Help to Buy. Buying a Home with the Help-to-Buy Scheme: A Guide
If you’re considering buying a home using the Help to Buy scheme then you’ll want to know exactly how Help to Buy works. Here’s what you need to know about Help to Buy.
What Exactly is Help to Buy?
Help to Buy is a home ownership scheme which is provided by the Government.
Help to Buy recognises that many people who can afford to buy a home, and who can afford the mortgage repayments, struggle to buy because they cannot raise the mortgage deposit that banks and building societies ask for.
The idea of Help to Buy is to enable more people to buy a home by providing them with a loan towards the cost so that they can buy with a minimum deposit.
There have been different types of Help to Buy schemes. The current Help to Buy scheme in England runs from April 2021 to March 2023. It is known as the Help to Buy: Equity Loan (2021-2023).
In Wales Help to Buy is known as Help to Buy – Wales and it works in a slightly different way. Help to Buy – Wales is available for properties up to £250,000.
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The Advantages of Help to Buy
The main advantage of Help to Buy is that it can allow you to buy with a smaller mortgage deposit than you might otherwise need. It means you can buy a home when you might not otherwise be able to get a mortgage.
Help to Buy means you may be able to get a better mortgage rate because the loan-to-value or LTV rate is lower.
Help to buy is an interest-free loan for up to five years. So it can actually save on interest in the short term.
With Help to Buy, the buyer owns the property outright. It is not a shared ownership scheme.
...and the Disadvantages
The main disadvantage of Help to Buy is that it may make it more expensive to buy a property than just by taking out a standard mortgage.
With Help to Buy the total amount you have to repay is linked to the value of your home at the time you repay the loan. Not to the amount you originally borrowed. If property prices go up you will have to repay more than you expected. (If prices go down you will need to pay less.) The Help to Buy interest rate, once you begin paying it, is linked to inflation so you could end up paying more (or less) in interest than you expected because of this.
Another disadvantage of Help to Buy is that you can only buy a new build home. There is also a limit to the maximum price you can buy a house for. This will restrict your choice of properties to buy.
Help to Buy is a loan secured against your property in the same way as a mortgage. If you cannot or do not repay it your house could be repossessed.
There are also some restrictions on what you can do with your house. You can’t make structural alterations without permission and you cannot sublet a property bought with Help to Buy.
Who is Eligible for Help to Buy?
To be eligible to buy using Help to Buy you, and anyone you buy with, need to be first-time buyers. You need to be buying a home to live in yourself.
Help to Buy is not available to those who already own a property, have previously owned a property, who are buying a second home, nor to investors.
The scheme is only available to help buy a new build home. (In some cases commercial properties which have been newly converted into homes are eligible.) You can buy either a house or a flat or apartment with Help to Buy.
The property you buy must be affordable. You must be able to afford both the repayments on the mortgage and the Help to Buy loan.
How Has Help to Buy Changed?
Recent changes to Help to Buy mean it is only available to first-time buyers. Previous versions of Help to Buy were open to first-time buyers as well as those who already own a property.
Recent changes to Help to Buy also introduce regional price limits or price caps. This means only properties below a certain price level are now eligible for Help to Buy, depending on the area in which they are located.
The regional Help to Buy price limits for England are:
|Yorkshire and The Humber||£228,100|
|East of England||£407,400|
How Help to Buy Works
Help to Buy is what is known as an equity loan scheme. The loan is provided by the Government’s Homes and Communities Agency or HCA, trading as Homes England.
With Help to Buy you need at least a 5% deposit for your new home.
You can borrow up to 20% of the total property price from the Help to Buy scheme. You can borrow up to 40% under the Help to Buy scheme in London.
You will then need a mortgage from a bank or building society to make up the total purchase price of your home.
The Help to Buy equity loan is interest free for five years. After five years interest is charged on the Help to Buy loan starting at 1.7% and rising each year by the Consumer Prices Index plus 2%. There is also a monthly management fee of £1 for the duration of the loan.
You can repay the capital lump sum you borrow as a Help to Buy equity loan at any time either in part or in full. Any part payment must be at least 10% of the value of your home at the time you make a part payment.
The Help to Buy Equity loan needs to be repaid in full either by the end of its agreed term, which is usually a maximum of 25 years. It must also be repaid by the time your mortgage is paid off, when you sell your house, and also if you break any of the terms and conditions.
The amount you pay back on a Help to Buy loan is worked out as a percentage of the market value of your home at the time you repay. It is not based on the actual amount you originally borrowed. If the value of your home has risen since you bought it you will owe more than you borrowed in the same proportion. For example, if your home rises in value by 10% you will owe 10% more on your Help to Buy loan. If the value of your home falls you will owe less.
- You buy a £200,000 new build property outside London. You have the minimum deposit of 5% or £10,000. You qualify to borrow 20% or £40,000 using the Help to Buy scheme. You then borrow the balance of 75% or £150,000 using a standard repayment mortgage.
- You buy a £600,000 new build home in London. You have the minimum deposit of 5% or £30,000. You qualify to borrow the larger amount of 40% or £240,000 using the Help to Buy scheme. You then borrow the balance of 55% or £330,000 using a standard repayment mortgage.
How to Find a Help to Buy Property
You can find out about properties that are available to buy from the official Help to Buy scheme website.
The builder or developer you buy from must be registered with the Help to Buy Equity Loan scheme.
How to Buy a Help-to-Buy Property
- Find your local Help to Buy agent. Check your eligibility for Help to Buy.
- Find and reserve a home you want to buy. The Help to Buy agent will help you apply for the equity loan.
- Wait for formal Authority to Proceed with Help to Buy. You can then apply for a mortgage from a bank or building society.
- Your property purchase then proceeds in the normal way using your own solicitor or conveyancer.
If you are considering a Help to Buy scheme be sure to check the individual details carefully and take professional financial advice if you need it. Help to Buy may not necessarily be the best way to buy a home for you. Check you can afford the repayments on the mortgage and on the Help to Buy equity loan both now and in the future.
Another Government home ownership scheme to consider, although very different, is rent to buy.