• Floris ten Nijenhuis

How does the Help to Buy equity loan work?


What are the restrictions?


You must be:

  • 18 or over

  • A first-time buyer

  • Able to afford the fees and interest payments

  • You cannot get the equity loan if you have ever:

  • Owned a home or residential land in the UK or abroad

  • Had any form of sharia mortgage finance

  • The home you buy must be:

  • A new-build

  • Sold by a Help to Buy registered homebuilder

  • The only home you own and live in


How much can I borrow?


Subject to change, please visit the government website for updated information. You can only borrow 20% of the property value (40% in London) up to a maximum purchase price of:

Region

Max Purchase Price

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

How much interest do I have to pay?


In year 6 you will have to pay 1.75% interest on the equity loan. So if it was a total of £25,000, you’ll have to pay £437.50 in year 6 or £36.46 per month. That is of course on top of the mortgage repayments that you are making already.


Beyond year 6, the interest goes up by the rate of inflation (calculated using the Consumer Price Index or CPI) plus 2%.


Do I ever have to pay that loan back?


Yes, the loan typically has a term of 25 years, and you will have to pay it off in full when it comes to the end. If you wish to pay some back early, you can do so, but you have to pay back a minimum chunk of 10% of the property value at the time (it might have changed from when you bought it). You will also have to pay it back if you choose to sell the property.


What’s good about an Equity Loan?


You legally own 100% of the property, which means you have no one else to answer to and can do whatever you want with it.


Because you only need a 5% deposit, you can move into your new property much quicker than if you were to wait for your salary to go up or to save up more for a deposit.


Your loan is interest-free for the first 5 years meaning you are getting free money at the beginning, although there are downsides to this. You can also potentially access cheaper mortgage rates.


Unlike the shared ownership scheme there are no restrictions on how much your household can earn to qualify for this.


What to watch out for


The biggest disadvantage to look out for is that your loan amount is not fixed, it grows if the value of your home grows. This means that if you borrowed 25% on a property worth £100,000, initially your loan would have been £25,000. If the property increases in value to £110,000, your loan amount would increase to £27,500 (25% of £110,000). This is unlike a mortgage, which stays fixed. So be careful!


Another financial worry is that you may run into negative equity, which is when the property value falls beyond the total outstanding mortgage value. That is because property prices may drop, meaning that if you are forced to sell your home, the amount that you get for it is worth less than your mortgage and your equity loan combined, so you could be out of pocket.


Beyond this, just like the Shared ownership scheme, you cannot pick any home that you want with the Help to Buy Equity Loan, it is only available on new builds. If that’s what you want then perfect, otherwise it might be a non-starter. Also, you can only purchase properties up to a certain value, so if are looking for something more expensive you will not qualify.


Remember how I said you were getting free money for five years? Well, the downside is that your loan will become more expensive after the interest-free period expires.


Be sure to check upfront whether you can get a competitive deal on a mortgage for a Help to Buy applicant, because that may not be the case.


 

Want to read about other alternatives to buying a home with a mortgage? You can find out more here