If you’re aiming to get on the property ladder for the first time in 2021, you may be considering a Help to Buy equity loan.
But what is Help to Buy and how is it changing in 2021? We’ve got all the answers here…
What is a Help to Buy equity loan?
The Help to Buy scheme was first introduced in 2013 and is a government-backed scheme aimed at helping people get on the housing ladder.
The equity loan part of the scheme sees the government lend you part of your deposit to buy a home, meaning you require a lower deposit and a smaller mortgage.
How does a Help to Buy equity loan work?
You can apply for a Help to Buy equity loan that covers 20% of your deposit on a new-build home (40% in London).
You then provide a 5% deposit, with a mortgage covering the remaining 75% of the purchase price (55% in London).
With a Help to Buy equity loan:
• You can only buy a new-build home
• You can only purchase your home with a repayment mortgage
• You can’t buy a property to rent out
Help to Buy equity loan key facts
Under the Help to Buy equity loan scheme:
• You borrow a percentage of your home’s value, meaning the equity loan can rise or fall depending on the value of your home
• If your property’s value falls, the loan amount reduces, but if the value rises, so does the amount of your loan
• You’ll pay no interest on your equity loan for the first five years
• Interest from year six is 1.75% and increases each year by the Retail Price Index plus 2%
• The interest payments on your loan only cover the interest, not the amount of the loan itself
Help to Buy equity loan eligibility
To be eligible for a Help to Buy equity loan, you must:
• Be a first-time buyer
• Have never owned a property in the UK or abroad before
• Both be first-time buyers if you’re buying with another person
How do you pay back the Help to Buy equity loan?
The term of your Help to Buy equity loan is 25 years and it must be paid back by the end of that term.
Your equity loan also becomes due if you sell your home before the end of the term, but the amount you pay back will depend on the value of your home at that time.
For instance, if you purchased a property for £200,000 with a 20% equity loan, the loan amount would be £40,000.
However, if you then sold that home five years later for £250,000, your equity loan would now be worth £50,000 – and this would be the amount you pay back.
Paying back your equity loan without selling
You can pay back your equity loan at any time without selling your home, if you wish to do so.
The amount you pay back will depend on your home’s value at the time and you can only pay back your loan in increments of 10%.
So, if your home is valued at £250,000 at the time you wish to pay back a 10% chunk of your equity loan, you would owe £25,000.
If you then paid back another 10% chunk a few years later, but your property’s value has dropped to £230,000, you’d pay back £23,000.
Help to Buy equity loan pros and cons
Before taking out a Help to Buy equity loan, it’s important you know whether doing so is right for you.
Pros of Help to Buy
• You only need to save a 5% deposit, which could mean you’re able to buy sooner than you thought
• Because your mortgage will cover 75% of the property’s purchase price, you may be able to secure a more attractive mortgage rate
• Your loan is interest-free for the first five years, so it will work out cheaper than a larger mortgage over the short term
• There are no early repayment penalties for paying off your equity loan
Cons of Help to Buy
• You are limited to buying a new-build home
• If your home increases in value, you’ll pay back more than you borrowed originally
• You must pay interest on your equity loan from year six and that interest rate increases each year
• Not all lenders offer Help to Buy mortgages
Changes to the Help to Buy equity loan scheme in 2021
The latest version of the Help to Buy scheme is now open for applications.
The main difference between this version of the scheme and the previous incumbent of Help to Buy is that the new scheme is only open to first-time buyers.
And while the previous scheme had a maximum purchase price limit of £600,000 across the UK, this is now assessed regionally.
So, the maximum price you’re able to pay for a home under the scheme will depend on where you’re buying.
Help to Buy regional price caps
The regional price caps for Help to Buy in 2021 are:
• North East England, £186,100
• North West England, £224,400
• Yorkshire and the Humber, £228,100
• East Midlands, £261,900
• West Midlands, £255,600
• East of England, £407,400
• South East, £437,600
• South West, £349,000
• London, £600,000
Thinking of buying a home for the first time in 2021? In that case, you’ll need to know all about stamp duty and what you may have to pay. Our guide has all the details…
And if you’re wondering which areas of the UK are the best for first-time buyers, we’ve outlined some of the country’s property hotspots for you to consider.