Help to Buy scheme: A complete guide

Help to Buy scheme: A complete guide

 

Property just keeps getting more expensive. The old-school three times salary mortgage scene was great. It worked well back in the days when a one bedroom flat cost less than thirty thousand pounds. These days few of us can afford a mortgage on three times our salary. The average UK property costs £265,668 and that means you’d need a salary of £88,000 or more to make the numbers work under the old way of doing things. No wonder the Help to Buy scheme is becoming more popular as time passes, and more people – especially young and first time buyers – are tapping into it. 

In this article we discuss how help to buy schemes are becoming more prominent for first time buyers and younger homeowners. And we’ll explain things in a simple way you should find easy to understand. Welcome to our essential guide to Help to Buy property.

 

What it is the help to buy scheme

 

The government’s Help to buy scheme is available in England only, with special schemes for Scotland, Wales and Northern Ireland. The scheme is designed to help more people get on the property ladder. With a bit of luck it might be exactly what you need to make buying your own home more affordable. First of all, you only need a 5% deposit, which is a lot less than the amount you’re often required to save up by mortgage lenders, and less than you usually need to qualify for a really good first time buyer mortgage deal – something that usually takes a deposit of at least 20%.

The government lends you as much as 20% of the value of the property and this equity loan is interest free for five years, giving your finances a valuable breathing space. All you need to do is find yourself a good 75% repayment mortgage deal and you’re on the way to being a homeowner. The scheme was created to help people overcome the runaway property prices we’ve been suffering since the 1990s, and it’s targeted at first time buyers who want to get a foot on the property ladder.

 

How does the help to buy scheme work

 

So how does the Help to Buy Equity Scheme work?  You have some strict eligibility criteria to fulfil, and we’ll talk about those later in the article. The Help to Buy property itself also comes with criteria attached. It has to be a new build, a brand new home, never owned by anyone else. It must be on sale via a registered Help To Buy builder, and must be the only home you own as well as the only place you live. And there’s a maximum purchase price that depends on the area of the country you’re buying in, simply because the average cost of new homes around the nation varies so widely:

  •         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

 

With a Help to Buy property you pay at least 5% deposit on the place you want to buy. You find your own repayment mortgage to cover at least 25% of the property purchase price, then you borrow a government equity loan to cover 5-20% of the purchase price, 40% in London. The equity loan percentage you borrow is the basis for calculating the interest and equity loan repayments. Here’s an example.

 

  •         Say you buy a place for £200,000 and borrow 20% of the value, £40,000
  •         You pay the usual legal fees, mortgage arrangement fees, and market value reports
  •         Your interest and repayments are calculated on an equity loan percentage of 20%
  •         There’s no interest payments for the first 5 years
  •         In year 6 you’re charged an annual interest rate of 1.75% on your equity loan – the equity loan percentage of the property purchase price – and this is spread over the year in monthly repayments. In this case you pay annual interest in year 6 of £700, £58.33 per month
  •         Your interest rate goes up annually every April, by the Consumer Price Index plus 2%
  •         If you make a part-repayment of your equity loan – which you can do any time you like – your interest payments will go down, simply because the amount you’re paying interest on is less than it was. Just bear in mind the smallest repayment you can make is 10% of the property’s  market value
  •         There’s a monthly management fee of £1 to pay when you take out the equity loan, which you’ll pay until the entire loan is paid back
  •         If you change the equity loan, remortgage or repay some of the equity loan, you’ll be charged admin fees
  •         You will have to pay all of your equity loan back when you come to the end of the loan term, usually 25 years. The same goes if you sell up, pay off your repayment mortgage, or don’t stick to the terms and conditions of your equity loan. Selling means you’ll have to pay the equity loan percentage of the market value or agreed sale price, but only if it’s higher
  •         If you have already made part-payments to reduce your equity loan and want to pay it back altogether, you’ll have to pay the equity loan percentage you still owe on the market value.

 

Remember that the interest and fee payments on a Help to Buy property don’t go towards paying your equity loan back. Not keeping up with payments could mean you’ll have to pay recovery costs or interest on the outstanding money.

Property prices vary widely across the UK, and London has the highest prices of all. The Help to Buy scheme London  involves a government loan of 40% of the value, not the usual 20%. You need a deposit of at least 5% and you’ll need to find a repayment mortgage to cover the remaining 55% of the property price. 

 

Who is eligible for help to buy

 

If you want to take advantage of the Help to buy scheme there are some eligibility criteria to meet. You need to be aged 18 or more and be a first time buyer. Like everyone who buys a property you need to be able to afford the fees and interest payments. You mustn’t have owned your own property or land before, and you can’t qualify if you’ve held any kind of Sharia mortgage or finance. You can apply for the scheme alone or with others, but all of you must meet the eligibility criteria.

When you’re part of a married or cohabiting couple who intend to live together, you need to apply on a joint basis. Your repayment mortgage should be less than four and a half times your gross annual income. And the place you buy has to fall under the maximum regional price cap, as well as a brand new home. Existing homes or places that have already had an owner don’t fall under the scheme. It’s also good to bear in mind your help to buy agent will check all your eligibility criteria carefully before going ahead.

