How ‘help to buy’ works in England, with links to information on variations in other parts of the UK.
The scheme in England operates as follows:
Who is eligible? It is open to first time buyers and individuals who have previously owned property. Eligibility is determined by the cost of the property. The home must be newly built and cost no more than £600,000. The home cannot be sublet and the purchaser cannot enter into a part exchange deal involving their old home. The purchaser cannot own any other property at the time the property is purchased with a help to buy equity loan.
How the scheme works The government lends to the new homeowner(s) up to 20% of the cost of the new home. The government will not charge loan fees on the 20% loan for the first five years.
The purchaser(s) must take out a first mortgage (with a qualifying lending institution eg a bank or building society) for at least 25% of the value of the property. The mortgage, together with any cash contribution (deposit) from the purchaser(s), must be a minimum of 80% of the full purchase price. The cash deposit must be a minimum of 5% of the full purchase price.
The government will provide an equity loan between a minimum of 10% up to a maximum of 20% of the full purchase price. The equity loan must be repaid after 25 years or earlier if the home is sold. When sold the same percentage of the proceeds of the sale must be repaid as the initial equity loan – eg if the property is purchased for £400,000 and the equity loan is £80,000 (20% of £400,000) then after say 15 years the property is sold for £1,100,000, then £220,000 (20% of £1,100,000) would need to be repaid to the equity loan provider.
If the property has fallen in value then a similar system applies – eg if the property is purchased for £400,000 and the equity loan is £80,000 (20% of £400,000) then after say 15 years the property is sold for £300,000, then £60,000 (20% of £300,000) would need to be repaid to the equity loan provider.
If the purchaser(s) has not complied with the terms of the Help to Buy mortgage deed then the government-appointed agency which is managing the scheme will seek to recover all the money they are owed.
The equity loan is interest free for the first five years. After that, a fee of 1.75% per annum applies, rising each year by the increase (if any) in the Retail Price Index plus 1%.
Example The purchaser takes out an equity loan of say £80,000 (20% of property cost £400,000). No fees are due on the help to buy equity loan for the first five years. In year six a fee of 1.75% of the help to buy equity loan will be payable: £1,400 (£80,000 x 1.75%). This fee is payable to the agency managing the scheme. The fee rises annually from the fifth anniversary of the purchase by the increase (if any) in the Retail Price Index (RPI) plus 1%. If the RPI is say 5% then for the seventh year the annual fee percentage will be 1.855% (1.75% x (1 plus 6%) giving an annual fee for that year of £1,484 (£80,000 x 1.855%). This fee can normally be paid monthly which in this case would amount to approximately £123.67 per month.
The purchaser(s) can make voluntary repayments of the equity loan at any time. The minimum voluntary repayment is 10% of the market value at the time of repayment (whether that value is more or less than when originally purchased).
The property can be sold by the owner(s) at any time and an independent valuer must decide what the property is worth. If the property is sold for more than this valuation then the amount due to the agency under the equity loan will be their percentage value of the actual sale price. If there are any fees outstanding at the time of selling, these must be paid before the sale is completed.
The scheme is available from house builders registered to offer the scheme. The scheme is planned to be available until 2020 although it may close earlier if all the funding is taken up before that date.
Further information and resources The above information relates to the scheme in England (excluding London).
For new properties in London the above scheme has been extended from 1 February 2016 so equity loans up to 40% of the purchase price of the property may be available.
There are also variations in other parts of the UK as follows: