How Does The New Help to Buy Scheme (2021-2023) Work?

The new Help to Buy equity loan scheme (2021-2023) is open for applications from 16th December 2020. New-build developers are taking reservations for builds completing after 1st April 2021.

Like its predecessor the scheme enables you to take an equity loan of up to 20% outside of London and 40% in London and allows you to put down a minimum deposit of just 5%. But there are some changes to the original Help to Buy scheme, in this blog I will explain all!

How does the 2021-2023 scheme differ?

The new 2021-2023 scheme is exclusively available for first-time buyers, so home-movers will no longer be able to take advantage. The new scheme also sees the introduction of regional price caps which are as follows:

Region Price cap for Help to Buy
homes April 2021 to March 2023
   
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

What are the benefits of the scheme?

One of the key benefits to the Help to Buy equity loan scheme is that you only need a 5% deposit which is very favourable in the current mortgage market. The lenders will treat your 5% deposit and the government’s 20% equity loan collectively meaning a combined deposit of 25% and therefore you can access 75% loan-to-value mortgage products which are at a lower rate of interest than higher loan-to-value mortgage products. The equity loan is interest free for the first five years and so you do not make any payments during this period.

If we look at a typical help to buy purchase outside of London, for a purchase price of £300,000 pounds, you would need to put in a 5% deposit. For example, you have a £300,000 pound property 5% deposit is £15,000, you could then get a 20% equity loan which would be £60,000 and then the remaining amount of 75% equals to £225,000 you’d need to obtain a mortgage.

What happens at the end of the 5-year interest free period?

After five years, you need to start paying back the interest as a minimum, what you need to be mindful of here is that you’re not actually paying back the capital, you’re just servicing the interest that’s charged starting at 1.75%.

Based on the previous example I gave for a property of £300,000, your equity loan is £60,000, that’s 20% you would end up paying back after five years £87.50 per month, and works out £1050 per annum. Remember that the new monthly payment on the loan is interest only and you’re not actually paying back the capital so you would need a strategy to repay the capital within 25 years.

An alternative option is to re-mortgage and consolidate the equity loan. That would mean because you’ve consolidated the equity loan, you’d also be paying back the capital, not just the interest. If you wish to re-mortgage and consolidate the loan there are a few things to consider.

You would need to get the property revalued and the 20% repayable is calculated on the new value. The valuation needs to be obtained from a RICS chartered surveyor at your own expense. There is also an administration fee payable to Help to Buy/ Target along with the costs of appointing a solicitor to complete the redemption process.

Thank you for reading my latest blog, if you have any questions or would like some professional, friendly mortgage advice then feel free to get in touch.

Thomas Honour

Thomas Honour

Business Owner & Principal Mortgage Advisor

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