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Help to Buy mortgage explained

Help to Buy mortgages operate much like a normal mortgage, but they are capped at 4.5 times of your income. You can use the Government’s Help to Buy equity loan to reduce how much you need to borrow from the mortgage provider.

For first-time buyers and home movers buying a new-build property within the Help to Buy scheme, the Government offers an equity loan. This is either up to 20% of the property value in England and Wales, 40% in London or 15% in Scotland. You then pay for the remaining amount with a mortgage and at least a 5% deposit.

For example, if your property costs £200,000, you’ll need a deposit of at least £10,000. The Help to Buy equity loan tops that up with a maximum of £40,000 in England and Wales – and you get a mortgage for the remaining £150,000.

The Help to Buy equity loan gives you breathing space. You’ll repay your mortgage from the first month – but the Government loan doesn’t require immediate repayments. Instead, you pay £1 a month maintenance fee for the first five years and start paying interest from the 6th year. Alternatively, you can repay the loan partially or fully at any time.

The Help to Buy equity loan means the Government effectively buys a 20% (or 40% in London, or 15% in Scotland) share in your home. As they own a percentage, rather than a set sum, if your property value increases when you buy that share from them later, the amount you need to pay would rise from the original loan amount.

Need to wrap your head around Help to Buy mortgages and equity loans? Our experienced team will help you find the best deal for your circumstances. Contact us today to find out if a Help to Buy mortgage suits your needs.

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All about Help to Buy mortgages

The Help to Buy equity loan scheme is available to both first-time buyers and home movers until 31 March 2021. Afterwards, it will only be available to first-time buyers.

You need to contribute a minimum 5% deposit. You can apply for a government equity loan (up to 15% in Scotland, up to 20% in England and Wales and up to 40% in London) and cover the rest of the purchase price with a Help to Buy mortgage.

The Help to Buy equity loan scheme is only available on eligible new built homes with values up to £200k in Scotland, £300k in Wales and £600k in England and London. These maximum purchase price caps will change, however, in England on 01 April 2021 – see below.

The term “equity loan” means that the government will become a co-owner of the property. In effect, when you sell the property or repay the Help to Buy equity loan, you will need to pay the government their percentage share based on the property value at the time. For example, if you received a 20% equity loan, you will have to pay 20% of the sale price to the government when you sell the property. Not 20% of the price you paid when you bought the property.

Until you repay the equity loan in full, you may also have to pay fees and interest on it, so please read the sections below about the regional rules for further guidance.

The Help to Buy equity loan scheme rules will change on 01 April 2021 and will be valid until 31 March 2023.

Going forward, the scheme will only be available to first-time buyers (not to home movers) and instead of the current maximum purchase price of £600,000 in England and London, regional price caps will be introduced.

The new Help to Buy regional property price caps for properties eligible for the Help to Buy equity loan scheme will be as follows:

  • 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

Whilst you still pay a monthly management fee of £1 from day one until you repay the equity loan and no interest is payable during the first 5 years, there is a change as to what happens after 5 years.

Under the current rules, you start making interest payments in year 6 at 1.75%, increasing each year in April by the Regional Price Index (RPI) plus 1% until you repay your loan.

After 01 April 2021, interest payments will start at 1.75% in the 6th year and rise each year in April by the Consumer Prices Index including owner occupiers’ housing costs (CPIH) plus 2%.

Other aspects won’t change though. You will still need a minimum 5% deposit and the government will lend up to 20% of the property price interest-free for the first five years (40% in London).

Homes England, the organisation acting on behalf of the government, secures the Help to Buy equity loan as a second charge on your home. You repay the equity loan when you sell the property, pay off your mortgage in full or reach the end of your mortgage term. However, you can repay all or 10% chunks of the Help to Buy equity loan any time before then without a penalty.

At the moment, until 31 March 2021, anyone can use the Help to Buy scheme as long as they won’t own another property after the Help to Buy purchase completes.

This means that both first-time buyers and home movers can use this property scheme.

However, as of 01 April 2021, the Help to Buy equity loan scheme will only be available to first-time buyers.

Yes, the Help to Buy equity loan scheme is for new build properties only – both flats and houses.

