Help to Buy mortgages – how do they work?

What is Help to Buy?

The term Help to Buy covers a number of schemes the government introduced to help first time buyers get onto the property ladder.

The Help to Buy schemes include:

  1. Help to Buy: Equity loan
  2. Help to Buy: Shared ownership
  3. Help to Buy ISA
  4. Lifetime ISA

This guide focuses on Shared Ownership, and the Help to Buy and Lifetime ISAs. To learn more about the Equity Loan, check out our Help to Buy calculator.

Help to Buy is designed to help those with very small deposits buy a property. Both ISAs are for first time buyers only.

What is Shared Ownership?

The shared ownership scheme allows you to buy between 25% and 75% of an ex-council or new-build property. You take out a mortgage for the part that you own, and pay rent on the remaining share.

On new builds, the share you do not own is owned by the property developer. On ex-council properties, that share is owned by the housing association.

How does shared ownership work?

To qualify for the shared ownership scheme, you must be one of the following:

  • A first time buyer
  • An ex-homeowner
  • A current shared owner looking to move

Your total household income cannot be more than £80,000 (or £90,000 in London).

There are independent schemes for London, Scotland, Northern Ireland and Wales.

There are also similar shared ownership schemes for people with long-term disabilities and people aged 55 and over.

You can only buy certain properties using the shared ownership scheme. Not all mortgage lenders are prepared to give you a mortgage on a shared ownership property. Check with a mortgage broker or directly with a lender before you apply.

You need a deposit of at least 5% to get a shared ownership mortgage. As with all mortgages, the bigger deposit you have, the better the interest rate.

You could buy a shared ownership property with very little deposit. For example: a 25% share of a £500,000 property is £125,000. A 5% deposit of £125,000 is £6,250 - that's the minimum you would need to save. You then need a mortgage lender to loan you £118,750 for the rest of your 25% share.

The housing association or property developer would own the other 75% (£375,000) of the property. That's the part you would pay the subsidised rent on, which is normally around 3%.

In this instance, the rent would be £11,250 per year or £938 per month. To calculate your total monthly payments, you would need to add this rent to your monthly mortgage repayments.

This rent is not the same as increasing your share in the property. Rent is just rent!

Additional costs on shared ownership properties

As well as your mortgage and rent, you may need to pay a service charge and/or ground rent. This is because shared ownership properties are primarily leasehold.

Unless you're a first time buyer purchasing a property valued below £500,000, you will have to pay stamp duty.

Can I increase my equity in a shared ownership home?

You can gradually increase your share in the property by buying it from the housing association (or property developer). This is known as “staircasing”.

The cost of acquiring more equity in the property depends on its current market value, so it could go up or down.

You can eventually own 100% of the property but you might not be able to acquire the freehold. If that’s important to you, be sure to check with the housing association before you buy.

What is the Help to Buy: Equity Loan?

To get the equity loan, you must have at least a 5% deposit. The government then lends you a large chunk of money (as a percentage of the property value) to add to your deposit. And a bigger deposit means lower mortgage rates.

The loan is interest-free for the first 5 years. You cannot rent out the property or get a mortgage that's more than 4.5 times your salary. You can pay back the loan at any time.

You can only use the loan on specific new build properties.

How much the government loans you depends on where in the UK the property is:

  • Within Greater London < 40%
  • England (excluding London) & Northern Ireland < 20%
  • Wales < 20%
  • Scotland < 15%

The maximum price of the property also varies depending on location.

Help to Buy ISAs

The Help to Buy ISA is a tax-free savings account aimed specifically at first time buyers save for a deposit.

The government pays a 25% bonus for every £200 you save in a Help to Buy ISA.

You can open a Help to Buy ISA until 30 November 2019 when the scheme ends.

But you can save into the account until December 2029. The government bonus is only available if you use it for a deposit on your first property by December 2030.

How to get a Help to Buy ISA

Help to Buy ISAs are only available for first time buyers wanting to buy a home worth up to £250,000 (or £450,000 in London). You must be over 16 years old to get one.

Unlike with the Help to Buy equity loan, the property does not have to be brand new.

You and your partner can each have a Help to Buy ISA if you are both first time buyers. This means you can effectively double the bonus you receive. If one of you has already owned a home, that person cannot get a Help to Buy ISA, but the other one can.

How Help to Buy ISAs work

You can open a Help to Buy ISA with any bank, building society or credit union that offers one – not all do.

The interest you get on your savings is usually comparable to a traditional cash ISA.

There are rules on how the scheme works:

  • You cannot open a cash ISA and a Help to Buy ISA in the same year
  • You cannot open a Help to Buy ISA on behalf of someone else
  • You can only have one Help to Buy ISA at a time but you can transfer your ISA from one provider to another
  • You can pay in £1,200 the first month you open your ISA
  • You can only save £200 per month after the first month
  • So, aside from the first year, you can only save a maximum of £2,400 per year
  • You do not qualify for the government bonus if you've saved less than £1,600 before you close the account
  • You can close your Help to Buy ISA whenever you want without penalty
  • The government pays the 25% bonus when you withdraw the funds to buy your first home.
  • You cannot earn interest on the bonus because it is only paid when you withdraw the cash

The Help to Buy ISA bonus

The government bonus is 25% of your savings. The maximum amount you can save in a Help to Buy ISA is £12,000. So, the maximum bonus you can get is £3,000.

You can pay £1,200 in the first month you open the ISA and £200 every month after that.

This means the most you can save in your first year is £3,400 and then £2,400 every year after that.

To get the maximum £3,000 bonus, it would take you exactly 4 years and 7 months. Even if you save more than £12,000, you’d still only get a £3,000 bonus.

If you’d like to put more money into savings, you could open a Lifetime ISA.

You can have both a Help to Buy and a Lifetime ISA at the same time.

How the Help to Buy ISA bonus is paid

The Help to Buy ISA bonus is paid in one lump sum to your solicitor or conveyancer after you have exchanged contracts. They then add it to the rest of your savings for your deposit.

You can use the bonus with any qualifying mortgage. You do not have to get a mortgage from the same place as your Help to Buy ISA.

Figures published by HM Treasury show that between December 2015 (when the scheme began) and end of March 2018, the government paid out £157 million in bonuses to 196,007 first time buyers. The average age of these buyers was 27.

Lifetime ISAs

A Lifetime ISA (LISA) works in a very similar way to its Help to Buy counterpart.

The government adds a 25% bonus to your (tax free) savings to use to buy a property.

But with a LISA, the bonus is paid at the same frequency you contribute to the pot, not just when you withdraw. So, if you pay in monthly, so does the government.

You can save up to £4,000 per year meaning your maximum yearly bonus is £1,000. The LISA can remain open for 32 years.

With a LISA, your funds are locked away for the first year. If you try to withdraw earlier, you will not get the 25% bonus and will have to pay a 25% fee instead.

Edited by: Sarah Guershon

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Last updated: 6 November, 2019

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