) to buy a £250,000 property. If, by the time you want to pay the loan back or are coming to sell the property, your home is now worth £270,000 you would now have to pay back 20% of £270,000 = £54,000, a £4,000 increase compared to the amount of the original loan, and this is on top of the interest that you will have already paid
- If you need a main mortgage that is more than 4.5 times your household income then you cannot use the Help to Buy equity loan scheme
About Wayhome
Wayhome is the Gradual Homeownership option that helps aspiring homeowners take their first steps towards ownership without taking a mortgage. A simple, yet revolutionary idea: if you can afford to rent, you can afford to gradually buy. Start with as little as a 5% deposit, and pay rent on the part of the home that you don’t own. Buy more as and when you can afford to do so.