The Help to Buy mortgage guarantee scheme was available for both new build and older properties, but this scheme finished at the end of 2016.

In England, the maximum purchase price is £600,000 for a new build property under the Help to Buy scheme.

You’ll need a minimum 5% deposit and the UK Government will provide a shared equity loan for a maximum 20% of the property purchase price. The rest of the purchase price (up to 75%) will need to be covered by a Help to Buy mortgage.

You’ll only have to pay an admin fee of £1 a month for the Help to Buy equity loan part during the first five years. After that, in addition to the £1 monthly fee, you’ll also pay interest at 1.75% in the first year, which will increase by the Retail Prices Index plus 1% every year.

When you sell the property or replace the Help to Buy equity loan, you’ll have to pay the government the equivalent of 20% of the property value at the time, not 20% of the original purchase price.

You can find more information here.

In the boroughs of London (click here for a map), the maximum acceptable purchase price for the Help to Buy scheme is the same as in England, i.e. £600,000.

You’ll need a minimum 5% deposit and the UK Government will provide a shared equity loan of maximum 40% of the property purchase price. The rest of the purchase price (up to 55%) would be covered by a Help to Buy mortgage.

You’ll only have to pay an admin fee of £1 a month for the Help to Buy equity loan part during the first five years. After that, in addition to the £1 monthly fee, you’ll also pay interest at 1.75% in the first year, which will increase by the Retail Prices Index plus 1% every year.

When you sell the property or replace the Help to Buy equity loan, you’ll have to pay the government the equivalent of 20% of the property value at the time, not 20% of the original purchase price.

You can find more information here.

In Wales, the maximum acceptable purchase price is £300,000 for a new build property.

You’ll need a minimum 5% deposit and the Welsh Government will provide a shared equity loan for a maximum 20% of the property purchase price. The rest of the property value (up to 75%) will be covered by a Help to Buy mortgage.

You’ll only have to pay an admin fee of £1 a month for the Help to Buy equity loan part during the first five years. After that, in addition to the £1 monthly fee, you’ll also pay interest at 1.75% in the first year, which will increase by the Retail Prices Index plus 1% every year.

When you sell the property or replace the Help to Buy equity loan, you’ll have to pay the government the equivalent of 20% of the property value at the time, not 20% of the original purchase price.

You can find more information here.

The Help to Buy (Scotland) Affordable New Build Scheme is available to larger developers, while the Help to Buy (Scotland) Small Developers New Build Scheme is available to smaller home builders. The rules are the same for both schemes.

Only new build homes up to a value of £200,000 could be eligible for these schemes. Both first-time buyers and home movers could apply, as long as a home mover will own no other property by the time the subject purchase completes.

You can apply for a maximum 15% Help to Buy loan from the Scottish Government and will need a minimum 5% deposit available.

Your Help to Buy mortgage and the deposit together must be a minimum of 85% of the purchase price. As the mortgage has to be minimum 25% of the purchase price and the Help to Buy loan can be less than 15%, it is possible to put down a larger deposit to minimise your credit commitments. This may benefit home movers who have a larger deposit available from selling their current property, but still need help with buying their new home.

There is an exception, however. Over-60s don’t have to take out a mortgage if they have enough deposit from sale and savings and can still benefit from the Scottish Government’s Help to Buy loan when buying a new build home.

To note, you won’t be eligible if you can afford to buy a home without the Scottish Government’s Help to Buy loan. You won’t qualify either, if you are a sole applicant and need a mortgage of more than 4.5 times of your income or as a couple, you need more than 3.5 times of your joint income.

You can find more information here.

The Help to Buy scheme ended in Northern Ireland in 2019, but you can find more information about alternative housing schemes here.

The Help to Buy equity loan can be repaid in part (in 10% increments) or in full at any time without a penalty.

While you’re paying an admin fee of £1 a month for the equity loan from day 1 and 1.75% of the equity loan as interest from year 6 (which increases every year afterwards as explained above), you don’t reduce the equity loan amount through the monthly payments.

The government’s equity loan is a percentage of the property value, which increases or decreases in line with how the value of the property changes.

This equity loan only needs to be repaid when your property is sold, or at the end of your mortgage term, whichever comes first.

