The Help to Buy equity loan is available for new build properties up to £600,000. It 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%. The scheme is currently available for both first time buyers and home movers, until the end of March 2021.
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.
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.
The equity loan is interest free for the first five years and so you do not make any payments during this 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.
Another option is to re-mortgage after the initial 5 years 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. I’ve helped arrange those surveys for my customers and you’re looking at around about £250 including VAT. There is also an administration fee payable to Help to Buy equity which is £200. You will then need to appoint a solicitor to complete the redemption process, the solicitor’s costs will vary but you’re probably looking at a minimum of £500-£750.
New scheme April 2021 onwards – The scheme is going to be changing from April 2021. The current scheme is available for legal completions up until the 31st of March 2021. It’s likely that the new-build developers will stop reservations on the current scheme in December 2020 January 2021, unless the house is already built and a quick sale can go through, that’s because legal completion must take place before the end of March 2021.
The good news is the scheme is not stopping completely and but there are some key changes to the scheme from April 2021. The new scheme will be exclusive to first time buyers, therefore no home movers, second movers or previous homeowners. The other key change is that there’ll be regional caps in place, in London that will be £600,000 pounds in the South East is going to be capped at £437,600 and in Midlands £261,900.
The South East which will include local areas such as Bicester, Buckinghamshire and Banbury. We are yet to know if Brackley is going to fall in South East or Midlands.
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.