Today I want to talk about another scheme that the government has launched to help people to get on the property ladder. This scheme is somewhat different from the shared ownership (you can read more about it here). This one is called – help to buy. Some others also refer to it as equity loan.
Help to buy allows you to buy a full property. One of the issues with the scheme is – it only applies to new-build properties. The shared ownership properties however are also available on the resale market. This can make a full value of shared ownership property a lot less when compared to a new-build in the same area.
I will cover the key features and benefits as well as some of the watch outs of help to buy below. One of the first things you have to keep in mind – the time is running out. You have to make your application to the scheme by the 31st of October 2022. You will also have to complete the process of purchase by the 31st of March 2023.
what is equity loan help to buy scheme?
Help to buy or equity loan simply mean that the government partially lends you money for the property. The amount of money available will depend on where you buy. The first five years you wouldn’t have to pay any interest on it whatsoever. That’s not entirely true – you will be charged £1 every month as admin fee. On top of that, you will have to consider what to do with the loan after the 5 year period.
The amount you can borrow is 20% of the value of the property in England. In London the percentage goes up to 40%.
There is also a limit to how much the property can cost. In London it is £600,000. The rest of England will vary depending on the region you are looking to buy in. It will start at £186,100 and go all the way up to £437,600. To see what is the limit for where you want to buy – just check this link.
how to exit the help to buy scheme?
As mentioned above, the equity you borrow is interest free for the first five years. After that, you would have to pay 1.75% interest on the money you borrow. This would be reviewed and increased annually based on the inflation rate.
The other option you have – you can buy out the equity in order not to pay the interest to the government. You can do this in one of the two ways. The first one being – paying it out with a lump sum. The second, which is probably more realistic, would be to increase your mortgage and pay it out that way.
At the time you are considering buying out your equity it is worth comparing which would end up costing you less in terms of interest payments you have to make.
The equity you have to buy out is the percentage of the initial property value. The value of this percentage however is based on the current market price of the property at the time of you buying it out.
If the property has increased in value – the value you have to pay will be higher than what you’ve borrowed. If the property however has lost some value over the 5 first years of you owning it – the amount of money you’ll have to pay will be less than what you’ve actually borrowed.
You also have an option to pay out only part of the loan at first – this can be no less than 10% of the value of the property.
what other conditions are there?
There are clearly some rules in order to be eligible to use the scheme. The first one is obviously the price of the property and the amount you’re looking to borrow. You will have to be able to afford the other part of the property through other means.
Just as a reminder – you can borrow 40% of the value in London and 20% for the rest of England. The maximum property value is £600,000 in London and varies for the rest of England. Full breakdown of the value available in different regions is in the link above.
You also have to be a first time buyer. What this means is – you don’t currently or ever previously owned a property or land in the UK or abroad. You can make a joint application for a property however the same rules will apply to all the people buying the property.
The property also has to be a new-build. You will have to be the first person to live in the property. The homebuilder has to be registered with the help to buy scheme as well. The below logo is a good indication that the property you are looking to buy is part of help to buy scheme.
summary
In my view equity loan help to buy scheme is a great way for people to get onto the property ladder. It allows you to start considering to own your own home with fairly little cash savings available to you.
As with many other help to buy schemes the deposit you will need to put down is only 5% of the value you are actually borowing through your mortgage. This doesn’t make flats and houses affordable to everyone however with some little planning forward there can be ways to get the keys to your own home.
As with any scheme there are some things to consider. My biggest recommendation here would be to start thinking of how are you going to exit the scheme in five years time. You need to have a plan in order to avoid paying high interest rates.
New build homes are also not for everyone. You should do some research into what the prices of these likely to do in the first years of ownership. As with any investment, these can both go up and down in value over time.
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