Help to Buy explained

Trying to get your foot on the property ladder can be a challenge; student debt coupled with an entry-level first job can make it tough to save money for your deposit, particularly if you’re paying rent as well.

To help more young people to purchase their first home, in 2013 the government introduced a number of different Help to Buy schemes. These include the Help to Buy Equity Loan scheme, the Help to Buy ISA and the Help to Buy Shared Ownership scheme. All are aimed at helping those struggling to get to where they want to be on the property ladder.

Help to Buy Equity Loan scheme

This scheme is available on new build homes only and is open to first time buyers, as well as people who own an existing property but want to move home, providing they meet the necessary scheme criteria.

How does a Help to Buy Equity Loan work?

There are different Equity Loan schemes for England, Greater London, Wales and Scotland, and they all vary slightly. For more information please click here, but the following details refer to the Equity Loan Schemes for England and Greater London only.

· The government will lend you up to 20% of the cost of your new build home. (This is up to 40% if you want to purchase a property in London). This is called an Equity Loan.
· You contribute a minimum of 5% of the purchase price of the property, against which you can use contributions from your Help to Buy ISA or Lifetime ISA.
· You therefore have up to 25% towards the purchase price of the property, and raise a mortgage for the remaining 75% using a specialist Help to Buy mortgage product.
· The Equity Loan is interest-free for the first five years and you don’t need to make any repayments on it during those first five years.
· By having a larger deposit, you won’t need to raise as much of a mortgage. This should help with affordability calculations when you apply for a mortgage, but will also mean that your initial mortgage payments will be lower.

After five years, you’ll be charged interest on the Equity Loan at the prevailing rate. However, you can pay off the Equity Loan at any point and either reduce your Equity Loan amount or pay it off completely.

It’s important to remember that you’ve borrowed a percentage of the value of the property from the government. So, for example, if your Equity Loan is 20% of the value of the property at the point you purchase it, and the value of your home rises, you’ll need to repay 20% of the new value of the property when you sell it or pay off your Equity Loan, not the original amount that you borrowed. Equally, if the value of the property decreases then you’ll be liable to pay 20% of the reduced value of the property at the point you sell it, or when you repay your Equity Loan, not the original amount that you borrowed.

You can find out more about it by reviewing the terms and conditions of the government Help to Buy Equity Loan here.

Help to Buy ISA and Lifetime ISA

If you’d like to start saving with a view to buying your first home, there are government ISAs which can help to boost your savings.

Currently, if you’re over 16 but under 40, you may be eligible to open a Help to Buy ISA, which means that in addition to the money you put in, the government will boost your savings by 25%.

· You can save a maximum of £200 a month, and the maximum you can save in a Help to Buy ISA is £12,000.
· This means that the maximum bonus you can earn is £3,000 (assuming you save £12,000).
· If two first time buyers are purchasing together, they can combine the savings and bonus from their Help to Buy ISAs, meaning that the maximum bonus they can receive jointly will be £6,000.

The Help to Buy ISA scheme closes on 30th November 2019. After this time, you can still claim any bonus you’ve earned up until 1st December 2030.

From 1st December 2019, if you’d like to save towards either your first home or your pension, if you’re over 18 and under 40 you can apply for a Lifetime ISA.

With a Lifetime ISA, you can save up to £4,000 per year, and the government will give you a 25% bonus on your savings. You can save up to £4,000 per year until you’re 50.

You can use the savings and bonus from your Lifetime ISA towards the purchase of your first home, providing that the property you purchase is valued under £450,000.

As with the Help to Buy ISA, if two first time buyers are purchasing together, you can combine your savings and bonuses from the government from both of your Lifetime ISAs.

You can find out more about the Help to Buy ISA here, and you can find out more about the Lifetime ISA here.

Help to Buy Shared Ownership

If you can’t quite afford the mortgage on 100% of a home, the Help to Buy Shared Ownership scheme offers you the chance to buy a share of between 25% and 75% of your home’s value, and then pay rent on the remaining share. Over time, as you earn more, you can increase the size of your mortgage until you own the property entirely, a process called ‘staircasing.’

Shared Ownership schemes might be a good option for some people who may not be able to raise a mortgage which is large enough to buy a home in the conventional way, but means that they can at least part-own the property they live in, and benefit from any increase in value over time. It also provides long-term security, which may be better than simply renting a property.

How does Help to Buy Shared Ownership work?

Typically, you would raise a mortgage on half of the purchase price of the property, and pay a deposit of 5% on this amount, rather than the full amount of the purchase price. Again, this can make it easier for those people on lower incomes or who are struggling to save a deposit.

There are a few conditions to determine if you're eligible for this scheme. You could buy a home through the Help to Buy Shared Ownership in England, if:

· Your household earns £80,000 a year or less outside London
· Your household earns £90,000 a year or less in London
· You're a first time buyer
· You used to own a home previously but can't afford to buy one now in the normal way
· You're an existing shared owner looking to move home

To find out more about Help To Buy Shared Ownership schemes, click here.

When do the current Help to Buy schemes expire?

You can apply for a Help to Buy ISA until 30th November 2019, after this date you’ll need to apply for a Lifetime ISA.

The Help to Buy Equity Loan scheme will run until 2023, although from April 2021 it will only be available to first time buyers. Also, in 2021 regional price caps will be introduced meaning that the value of a property you can purchase via the Help to Buy Equity Loan scheme will vary in different parts of the country.

At the current time, there is no published end date to the Help to Buy Shared Ownership Scheme.

Are you interested in taking advantage of the Help to Buy scheme to purchase a property? To find out more, please get in touch with us to speak to an adviser in more detail.