The Help to Buy mortgage schemes were introduced by the government to help first-time buyers get on the property ladder.
Help to Buy mortgage schemes available
There are three different Help to Buy mortgage schemes provided by the government:
- Help to Buy: Shared Ownership, which lets you buy as little as 25% of a property, so that you only need to raise a small deposit and mortgage
- Help to Buy: Equity Loan, which gives you access to a larger deposit (that you must repay!), so that you can afford to buy a property
- And the Help to Buy ISA, which offers a government bonus for saving towards a deposit
Help to Buy: Equity Loan
How do you qualify for Help to Buy: Equity Loan?
The Equity Loan scheme offers a government loan to help both first-time buyers and home movers save for a deposit to buy a new-build property.
What are the rules of Help to Buy: Equity Loan?
You must provide a deposit of at least 5% from your own funds – but then the government will lend you 20% of the cost of the property in England or 40% in London. In other words, your mortgage and deposit must cover a minimum of 80% of the purchase price or 60% in London.
So, to buy a house in London for £400,000 with a deposit of 5%, you would need a £20,000 deposit, which would unlock a £160,000 loan from the government – and then you’d get a mortgage for the remaining £220,000.
This effectively means you have a deposit of 45%, which would qualify you for much cheaper mortgages than if you only had a 5% deposit.
The maximum loan in England is £120,000 (or £240,000 in London). There is no minimum amount of equity loan – so in areas with low house prices the deposit you’d need would be low. For instance, if a flat cost £80,000, you would only need a deposit of £4,000 alongside a government loan of £16,000.
How does Help to Buy: Equity Loan work?
After you raise a deposit from your own funds and the government loan, you take out a mortgage on the remaining value of the property. It must be a first charge mortgage through a qualifying lender.
It must be your only residence, you can’t sublet (rent it out), and the new property must cost no more than £600,000. There is no maximum income cap, but you can’t use the scheme if you need to borrow more than 4.5 times your household income (joint applications are fine).
How much does Help to Buy: Equity Loan cost, and how do you repay the loan?
You pay a £1 monthly management fee from the start of the loan until it’s repaid.
The loan is interest-free for five years. In year six you pay interest of 1.75% and then the rate increases annually by the retail price index (RPI) inflation rate plus 1% (which comes to around 4% today). So, for example, in year seven you might have an interest rate of 1.82%, then 1.89% in year eight, 1.96% in year nine, and so on.
The rate of interest on the equity loan is fairly low, but it can still add significantly to your monthly repayments, especially if you borrowed the maximum amount.
You can repay the equity loan at any time without penalty, but you must do so in chunks of 10% or 20%. You must repay the loan after 25 years, when you sell the property or when your mortgage term finishes – whatever happens first.
The government loan is repaid at the property value at the time of sale, so you could repay more or less than the loan amount if your house goes up or down in value.
For instance, if you sold a property in London that cost £400,000 for £450,000, and you took the full 40% equity loan, you’d repay the government £180,000.
If property prices fall, you repay less than you borrowed. For instance if the same property was sold for £380,000, you’d only pay back £152,000.
To take out a Help to Buy Equity Loan you need to contact your local Help to Buy agent.
Help to Buy: Shared Ownership
The Shared Ownership scheme allows you to buy between 25% and 75% of a housing association or new-build property. You take out a mortgage for the proportion that you own, and pay rent on the remaining share.
How do you qualify for Help to Buy: Shared Ownership?
You must be either a first-time buyer, an ex-homeowner or already be a shared owner who is looking to move. Your total household income can’t be more than £80,000 (or £90,000 in London). Where you live defines how the scheme works for you because there are separate 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 older people aged 55 and over.
How does Shared Ownership work?
You agree a mortgage with a lender who’s prepared to lend for Shared Ownership properties – and then save up a deposit of at least 10%, plus money to cover stamp duty, legal fees and moving costs.
If you want to buy a 25% share of a property valued at £500,000, your share will cost £125,000. You need a deposit of 10% – £12,500 – and a mortgage for the remaining £112,500. The housing association owns the other 75% of the property.
You pay subsidised rent on the share you don’t own, and often a service charge and/or ground rent because shared ownership properties are usually leasehold. The amount of rent will vary from property to property, but it’s usually around 3% of the equity owned by the housing association. So, in the example above, the rent would be £11,250 per year or £940 per month.
Can I increase my equity in a Shared Ownership home?
As your financial situation improves and as you can afford it, you can gradually buy more of the property. This process 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.
Help to Buy ISA
How do you qualify for the Help to Buy ISA?
Help to Buy ISAs are available for first-time buyers who want to buy a home worth up to £250,000 (or £450,000 in London). The property doesn’t have to be new.
Help to Buy ISAs are available on an individual basis to people aged 16 and over, so you can buy a home with your partner – and if you both have a Help to Buy ISA, you can double the bonus you get. If one of you has already owned a home they can’t get a Help to Buy ISA, but the other person can.
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 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.
You’d need to save £12,000 to get the maximum government bonus – and it would take exactly four years and seven months to pay in that amount.
If you’d like to put more money into savings, you should take a look at the Lifetime ISA, which lets you save up to £4,000 per year and be paid a bonus of 25% (max £1,000 per year).
How does the Help to Buy ISA work?
You can open a Help to Buy ISA with any bank, building society or credit union that offers one.
You will 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 buy the property.
What are the rules on saving?
If you don’t pay the full amount of £200 in one month you can’t catch up later.
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. 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 bonus paid?
The bonus is only paid 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.