 

Advantages and disadvantages of help to buy schemes

 

It’s important to fully understand all the advantages and disadvantages of the Help to buy scheme, London or otherwise, as well as know exactly how the ins and outs of everything might impact you or the loan itself in future.

Pros of the Help to Buy scheme

  •         You might be able to buy a home a lot sooner than you had imagined. This can be a real deal-maker especially at times when property prices are rising fast, like they are at the moment
  •         You may be able to buy somewhere bigger or better than you’d thought. You could end up in an area you like more than the area you thought you’d be able to afford, in a home with more space or more rooms, or a garden
  •         You can buy with a smaller deposit, which matters a lot when saving up isn’t easy. Rents are sky high at the moment, so your escape from the rental market – with all that ‘dead money’ spent on rent, could be closer than you think
  •         It’s incredibly rare to be able to borrow interest-free. The scheme provides interest-free borrowing for five years, and that alone can make a huge difference to your future as a property owner
  •         After five years has passed, you’ll get a very competitive loan rate compared to the rate you’d get under ordinary circumstances
  •         You benefit from access to cheaper mortgage rates and better mortgage deals than you’d be able to get otherwise
  •         Assuming you pay back your loans and fees on time, you naturally acquire a good reputation as a person it’s safe to lend to   

 

Cons of the Help to Buy scheme

There are also a few important down-sides to take into account with a Help to Buy property.

  •         As time passes your loan becomes increasingly expensive. On the other hand people tend to earn more over time, so this might not be a problem for you
  •         Your loan amount isn’t fixed, so you can’t be certain you’ll always be paying the same amount back.  The rate fluctuates along with the market value of your property simply because it’s is percentage-based. If your home’s value shoots up, you might find you have to pay back significantly more than you borrowed
  •         You’re limited to certain new-build homes, which means you can’t enjoy an older home packed with character, and can’t always choose the kind of location you’d ideally like. Most  new builds take place outside of city and town centres, on the fringes, so you may find you’re living in a place that isn’t ideal for your needs
  •         There’s a limited choice of lenders, which inevitably means you might not have the same wide choice of mortgages that a buyer who’s purchasing the usual way
  •         There’s a risk of negative equity. When you have a stagnant housing market together with a new build premium, your re-mortgage options are fewer and you could face negative equity if property prices begin to drop
  •         The fees and other terms can change, which means you can’t be 100% certain what you’ll owe in future

 

Help to Buy Scheme FAQs

 

Now we’ve covered the ins and outs of the help to buy scheme, let’s answer some of the most frequently asked Help to Buy property questions.

How do you apply for help to buy?

All you do is find an official Help to Buy agent in the area you want to buy. They know all about the scheme and will be experts in helping you through the process from start to finish, in much the same way as an everyday conveyance supports people in buying a home of their own the traditional way. There’s a different maximum cap on property values for the scheme, and various parts of the country have different caps depending on average local property values.  

Where is the Help to Buy scheme available?

The Help to Buy scheme we’re talking about is available in England. There are separate schemes for people who live in Scotland, Wales and Northern Ireland.

How long will the Help to Buy scheme run for?

The current Help to Buy initiative lasts until March 2023, with no changes planned before then.

Is Help to Buy a shared ownership scheme?

In a word, no! Shared ownership comes with different eligibility criteria including your earnings, and your homeowner status. You can, for example, take advantage of shared ownership if you owned your own home in the past, something you can’t do under Help to Buy.

Can I pay off the equity loan before the end of the first 5 years?

Yes, you can pay off some or all of your equity loan whenever you like. This brings down the amount you owe, so your repayments will also reduce. The lowest equity loan repayment you can make is 10% of your property’s  market value, and changing the equity loan means you might be charged admin fees.   

What is the maximum help to buy loan?

The maximum amount you can borrow depends on where in the country you’re buying. The government lends you up to 40% in London of the sale price up to the regional limit, and 20% elsewhere in the country. You borrow the rest – up to 75%, or 55% if you’re buying in London, from a mortgage lender on a repayment basis.

  •         London: £600,000
  •         South East: £437,600
  •         East of England: £407,400
  •         South West: £349,000
  •         East Midlands: £261,900
  •         West Midlands: £255,600
  •         Yorkshire and The Humber: £228,100
  •         North West: £224,400
  •         North East: £186,100

 

What happens if my home goes up or down in value?

Help to buy is great when prices are going up, giving you an affordable way to join the property ladder. If the value of your home goes down, you could end up paying back more than your initial loan.

When you eventually repay your government loan, the amount you’ll pay back depends on the property’s value at the time. Imagine you’ve borrowed 20% of the purchase price. After five years you repay 20% of the value of your home. When house prices rise, so does the amount you have to pay back.

If house prices go down, the opposite applies. You could pay back less or the same as you borrowed, but at the same time there isn’t as much equity in the property so you might find it a challenge to leave the scheme and get a regular mortgage. 

 

The Strawberry Star Help to Buy Scheme

 

Did you know that Strawberry Star offers a help to buy scheme? Why not take a look at the details and see if the scheme could help you grab a hold of the property ladder for the first time? We’re here to help you every step of the way.