Understanding The Help To Buy Scheme

Buying a home for the first time is one of the most exciting (and daunting) things you’re likely to do. I bought my first property in 2012 under the shared ownership scheme and I’ve talked about that a lot. But there are other schemes that you can use to get on the property ladder including help to buy.

Most schemes are available on newly built properties, and it’s likely that most new build estates will have a government backed scheme available to take advantage of.

In this post I’m going to look into the help to buy scheme in more detail.

What is the help to buy scheme?

The scheme is a government initiative aimed at making it easier for people to buy a new-build home.

Saving a large enough deposit is one of the hardest parts of buying a home. The help to buy scheme was introduced in 2013 to help with this, offering an equity loan that can reduce the initial financial burden.

How does it work?

The scheme operates through an equity loan system where the government lends you up to 20% (or 40% in London) of the cost of your newly built home.

You need to provide a minimum 5% deposit and alongside the loan this goes into paying for your home. Then you secure a mortgage to cover the remaining 75% balance (or 55% in London).

For example if you’re buying a £300,000 home outside of London you’ll need a £15,000 deposit (5%). Then you’ll get a £60,000 equity loan from the government (20%) and a £225,000 mortgage (75%).

For most people the equity loan is the only way to get onto the property ladder as they may not be able to save more than 5% deposit. Or they may not be able to get a mortgage for more than 75% of the value of the property.

Repayment of the help to buy loan

The equity loan is interest-free for the first five years, and then from the sixth year onwards you’ll be charged an annual fee of 1.75% of the loan’s value. The interest increases each year by the Retail Price Index (RPI) plus 1%. But the interest percentage is likely to be lower than a traditional loan.

You must repay the equity loan if you sell your home, or at the end of the mortgage term, whichever comes first. But you can choose to pay it off earlier.

Repayments are based on the market value of your home at the time you want to make a repayment, not on the original loan amount. So if the value of your home increases the amount you repay will also increase. For example if you borrowed £60,000 off a £300,000 home, but that’s now worth £400,000 then you’ll pay back £80,000.

Who qualifies for the help to buy scheme?

You need to meet certain criteria to quality for the scheme:

• You must be a first-time buyer. Prior to 2021 this scheme was open to existing homeowners but it changed to help prioritise those buying their first home.
• The scheme only applies to newly built properties from registered help to buy builders. So you can’t use this scheme on any home.
• The home must be your primary residence and it can’t be used for second homes or buy-to-let properties.
• The price of the home must not exceed the regional price cap. For example, the cap is £600,000 in London and varies across England.

How to apply for the scheme

To start with you need to find a registered builder to see properties that are sold under the scheme. You may find whole new build estates are available, or just certain units. Once you find a new-build home you like you’ll pay a reservation fee of around £500 to reserve the home.

When you’ve reserved the property you’ll apply for the equity loan by completing a help to buy application form from the registered builder or help to buy agent. Once this is secured you’ll apply for a mortgage for the remaining amount to purchase the home. When applying for your mortgage the lender must be a help to buy mortgage provider.

Once you have your mortgage in place your solicitor will manage all of the legal aspects including the equity loan. And once all the paperwork is complete you can move into your new home.

As the property will be a new-build the process may be a lot quicker than a traditional home sale as you don’t have previous owners ready to move out, so there’s no chain to compete with.

Benefits of the help to buy scheme

Lower deposit required

The scheme allows you to buy a home with a minimum 5% deposit which can make saving to own a home more attainable than having to say 10-20%.

You may be able to afford more

With the scheme’s help you may be able to afford a more expensive property than if you were buying it through your own deposit and a mortgage alone.

Interest-free loan

The loan is interest-free for five years, and it’s unlikely you’ll ever be offered an interest-free loan for this period again. You’ll save a lot of money on interest over those years, especially if you continue to pay off as much as you can.

Understanding help to buy

The scheme is a hugely valuable resource for first-time buyers, especially when prices and interest rates are so high.

By reducing the initial deposit requirement and offering a loan interest-free for five years it makes homeownership more attainable.

If you think you’re eligible and are looking to buy through the scheme consult a financial advisor who can discuss more details with you.