Help to Buy mortgages – how do they work?

What is Help to Buy?

The Help to Buy mortgage schemes were introduced by the government to help first-time buyers get onto the property ladder.

Currently there are two Help to Buy mortgage schemes available: Equity Loan and Shared Ownership.

In addition to the mortgage schemes, there are also two savings products to help you save up a deposit and buy your first home: Help to Buy ISA and Lifetime ISA.

The amount you can borrow with Help to Buy: Equity Loan varies depending on where you want to buy a home. You can use our Help to Buy calculator to find out how much you can borrow from the government in your part of the country.

What is Help to Buy: Shared Ownership?

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

If you’re buying a new build, that share is owned by the property developer but if you’re buying an ex-council property, it’s owned by the housing association.

How much can I borrow?

How does the Shared Ownership scheme work and how much does it cost?

You must either be a first-time buyer, an ex-homeowner or already be a shared owner who is looking to move. Your total household income cannot be more than £80,000 (or £90,000 in London). There are independent schemes available for London, Scotland, Northern Ireland and Wales.

There are also separate but similar Shared Ownership schemes for people with long-term disabilities and for people aged 55 and over.

With Shared Ownership, you agree a mortgage with a lender who’s prepared to lend for Shared Ownership properties (not all are) – and then save up a deposit of at least 10%, plus money to cover stamp duty, legal fees and moving costs.

Calculate how much stamp duty you’ll have to pay

If you want to buy a 25% share of a property valued at £500,000, for example, your share will cost £125,000. You’ll need a deposit of 10% (that’s £12,500) and a mortgage for the remaining £112,500. The housing association (or property developer) owns the other 75% of the property and that’s the part you pay the subsidised rent on.

In this instance, the rent would be £11,250 per year or £940 per month. What you pay will vary from property to property but it’s usually around 3% of the equity owned by the housing association.

You’ll also often need to pay a service charge and/or ground rent because shared ownership properties are primarily leasehold.

Can I increase my equity in a Shared Ownership home?

If you can afford to, you can gradually buy more of the property from the housing association. This process is known as “staircasing”. Note that the rent you’ve paid on the share owned by the housing association does not equate to buying more the property. Rent is just rent!

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 Help to Buy: Equity Loan?

This is perhaps the most well-known scheme and is often referred to as simply Help to Buy.

If you raise a deposit of at least 5%, the government will lend you a large chunk of money that you can put down as a deposit on a new-build property (older properties do not qualify).

Outside of London the maximum equity loan is 20% of the property value; inside London the limit is 40%. The property must not cost more than £600,000 (or £300,000 in Wales), and you cannot rent it out or get a mortgage for more than 4.5 times your total household income.

The equity loan is interest-free for the first five years. In year six the interest rate starts at 1.75%, and then increases in-line with inflation.

You can pay back the equity loan at any time by selling the property.

Help to Buy calculator: Calculate equity loan and deposit amount
Learn more about Help to Buy: Equity Loan

What is the Help to Buy ISA?

The Help to Buy ISA is a tax-free savings account aimed at helping first-time buyers save for a deposit. The government pays a bonus of 25% for every £200 saved. The scheme is closing on 30 November 2019.

How do I 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). Unlike with Help to Buy equity loans, the property doesn’t have to be brand new.

Help to Buy ISAs are available on an individual basis to people aged 16 and over. If you’re buying a property with your partner who is also a first-time buyer, you can each have a Help to Buy ISA and effectively double the bonus you get. If one of you has already owned a home that person can’t get a Help to Buy ISA, but the other one can.

How does a Help to Buy ISA work?

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

You’ll receive interest on your savings; the rate is usually comparable to a cash ISA. You don’t get interest on the government bonus because that’s not paid until you withdraw your cash to buy a property. Help to Buy ISAs run for a maximum of five years.

There are rules on how the scheme works alongside other ISA products:

  • You can’t open a cash ISA and a Help to Buy ISA in the same year
  • You can’t open one on behalf of someone else
  • You can use the Help to Buy ISA scheme in conjunction with the Help to Buy: Equity Loan scheme
  • You can only have one Help to Buy ISA at any time but you can transfer your ISA to another provider

How much is the Help to Buy ISA bonus?

For every £200 saved, the government pays a £50 bonus, up to a maximum of £3,000. You can pay £1,200 in the first month and then up to £200 a month. So, the maximum you could save in your first year is £3,400 and then £2,400 every year after that.

You’d need to save £12,000 to get the maximum government bonus (which would take exactly four years and seven 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 should take a look at the Lifetime ISA. You can have both a Help to Buy and a Lifetime ISA at the same time, even though the Lifetime ISA is technically a cash ISA.

What are the rules on saving with a Help to Buy ISA?

The limits on how much you can save are set monthly. This means that if you don’t pay the full amount of £200 in one month you can’t pay more the following month to make it up to the yearly maximum of £2,400.

The minimum government bonus is £400, so the lowest amount you can save to qualify is £1,600. If you want to buy a home earlier, and you close your account without saving £1,600, you won’t get a bonus but will still get the interest you earned on your savings tax-free. The scheme is open to new savers until the end of November 2019. You can save into it until December 2029 and the bonus is available if you use it for a deposit by December 2030.

How is the Help to Buy ISA bonus paid?

The bonus is paid in one lump sum only once it’s confirmed that the property purchase will go ahead. It must be claimed by your solicitor or conveyancer between exchange and completion and is put towards your overall deposit.

You can use the bonus with any qualifying mortgage and you don’t have to get a mortgage from the same institution that provides your Help to Buy ISA. You can combine your Help to Buy funds with other savings to make up your complete deposit.

Figures published by HM Treasury show that from when the scheme began in December 2015 to the end of March 2018, £157 million in bonuses was paid out to 196,007 first-time buyers, who had an average age of 27.

Lifetime ISAs

A Lifetime ISA (LISA) works in a very similar way to its Help to Buy counterpart. Both allow tax-free savings and both give a 25% bonus which is paid by the government. The bonus is paid in with the same frequency you contribute to the pot. So, if you pay in monthly, so does the government.

However, where a Help to Buy ISA only lets you save a max of £2,400 per year (£3,400 in year one), with a LISA you can save up to £4,000 per year meaning your maximum bonus is £1,000 per year. 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 not only will you not get the 25% bonus, you’ll also have to pay a fee.

Tips for first-time buyers
What’s the max mortgage you can afford?

Edited by: Sarah Guershon

Did you find this useful?

Last updated: 1 May, 2019

© 2019 Bankrate and its licensors. All rights reserved. Bankrate is a trading name of uSwitch Limited, registered in England and Wales (company number 03612689). uSwitch Limited is authorised and regulated by the Financial Conduct Authority under firm reference number 312850. You can check this on the Financial Services Register by visiting the FCA website: Our registered address is The Cooperage, 5 Copper Row, London, SE1 2LH.

Bankrate services are provided at no cost to you, but we may receive a commission from the companies to which we refer you.

We use cookies to enhance your experience with our tools and services. By clicking ‘Agree’ you accept our Cookie Policy.