The new Help to Buy Equity Loan: here’s what you need to know
Are you considering using the Help to Buy Equity Loan scheme to buy a home? Then it’s essential you know about major changes happening when the current scheme ends in March 2021.
The new Help to Buy Equity Loan scheme that’s replacing the existing one next April has different rules. You may find there's a dramatic impact on the value of property you’ll be able to buy. Plus it could even mean you’re no longer eligible to use the scheme.
What are Help to Buy Equity Loans?
Launched by the government in 2013, Help to Buy Equity Loans are aimed at helping those who are struggling to get on the property ladder.
In a nutshell, with the Help to Buy Equity Loan scheme:
- The government will lend you up to 20% of the cost of your new build home. This increases to up to 40% of the cost if the property is in London. This is called an equity loan.
- You’ll need to save a minimum of 5% of the purchase price as a deposit, and you can use contributions from your Help to Buy ISA or Lifetime ISA to pay this. The remaining 75% comes from a specialist Help to Buy mortgage product.
- As you’ll have a larger deposit, you won’t need to raise as much of a mortgage. This means your initial mortgage payments will be lower. It should also help with affordability calculations when you apply for your mortgage.
- The equity loan is interest-free for the first five years and you don’t need to make any repayments on it during that time.
- The current scheme is open to first time buyers and existing home owners. It’s also only available on new build homes, up to a maximum purchase price of £600,000. For more information on the scheme, please click here.
What’s different about the new Help to Buy Equity Loan scheme?
The current Help to Buy Equity Loan scheme runs until March 2021, whereas the new scheme will run from April 2021 to March 2023.
The government will still lend you up to 20% of the cost of a newly built home. Again, this increases to up to 40% in London. However, there are some major changes to the scheme:
• Only first time buyers will be able to use the new Help to Buy Equity Loan scheme.
• New regional price caps will be introduced. As a result, the maximum value of homes that can be bought with the scheme's help will be dramatically cut in most areas. The caps have been set at 1.5 times the average first time buyer price in each region (as of autumn 2018).
What are the regional price caps?
|Yorkshire and The Humber||£228,100|
|East of England||£407,400|
What is the impact on the wider market likely to be?
So what will the impact on the market be as the scheme eligibility is restricted to first time buyers only? James Chidgey, New Homes Relationship Manager for Mortgage Advice Bureau, explains:
“About 13% of first time buyers bought using the Help to Buy Equity loan scheme in 2018," he says. "And of those using the current scheme some 80% are first time buyers.
“The scheme has been a simple and affordable way to buy a new build home with just a 5% deposit,” he adds. “And although the choice of property will no longer be as generous under the new scheme, this low deposit facility will still be available.
“However, the new restrictions mean there could be a fall of up to a third in the annual 50,000+ buyers using the new scheme next year,” he warns. “And pressure is building on lenders and the market to come up with other ways to fund high loan to value mortgages on new build properties, after Help to Buy finally closes in 2023.
“Currently, outside the Help to Buy scheme, most lenders will only lend up to 85% loan to value on new build houses, and 80% loan to value on new build flats.”
What should I do if I want to use the scheme?
Do you want to take advantage of the Help to Buy Equity Loan scheme and you’re not a first time buyer? Then you'll need to act quickly as you won’t be able to use the scheme from April 2021.
Likewise, if you’re hoping to buy a property that is priced above the regional price caps, then it’s important to act now, otherwise you could miss out.
What are my other options?
While Help to Buy has been popular with first time buyers, it’s not the only route available if you have a small deposit.
- 95% mortgages: The average rates on mortgages that require just a 5% deposit have reduced significantly in recent years. This has made them considerably cheaper. And unlike with the Help to Buy Equity Loan scheme, you won’t be restricted to new build properties. However, as James explains above, you may struggle to get a high loan to value mortgage on a new build property.
- Shared Ownership: Also known as ‘part buy, part rent’, this scheme allows you to buy a share of a property and pay rent on the rest. And as you'll only need a mortgage for the share you’re purchasing, you'll need a much smaller deposit than if you were buying the home outright. Find out more about Shared Ownership here.
- Guarantor mortgages: This is when a parent or close family member uses their own property or savings as security against your loan. This means lenders may accept a smaller deposit than usual and sometimes they won’t require any deposit at all. Find out more about guarantor mortgages here.
For more information about the Help to Buy Equity Loan, feel free to get in touch with our friendly team of mortgage advisers.
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