The Help-to-Buy Equity Loan Scheme has helped thousands of aspiring homeowners step onto the property ladder since it launched in 2013. It could help you buy a home with a lower deposit and a smaller mortgage. In the year to March 2021, a record number of households took advantage of the scheme, but there are some drawbacks you need to consider too.
According to Zoopla, 55,649 homes were purchased using the scheme in the 12 months to March 2021. In total, 328,506 families have used the scheme, with the government advancing £20.1 billion in equity loans to help homeownership dreams come true. More than 8 in 10 people who used the scheme were first-time buyers.
What is the Help-to-Buy Scheme?
The Help-to-Buy Equity Loan Scheme aims to help families buy a home by providing an equity loan. In England, rather than a traditional 10% deposit, buyers using the scheme can proceed with just a 5% deposit. The equity loan can then cover up to 20% of the value of the property (40% in London). A mortgage is then used to cover the remaining amount. The equity loan means buyers don’t have to borrow as much through a mortgage.
However, the loan will need to be repaid. The loan is interest-free for the first five years. After this, the interest rate is 1.75% and rises each year by the rate of inflation according to the Retail Prices Index plus 1%.
As it is an equity loan, it is tied to a percentage of your property, rather than a set figure. This means that when you pay off the loan, including if you sell your home, you’re likely to pay a different amount than the figure you originally borrowed. If the value of your home rises, so to will the amount you need to pay back.
While the scheme has been helping buyers since 2013, the government introduced two important changes in April 2021:
- You can now only use the scheme if you are a first-time buyer.
- The maximum amount you can spend on a property is capped according to the region you will be buying in. For instance, a homebuyer in London could use the scheme to purchase a property up to £600,000. This falls to £186,100 in the North East.
If you’re thinking about using the Help-to-Buy Equity Scheme, here are some of the advantages and disadvantages to weigh up first.
Advantages of using the Help-to-Buy Equity Loan Scheme
1. You can buy a home with a smaller deposit
First-time buyers can face significant challenges. One of the first obstacles is saving a deposit. The Help-to-Buy Scheme means you need just 5% to put down on a property. It can make your dreams of homeownership come true sooner. However, if this is the only reason you’re considering using the scheme, you should note that there are traditional mortgages available that require a 5% deposit.
2. It will lower the amount you need to borrow through a mortgage
Usually, you can borrow up to 4.5 times your annual income through a mortgage. In some cases, this will mean your budget to buy a home won’t stretch far enough. Depending on where you live, there may be no houses available within your budget or they may not be suitable for your needs.
As the Help-to-Buy Scheme means you only need to take out a deposit to cover 75% of the property’s value, it can reduce the amount you need to borrow through a mortgage lender. It can also make your mortgage repayments more affordable.
3. It can be an efficient way to borrow to buy your home
If you need to borrow to buy a home, the equity loan scheme can make sense. It’s interest-free for the first five years and you have up to 25 years to pay back the loan in full. However, you will need to pay back the loan in full if you sell your home, and interest can add up over the long term.
Disadvantages of using the Help-to-Buy Equity Loan Scheme
1. It must be a new-build property
The scheme can only be used to purchase a new-build. This means you’ll have less choice, and it may mean that eligible properties are more expensive when compared to the whole market.
2. The value of the loan will fluctuate
As mentioned above, the value of the loan is dependent on the value of your property. In many cases, this will mean you need to pay back more than you borrow as house prices rise. It’s important you understand how this will impact your repayments to ensure you’re on track.
3. The interest payments could cost you thousands of pounds
While using an equity loan can make homeownership more affordable in the short term, it can mean the total cost of buying a home is much higher. After the initial five interest-free years, the amount you owe can rise quickly. This could put a strain on your day-to-day finances, as well as adding up over the long term.
4. Your mortgage choices may be limited
When you’re looking for a mortgage, you will have fewer options when using the Help-to-Buy Equity Loan Scheme. You will need to borrow less money to buy a home, but some deals won’t be open to you and this could mean you will need to pay a higher rate of interest.
If you’re getting ready to buy your first home, please get in touch. We’re here to help guide you through the process and secure a mortgage that meets your needs.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.