Help To Buy Scheme

Help to Buy is a government scheme first announced in the March 2013 Budget, and designed to help anyone struggling to save a deposit for their first home or move up the property ladder as they have limited equity. Help to Buy means that  you could move home with a deposit as low as 5%. 

It works in the following way: you want to buy a new build property with the budget up to £ 600,000. With a Help to Buy equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage with qualifying lending institution in the UK (e.g. a bank or building society) to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home. This lending institution should participate in the Help to Buy Government scheme. The mortgage must be on the repayment basis. 

You cannot choose to take a lower mortgage if your affordable income multiple suggests (roughly up to 4.5 times your household income) you can afford and sustain a higher one. This is because the scheme is designed to assist buyers by giving them the help they need (but not more than that) to buy a new home. With limited resources available, the specially created Home Buy Agent is seeking to help as many buyers as possible, and allowing a buyer to reduce their mortgage (and maximise their equity loan) could also stop others from benefiting from this initiative. 

As for the residential mortgages, you would be also liable for payment of interest on the government equity loan. This interest is being called loan fee, which is not payable for the initial 5 years. In the 6th year, the fee of 1.75% of the loan's value would be charged annually. The fee would be fixed only for a year and would be increased every year, based on retail price index plus 1%.

Firstly, in order to participate into this scheme, you would need to approach local Home Buy Agent and check a list of registered Help to Buy builders in your area. Remember that this scheme is only applicable for new build home. If you are considering a restored or listed buildings, which are offered by developers, are not suitable for this scheme and you need to carefully verity with your local agent suitability of the property. The property purchased must be your only residence. Help to Buy scheme is not available to assist buy-to-let investors or those who will own any property in the UK other than their Help to Buy property after completing their purchase.

Secondly, you need to appoint a bank, which would be able to facilitate your 75% mortgage. Initially only NatWest, Halifax, Bank of Scotland expressed their willingness to participate in this scheme. At later stage some other banks such as HSBC, Virgin Money and others also confirmed that they would join the scheme.

The home will be in your name, which means you can sell it at any time. You'll have to pay back the equity loan either when you sell your home, or at the end of your mortgage period,  whichever comes first. You can also pay back some of your equity loan without selling your home. You can pay back either 10% or 20% or the total amount, as long as the loan is worth at least 10% of the value of your home. The tricky moment which you need to bear in mind is when you sell the property and would be in the position to repay 20% equity loan to the government, it would be 20% of the selling price of the property, which means that capital repayment (ignoring the interest, which you are paying during availability of this facility to you) can be higher that original size due to capital gain accumulated at the point of selling of the property.  

When you sell the property, the independent valuer must decide what it is worth. The property should be sold on the open market at the prevailing market valuation. If you do sell your property for more than the prevailing market value then the amount due to the Agency under the equity loan will be their percentage value of the actual sale price. The Agency will not agree to release its charge over the property for sales at less than market value. If you sell your property with a loss, you will repay less than the original amount the Agency contributed to the original purchase. You must always show that the proposed sale value is at the prevailing market value before going ahead. The Post Sales Home Buy Agent must approve the sale before allowing the second charge to be released. As long as you have complied with all your obligations in the Help to Buy mortgage deed, you will not be required to provide for any shortfall in the equity loan if you sell when values have fallen.  If you do not comply with the terms of the Help to Buy mortgage deed, the Agency will seek to recover all the moneys they are owed. Your solicitor will explain the Help to Buy mortgage deed to you before the property is purchased.

LONDON HELP TO BUY

If you live in London, from early 2016 the Government will lend you 40% the price of your home, increasing the upper limit for the equity loan it gives new buyers within Greater London from 20% to 40%.

With London Help to Buy equity loan:

  • you’ll need to contribute at least 5% of the property price as a deposit
  • the government will give you a loan for up to 40% of the price (a significant increase from previously available 20%)
  • you’ll need a mortgage of up to 55% to cover the rest

The changes are designed to further facilitate the first time buyers in London with getting on the property ladder.

Equity loan will be now available until 2021.

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