Get on the Housing Ladder with Help to Buy Equity Loan

Help to Buy Equity Loan

The number of people who have bought a home through the Help to Buy scheme reached an all-time high last year.

Figures released on 13 August 2021 show that from 1 April 2020 to 31 March 2021 over 55,000 households bought a home with the support of a Help to Buy: equity loan.

That made it a record-breaking year for the scheme, which has helped over 328,506 households to purchase a home since it was introduced on 1 April 2013.

In total, the value of these equity loans has reached over £20 billion, with the value of properties sold under the scheme going past the £90 billion mark.

How does it work?

The scheme helps first-time buyers in England onto the housing ladder by providing a loan to put towards the cost of buying a newly built home. It was also available to home movers, but has been limited to first time buyers since April 2021.

You can borrow a minimum of 5%, up to a maximum of 20% (40% in London) of the full purchase price of a new-build home, along with a deposit from yourself and a mortgage for the remaining value.

How can you benefit?

Anyone interested in buying a home through the Help to Buy scheme should visit the scheme’s webpage. There you will find more information on the various steps to take to buy your first home, including instructions on how to apply and contact details for Help to Buy agents in your area. A help to buy agent will help you put the loan part of the agreement in place. You will then need to find a mortgage for the mortgage element. At Blackthorn Financial Services we are well placed to aid you in finding a mortgage for your new property or if you are thinking about refinancing, we can also help.

So, what are the charges on the equity loan?

Help to Buy purchasers will not pay a fee on the Homes England equity loan for the first five years. If you choose to stay in your property and not refinance your equity loan, from the beginning of year six an annual fee of 1.75% will be levied on the equity loan, payable in monthly instalments. The annual fee of 1.75% of the market value of the property at the time of sale will be uplifted by RPI + 1% p.a.

When it comes to moving or repaying your equity loan, what happens?

If you opt to sell the property prior to the redemption date (of 25 years), or you redeem your main mortgage prior to that period (without immediately refinancing) the equity loan is to be repaid.

The amount payable is based on the relevant percentage share of the market value of the property at the time the loan is repaid. Owners may redeem the equity loan (“staircase out”) at any time in full or in part. The minimum amount for equity loan redemption will be 10%.

An example of how Help to Buy will work is as follows:

  • Initial purchase price: £200,000 Mortgage: £150,000 (75%) Deposit: £10,000 (5%) equity loan: £40,000 (20%)

For the first five years the equity loan is charge free. At the start of year 6 an equity charge is levied of 1.75% rising at RPI + 1% per year.

Sale after 5 years Open Market Value (OMV): £210,000 (a 5% uplift in value). Mortgage repayment: £150,000. equity loan: 20% of OMV = £42,000

The remainder is available to the purchaser to use as a deposit = £18,000 for their next purchase/remortgage.

At Blackthorn Financial Services Ltd our Mortgage advisers have experience of helping clients remortgaging their properties, this includes being able to advise you on the options of repaying your equity loan even if you are going to remain in the property.

If you are nearing your 5th anniversary, where you will start to pay your annual fee each month on your equity loan, it could be a great time to review your mortgage and the options available to you and your circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.