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Help to Buy mortgages – how do they work?

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Written by Ben Salisbury

What is Help to Buy?

If you would love to own your own home, but haven’t been accepted for a standard mortgage, you may be able to get help from the government. 

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

They include:

  1. Help to Buy: Shared Ownership

  2. Help to Buy: Equity loan

  3. Help to Buy ISA (no longer open for new applications)

  4. Lifetime ISA 

Want to buy your first home? Our personalised guide can help

What is Help to Buy: 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.

This share can be increased in the future when you feel you are financially able to commit to more, known as ‘staircasing’.

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 and in both cases, the property is leasehold.

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

You could buy a shared ownership property with very little deposit. Let’s break it down:

A 25% share of a £200,000 property is £50,000. With a 5% deposit of £50,000 you’ll need £2,500 – so that's the minimum you would need to save. You then need a mortgage lender to loan you £47,500 for the rest of your 25% share.

The housing association or property developer would own the other 75% (£150,000) of the property. That's the part you would pay the subsidised rent on, which is cheaper than the market value and normally around 3%.

To calculate your total monthly payments, you would need to add this rent to your monthly mortgage repayments.

To qualify for the scheme, your total household income cannot be more than £80,000 (or £90,000 in London). There are independent schemes for LondonScotlandNorthern 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, and some properties are only offered based on your connection to the area, such as living or working in the borough, or being recognised as a key worker.

You should also be aware that not all mortgage lenders will be prepared to give you a mortgage on a shared ownership property. It’s therefore worth checking with a mortgage broker or directly with a lender before you apply.

You’ll 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.

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). As mentioned above, 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 with house purchases you might not be able to acquire the freehold (property and land). 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?

If you have your eye on a new-build property and have stashed away a 5% deposit, this scheme may be able to help you.

To qualify for an equity loan, the home you buy must:

  • Be a new build 

  • Have a purchase price of up to £600,000 in England (or £300,000 in Wales) 

  • Be the only home you own

  • Not be sublet or rented out after you buy it

  • Be one that you can show you cannot afford (if you’re applying in Wales)

Essentially, the government will lend you up to 20% of a new-build property price, interest-free for the first 5 years. You then provide the 5% cash deposit and take out a 75% mortgage to cover the rest. 

There are no loan fees payable on the 20% government loan for the first 5 years. In year 6, you will start to be charged 1.75% on that 20% loan. This will rise in each subsequent year by the Retail Prices Index (RPI) plus 1%.

So, if you bought a property for £200,000, you would need a £10,000 deposit (5%). The government equity loan would be for £40,000 (20%) and you would need to borrow £150,000 (75%) from a mortgage lender.

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

  • England (excluding London) & Northern Ireland < 20%

  • Wales < 20%

  • Scotland < 15%

The maximum price of the property also varies depending on location. Homebuyers in Greater London will be able to borrow up to 40% under the Help to Buy London scheme.

The equity loan would need to be repaid when you sell the property, or at the end of the mortgage term (whichever comes first) and means that the government would take 20% (40% in London) of the sale price of the property. 

So, if this property sold for £250,000, you would repay 20% (£50,000) to the government (not £40,000 borrowed). Conversely, if the property lost money you would repay less. Alternatively, you can choose to pay back some or all of the loan without selling the property.

You should also be aware that while the property is in your name, you will need approval from your Help to Buy agent if you wish to alter or extend the property, and you cannot rent out the property or get a mortgage that's more than 4.5 times your salary.

Wales and Scotland offer their own, similar, Help to Buy equity loan schemes.

Help to Buy ISAs

The Help to Buy ISA is a tax-free savings account aimed specifically at first time buyers saving for a deposit on a property. The government pays a 25% (£50) bonus for every £200 you save into the account and just like every ISA, the interest earned is tax-free.

This scheme was closed to new applicants in November 2019.

If you already have a Help to Buy ISA, you can continue to save up to £200 into the account each month until December 2029. The maximum you can save into the scheme is £12,000, so the maximum bonus is £3,000.

The 25% government bonus is only paid if you have saved £1,600 or more and use it for a deposit on your first property by December 2030.

The bonus is paid in one lump sum to your solicitor or conveyancer after you have exchanged contracts.

Lifetime ISAs

If you missed the deadline for taking out a Help to Buy ISA, worry not, as you may find a Lifetime ISA (LISA) a suitable alternative.

With a LISA, the government also adds a 25% bonus to your (tax free) savings, provided you use it to buy a first home, or for retirement. But, unlike the Help to Buy ISA, 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 into a LISA, meaning your maximum yearly bonus is £1,000 and the account can remain open for 32 years.

Anyone aged between 18-39 can open a LISA and the money can be used either for a deposit on a first home, or for retirement (when you turn 60). You can contribute to a LISA until the day before you turn 50.

LISA Penalties

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.

However, on 5 May 2020, the Treasury announced that LISA holders who need to withdraw funds early will be charged 20% until April 2021. 

So, if you had £1,000 in your LISA, with the 25% bonus of £250 you would have a total of £1,250. Normally, if you wanted to withdraw your savings you would be charged a 25% penalty -£312.50 – meaning you would receive just £937.50.

If you made the withdrawal before April 2021, however, you would be charged 20%, or £250 – meaning you would receive your full £1,000 back.

Transferring LISAs

LISAs can be transferred from one provider to another, allowing you to chase the best rates, and you are allowed to contribute to both a LISA and Cash ISA in the same year. 

What’s more, if you use your LISA savings to buy a property, you can keep the account open and use it to save for retirement.

COVID-19 update for mortgage borrowers

On 2 June 2020, the Financial Conduct Authority (FCA) confirmed that homeowners whose finances have been affected by COVID-19 can apply for a three-month extension to their mortgage payment holiday. Homeowners unable to make their mortgage payments who have yet to apply for a payment holiday have until 31 October 2020 to do so.

Mortgage payment holidays ease the burden of having to make monthly payments at times when you may be struggling to make ends meet. However, it is important to remember that this is not free money – it is simply extending the term of your mortgage by 3 months. Your home loan will continue to build up interest during this time, meaning the total amount you will pay back over the term of your mortgage will be higher.