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Help to Buy: Equity Loan

Help to Buy Equity Loans to top-up mortgage borrowings
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So you’ve managed the incredible task of saving a deposit for a house – congratulations! Affordability now comes into play, and many London home buyers find that they’re not able to borrow the full amount needed to purchase their dream home. To help first-time buyers step onto the property ladder, the government has introduced Help to Buy Equity Loans to top-up mortgage borrowings. The following guide will outline everything you need to know, and help you decide if this is the government scheme for you.

What is a Help to Buy Equity Loan?

A Help to Buy Equity Loan allows a purchaser to contribute a minimum of 5% deposit and borrow up to 40% as a government loan (20% if buying outside of Greater London). The remaining amount made up by a mortgage loan (up to 55%).

Who is eligible for a Help to Buy Equity Loan?

In order to apply for a Help to Buy Equity Loan, you must:

  •       Be a first-time buyer or a homeowner looking to move
  •       Not own any additional properties
  •       Be purchasing your primary residence
  •       Be purchasing a newly built home for up to £600,000

Current homeowners are not able to part-exchange their current home if taking out an equity loan.

How do I apply?

The London Help to Buy Equity Loan scheme is available on certain new-build properties. When enquiring to an agent, ask whether they have these available or look out for the Help to Buy logo on developments. Once an eligible property is identified, you apply for the scheme online.

What mortgage do I need?

Mortgages must be repayment only, and the amount borrowed mustn’t exceed 4.5 times household or individual income.

Calculating repayments on a Help to Buy Equity Loan

In order to calculate repayments on a Help to Buy Equity Loan, the staggered interest fee must be considered:

  1.          First five years = Equity loan is interest-free
  2.          Sixth year = 1.75% interest rate
  3.          Seventh year onwards = Interest is rate of inflation plus 1%

In addition, a £1 per month management fee applies from the date the property is purchased until the loan is paid off.

Can I pay off the equity loan?

Known as staircasing, it’s possible to repay all or part of an equity loan if affordability permits. A repayment must be a minimum of 10% of the property’s prevailing market value. If repayments are made after the initial five-year, interest-free period, then the interest fees charged will reduce to reflect the smaller loan percentage.

What if I want to sell the property before I have paid back the Help to Buy Equity Loan?

For properties sold before the equity loan has been repaid, the repayable amount to the government is calculated based on the current market value and the percentage borrowed. For example, if 30% was borrowed from the government, then 30% of the property’s current market value will be paid back, whether this amount has increased or decreased in size from the initial loan.

Are there any restrictions on Help to Buy properties?

A major restriction on Help to Buy properties is that they cannot be sublet. The exception to this rule is if the property owner is a serving member of the Armed Forces whose tour requires them to serve away from home for a fixed period. In this case, an application to sublet is submitted.

For more information on Help to Buy and government schemes available to you, take a look at our articles on Help to Buy ISAs, Lifetime ISAs and Shared Ownership. If you’re looking for a property eligible for a Help to Buy Equity Loan, speak to our New Homes team.

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