How Does the Help to Buy Scheme Work?

Nov 15, 2021 | Guides | 0 comments

The Help to Buy scheme is a program that helps first-time homebuyers to buy a property. If you’re looking for a home but don’t think you can put together a deposit, then you may want to consider this program.

We’ve put together some information about the Help to Buy scheme and what you need to know about the program.


What is the Help to Buy Scheme?

Help to Buy is a government equity loan scheme where the government loans money to a homebuyer. The scheme provides the homebuyer with a loan of up to 20% of the value of the new build home. The program offers up to 40% of the property value for new build homes for those in London.

If you’re a buyer participating in this program, you can then borrow a minimum of 5% of the full purchase price of the new-build home. It’s also required that you buy the home from a home builder registered with the Help to Buy Equity Loan scheme.

The government part of the loan stays interest-free for the first five years you own the home. After that, the interest rate will be 1.75% in year six and increase 1% (plus inflation) for each subsequent year.

The equity loan can be repaid at any time; you can choose to pay a part of the loan or the entire loan. However, you must pay at least 10% of what your home is worth when you do repay.


Changes in the Help to Buy Scheme in 2021

In 2021, the Help to Buy Scheme was updated and came into effect on 1st April 2021. The updated scheme includes some significant changes, including:

  • The updated scheme is only made available to first-time homebuyers. Those who have previously owned a home will not qualify for the scheme.
  • The value of new build homes eligible for purchase through the scheme is capped differently in each region.

Here’s a look at the regional price caps under the updated Help to Buy scheme:

  • London is £600,000
  • South East is £437,600
  • South West is £349,000
  • East of England is £407,400
  • North East is £186,100
  • North West is £224,400
  • East Midlands is £261,900
  • West Midlands is £255,600
  • Yorkshire and the Humber are £228,100


Who is Eligible for the Help to Buy Scheme?

In this section, we’ll go over the eligibility requirements for the Help to Buy Scheme:

  • You must be 18 years or over
  • Be a first-time property buyer
  • Be assessed as having the capacity to meet the fees and interest payments

You’re not eligible for the scheme if you have:

  • Previously owned residential land or property in the UK or abroad
  • Previously held any form of sharia mortgage finance

Those who apply can do so as an individual or a group; however, the scheme requires all the applicants to meet all of the eligibility requirements. And if you’re married, cohabiting with a partner, or you’re in a civil partnership, you must make a joint application.


Property Eligibility

Just as there are requirements for applicants, the Help to Buy scheme also has eligibility requirements for properties that can be accommodated under the scheme. Each property must be:

  • A new-build
  • The only home you both own and reside in
  • Sold to you by a registered Help to Buy homebuilder
  • Be priced within the regional price cap threshold for your region

What’s more, the home may not have been previously lived in by anyone before you buy it. And you’re not allowed to rent the property out or sub-let it after purchasing the property.


How Does the Help to Buy Scheme Work?

The Help to Buy Scheme is very straightforward. You are required to:

  • Put down a minimum deposit of 5% of the property’s purchase price
  • Successfully apply for a repayment mortgage of at least 25% of the purchase price

You can use the scheme to borrow an equity loan between 5% and 20% of the purchase price of a newly built home. You can borrow a maximum of 40% for properties in London, since home prices are much higher here.

Then the percentage of the equity loan you borrow is used to calculate your equity loan and interest repayments.


Interest Payments Under the Help to Buy Scheme

A homebuyer is not required to pay interest payments for the first five years. However, by the sixth year, the homebuyer is charged an interest rate of 1.75%, which is applied to the original equity loan amount that was borrowed. This is an annual interest rate that’s spread over twelve monthly payments.

The interest rate charged then increases in April each year by adding on the Consumer Price Index (CPI) plus another 2%.

The amount of interest paid can be reduced by making a partial repayment of the equity loan. This works to decrease the amount the interest rate applies to.


Are There Any Fees Involved with the Help to Buy Scheme?

That’s a great question! Yes, there is a management fee of £1 that is paid each month until the loan is paid in full. If the home is remortgaged or the equity loan is changed in some way, then it’s necessary to pay administration fees.

In addition, there are standard fees that come with buying a home, which includes the mortgage arrangement fees, legal fees, market value report expenses, and more.


Repaying the Equity Loan

When it comes to repaying the equity loan, it’s possible to repay part or all of the equity loan at any time. The repayments are calculated using the percentage of the equity loan, along with the home’s market value at the time of repayment.

The smallest repayable amount allowed is 10% of your home’s current market value. Repaying part of the loan works to reduce the amount of the monthly interest payments required from the sixth year and on.

The equity loan must be paid off in full when:

  • You pay off your mortgage
  • Sell the property
  • When you reach the end of the loan’s term (which in many cases is about 25 years)

You may also be required to repay the loan in full if you don’t follow the terms and conditions. What’s more, if the home is sold, it’s necessary to pay the equity loan percentage of the property’s market value or the agreed price of sale if that is higher.


Advantages of the Help to Buy Scheme

There are some advantages to the Help to Buy scheme for those looking to buy a home:

  • Requires a low deposit
  • A great option for couples
  • Great for Londoners who would like to buy a home


Disadvantages of the Scheme

Just as there are some advantages to the scheme, there are also disadvantages, including:

  • Limited only to newly built homes
  • Interest rates are subject to increase

If you’d like more information about the Help to Buy scheme, then contact us today! We’re happy to answer your questions and help with other aspects of buying a home!

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