As a first-time buyer, you may be struggling to get approved for a mortgage because you haven’t got enough deposit to meet lenders’ requirements. The government’s Help to Buy: Equity Loan scheme is specifically designed to give you the boost you need to get on the property ladder. To take advantage of it, be sure to get your application in by the deadline of 6pm on 31st October 2022.
What is the Help to Buy: Equity Loan scheme?
Available for first-time buyers wishing to own a home in England, this scheme helps you to buy a newly built property. The government will provide you with an equity loan of between 5% and 20% of the property price, or up to 40% if you’re buying a property in London. You need to pay a minimum deposit of 5% of the purchase price and arrange a repayment mortgage for at least 25% of your new home’s price. The equity loan will be interest-free for the first 5 years and you’ll then be charged 1.75% in interest for the sixth year.
This scheme is set to end on 31st March 2023 and the deadline to reserve a home and apply for an equity loan is 6pm on 31st October 2022. The gap between these dates is to ensure you have enough time to complete on the purchase of your home.
Are there any restrictions relating to the property you can buy?
This opportunity is specifically for new-build properties that are available via home builders registered with the scheme. Price caps for the property prices have been set for different regions in the country:
- North East: £186,100
- North West: £224,400
- Yorkshire and the Humber: £228,100
- East Midlands: £261,900
- West Midlands: £255,600
- East of England: £407,400
- London: £600,000
- South East: £437,600
- South West: £349,000
If you wish to buy a home in Bexleyheath, Kent, for example, you can borrow a maximum equity loan of £87,520. When buying in Pimlico, London, however, the maximum you can borrow is £240,000.
Eligibility for the scheme
To be eligible for the scheme, you need to be a first-time buyer, as does anyone else you intend to buy with. This means you cannot have previously owned a home or any residential land either in the UK or abroad. You – and anyone you are buying the property with – also need to meet the following criteria:
- You must be aged 18 or above.
- You mustn’t have had any type of sharia mortgage finance.
- You need to make a joint application if you are married, have a civil partner or are cohabiting with your partner.
- You need to declare if you are connected to a home builder.
- You need to ensure that you can afford to pay the fees and interest payments.
The fees mentioned above include up to £500 to reserve your property with a home builder, the mortgage and valuation fees, legal fees, stamp duty (if applicable) and a £1 monthly management fee once the equity loan starts.
How is the interest calculated?
As mentioned earlier, you won’t have to pay any interest for the first 5 years. In the sixth year, interest will become payable at a rate of 1.75%, based on the initial amount you borrowed. The annual amount will be divided into 12 monthly payments. As an example, if you buy a property in Bexley for £400,000, you will be eligible for a maximum equity loan of £80,000. The annual interest charged in year 6 will be £1,400. Over the year, you’ll make monthly interest payments of £116.67. Each year in April, the interest rate will increase in line with the Consumer Prices Index (CPI) and an additional 2%.
Repaying the equity loan
You can repay some or all of the loan at any point and the amount to be repaid is determined by your home’s market value at the time of repayment and the percentage of equity loan you received. When repaying some of the loan, this must be a minimum of 10% of your home’s market value. Going back to the previous example, you had a 20% equity loan of £80,000 based on a purchase price of £400,000. You wish to repay 10% and the current market value is £440,000; therefore, you need to repay £44,000. This leaves you with a 10% equity loan based on your home’s market value.
Once the payment has been made, your monthly interest payments will reduce. Instead of paying 1.75% of your original 20% equity loan, you will pay 1.75% interest on 10% of the original price you bought the property for, increasing each year in accordance with the Consumer Prices Index (CPI) and an additional 2%.
The entire equity loan must be repaid when you either sell the property, have paid off your repayment mortgage or the equity loan term ends, which is usually 25 years. When selling your home, the equity loan percentage will be based on the market value at the time or, if it’s higher, the agreed sale price. Using the same example, you purchased your home in Bexley for £400,000 with an equity loan of 20% at £80,000. You have agreed to sell it for £470,000, meaning you need to repay a 20% amount of £94,000.
Get onto the property ladder with the help of this scheme
Give us a call on 01322 907 000 to take advantage of this scheme before the application date closes. Our expert mortgage brokers are ready to search for a competitive deal for your Welling or Pimlico repayment mortgage. Alternatively, send your details to us by email at firstname.lastname@example.org and we’ll contact you with information on the next steps to take when purchasing a property via this scheme.