Alternatively, you can repay the equity loan in part or in full early, based on a local surveyor’s valuation as agreed between you and the Help to Buy agent. The minimum you can repay is 10% of the property value at the time of the repayment.

For convenience, homeowners normally do partial or full repayment at the time when they remortgage, either by using savings or by increasing their mortgage borrowing to settle the Help to Buy equity loan.

The Help to Buy Individual Savings Account (ISA) helps boost your deposit when buying your new home through the Help to Buy equity loan scheme.

As long as you have saved minimum £1,600 in your Help to Buy ISA account, you will be eligible to receive a 25% of your savings (up to a maximum of £3,000) as a tax-free bonus from the government.

You can start your Help to Buy ISA account with an initial deposit of up to £1,200 and then pay maximum £200 per month into this account. For every £200 you save, the government will pay £50. However, this bonus is capped at £3,000 and to earn this much, you need to have saved a total of £12,000.

When you buy a property through the Help to Buy equity loan scheme, the government pays the bonus to your solicitor, who will add it to your deposit. You will not receive the bonus if you don’t buy a home with the Help to Buy equity loan or Shared Ownership scheme.

To qualify for the bonus, there are a few more requirements:

  • the property has to be in the UK;
  • the purchase price should be up to £250,000 or up to £450,000 in London;
  • the new home should be the only property you own;
  • you must intend to live in the property and
  • you need to buy the property with a mortgage.

You can’t open a new Help to Buy ISA account anymore (since December 2019), but if you already have an account, you can keep saving into it until 30th November 2029. After this date, additional contributions will no longer be allowed and you will have to claim the bonus by 1st December 2030.

You can find more information here.

This scheme allows regular servicemen or servicewomen in the armed forces to borrow up to 50% of their salary (maximum £25,000) interest-free to use as a deposit.

Other government-backed home buying schemes, such as Help to Buy Equity Loan and Shared Ownership, can be used together with the Forces Help to Buy.

This loan is for buying your first home or moving to another property on assignment or as your family’s needs change.

All regular service personnel can use this scheme as long as:

  • Those serving in the Royal Navy have been accepted onto trained strength;
  • Army and RAF personnel have completed two years of service from the date of enlistment and be on trained strength i.e. completed Phase two training;
  • You have at least 6 months left to serve at the time of application;
  • You meet the right medical categories;
  • You buy the property for yourself or immediate family, even if you are stationed abroad at the time of the application;
  • The property is not for investment purposes and you don’t own any other properties at the time when the purchase completes.

You can apply for the loan online through the Joint Personnel Administration (JPA) system and can seek advice on your application through your chain of command and personnel agency.

You can find more information here.

Building insurance

If you buy a house, then building insurance will be mandatory to ensure that in case the structure is damaged (e.g. by fire, flood or movement), the insurance will cover at least the mortgage amount.

Nothing else is compulsory, but of course, it makes sense to cover costly unexpected events.

Contents insurance

Contents insurance can pay for replacing your personal belongings if someone burgles your home, there is fire, you accidentally drop your new flat screen TV…and the list goes on.

Landlord insurance

If you’re planning to rent out your property then you should consider getting landlord insurance. Landlord insurance protects you as a landlord from risks associated with your rental property. It usually includes buildings and contents insurance, but can also include rental-property specific covers such as protection against loss of rent, and tenant default. It can also cover legal fees and compensation for damage or injury to the tenant due to the property.

Life insurance

Life insurance is a one-off payment if you were to die during the mortgage term, so the insurance can settle your mortgage. This would allow your family to stay in the property without worrying about mortgage payments at an already stressful time.

Critical illness cover

Critical illness cover would give you a lump-sum if you had a serious illness like cancer, heart attack or stroke as well as dozens of other conditions. This payment may or may not settle the mortgage, but it can help pay for treatment, let you take time off work while recovering or alter your home, if necessary.

Income protection

Income protection is designed to give you a monthly income for some time in case you can’t work due to an accident or a long term illness. This covers mental health issues as well.

Of course, all the insurances come with terms and conditions, optional features and your medical history can influence your options.

To find the right insurance cover that fits within your budget, speak to our team today. We can compare the whole market, find the most suitable cover and apply on your behalf free of charge.

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