The new Help to Buy: Equity Loan scheme for first-time buyers​

Set to begin in April 2021 and continue until the end of March 2023, a new Help to Buy: Equity Loan scheme will replace the existing scheme in England with a few fundamental changes. Here, we’ve explained what those changes will be and how this scheme can help you as a first-time buyer.

The current Help to Buy: Equity Loan scheme

The existing Help to Buy: Equity Loan scheme helps first-time buyers and existing homeowners purchase new-build properties in England. You have to pay a deposit of at least 5% of the full price of the property. The government provides up to 20% of the purchase price as an equity loan. Applications for this scheme must be made by 15^th December 2020.

You must take out a repayment mortgage for at least 25% of the property value. Your mortgage and any cash payment you may contribute towards the purchase must equal at least 80% of the full price. Even though you don’t own all of the equity for your new home, your name goes on the title deeds. This means that you are the legal owner. This scheme is available for properties up to a value of £600,000. Therefore, the maximum you can borrow under this scheme to purchase a new-build property in Bexley, Kent is £120,000.

London Help to Buy

In London, due to the higher property values, the equity loan provided is up to 40% of the purchase price. Your repayment mortgage must be for at least 25% of the property value and form a minimum of 60% of the property price when combined with any cash contribution you make. The higher equity loan amount means you can borrow a maximum of £240,000 via this scheme when purchasing a property in Pimlico, London.

How is the equity loan repaid?

Once your equity loan starts, you pay £1 per month as a management fee until the loan is repaid. There is no interest to pay on the equity loan for the first 5 years. After that time, an interest fee of 1.75% becomes payable on the loan amount. This increases every year in line with the Retail Prices Index (RPI) plus an additional 1%.

You need to repay your equity loan by the end of a 25-year term or earlier if you decide to sell your home. As the equity loan is based on a percentage of your property’s value, this same percentage applies when you sell your home. Therefore, if you sell it for a higher price, the amount you repay is higher than the initial amount you received. Alternatively, if your home’s value decreases, you repay the loan percentage based on the lower sale price.

You can increase your equity share

You can make a full repayment whenever you want to before the end of the 25-year term. However, you can also make part repayments, which is called staircasing. Each repayment must be for a minimum of 10% of the current market value.

How the new Help to Buy: Equity Loan scheme differs

The new Help to Buy: Equity Loan scheme is only available to first-time buyers looking to buy new-build homes. It will be open for applications from 16^th December 2020. The home builder must already be registered for the scheme before you apply. You need to pay a 5% deposit at the exchange of contracts and the government will fund 5% to 20% of your new home’s market value (or up to 40% if you are buying a home in London) by way of an equity loan. You need to have a repayment mortgage in place for at least 25% of your new home’s purchase price.

Property price caps

Whereas the existing scheme applies to properties up to £600,000 in value, the new scheme has set maximum property prices that differ for each region in the country. These are:

• 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

This means that if you purchase a new home in Bexleyheath, Kent, the maximum you can borrow from the government is £87,520. The maximum equity loan you can receive when purchasing a new home in Pimlico, London is £240,000.

These new price caps have been calculated at 1.5 times the average price for a first-time buyer in each area. This is to ensure that new-build property prices are kept more in line with the average prices that first-time buyers usually pay within each region.

How is the equity loan repaid?

From the commencement of your equity loan, a £1 payment is made monthly as a management fee. This continues until the equity loan is repaid. No interest is due on the equity loan for the first 5 years. After that, an interest fee is charged at 1.75%. This increases each year in April according to the Consumer Prices Index (CPI) plus an additional 2%.

Your equity loan must be repaid in full when your repayment mortgage is paid off, you decide to sell your home or when the equity loan term has come to an end, which is usually 25 years. The percentage of your equity loan is based on your new home’s market value. This means that when you repay the loan, it is calculated as a percentage of the market value at that particular time. Therefore, if the value of your home increases, the amount to repay for your equity loan also increases. If your home’s value decreases, however, so does the amount you need to repay for your loan.

You can increase your equity share

You can make a part repayment at any time to increase your equity share. Known as staircasing, this can be done in minimum amounts of 10% of the current market value of your home. To ascertain the market value, you need to instruct a qualified surveyor to provide a valuation report.

Is the new Help to Buy: Equity Loan scheme right for you?

If you have been able to save a substantial deposit and can obtain a mortgage deal without help from the government, then you may prefer not to apply for an equity loan. Speak to a professional mortgage broker first to ensure you make the right decision when buying your first home.