Figures published last month reveal that over 52,000 new build homes were purchased last year using the Help to Buy Equity Loan Scheme – an average of around 1,000 per week.
With 81% of these homes being sold to first time buyers, and one in seven first time buyers using the scheme, more and more people are finding themselves using Help to Buy to take their first steps on the property ladder.
All the terminology can seem confusing so we’ve put together a list of the ten most frequently asked questions we’ve come across.
What is it and how does it work?
Launched by the Government in 2013, the scheme assists purchasers of newly built properties by lending purchasers up to 20% of the purchase price of your property (or up to 40% in London), meaning you’ll only need a 5% deposit and a 75% mortgage. Once you have reserved your new home, in addition to applying for your mortgage, you will need to complete the “Property Information Form” which is available from the developers, to apply for the Help to Buy loan. If you are approved, Help to Buy will issue their “Authority to Proceed” to your appointed solicitors who can then liaise with Help to Buy and will act on your behalf to obtain the loan as part of the purchase of your property.
Can I put down more than 5% as a deposit?
Yes, but you must be taking out a mortgage for a minimum of 25% of the value of the property.
Do I need to be a First Time Buyer to use the Scheme?
No – not with the current scheme, although you cannot own another property or be named on the deeds of another property at the time that you purchase the new home. You usually cannot later rent out the property either as it needs to be your main residence, although exceptions are made for those serving in the Armed Forces. The new scheme, launching in 2021, will only be available to First Time Buyers.
Can I use Help to Buy and the Help to Buy ISA?
Yes – you can purchase the property using the Help to Buy Equity Loan and claim a First Time Buyers Help to Buy ISA bonus.
Is it different to a normal mortgage? How does the interest work?
With a repayment mortgage, the loan is repaid along with the interest in monthly payments. By the end of the term of the loan you would have paid off the whole of the loan amount and the interest on the loan. The Help to Buy equity loan is different, the loan is interest free for the first five years and then after five years time the payments you make only pay off the interest. The initial interest rate is set at 1.75% and is increased in subsequent years based on the Retail Price Index plus 1%. The repayments do not pay off any of the debt and at the end of the term you will not have paid off any of the initial loan amount.
I have a Help to Buy loan on my existing property. When and how do I repay the loan?
There are three situations when you would need to repay the loan – known as “redemption events”. The three redemption events are:
1. If you sell the property, you are required to redeem in full.
2. If you choose to redeem the loan at any time – either in full, or partially which is known as “staircasing”
3. At the end of the term. After 25 years, the loan becomes automatically repayable in full.
When you come to redeem the loan, the amount you will need to pay back is calculated based on the value of the property when you redeem the loan, or the sale price of the property if you are selling. If you initially borrowed 20% of the value of property, then if you are redeeming the loan in full you will be required to pay back 20% of the value of the property at the time of redeeming.
Can I pay off just some of the loan like I can overpay on my mortgage?
Unlike a regular mortgage, you cannot make small, regular payments towards the amount owed. Any repayments must be a minimum of 10% of the market value of the property.
I want to redeem my loan – what do I need to do?
The first step will be to arrange for an independent RICS surveyor to carry out a market value valuation on the property. Help to Buy publish their requirements and their information booklet at https://www.myfirsthome.org.uk/. This valuation needs to be sent to Help to Buy, along with a fee for processing the redemption statement. You will also need to provide Help to Buy with your solicitors details on the relevant form and then they will issue the redemption pack to your appointed solicitor, who will then correspond with Help to Buy and facilitate the redemption.
Do I need a solicitor if I am not selling or buying another property?
Even if you are not selling your property, if you want to redeem the loan in full or partially, you will need to instruct a solicitor to act on your behalf.
With house prices increasing, will I have to pay back more?
Yes – if your property goes up in value, the amount you will need to repay when you redeem the loan will be higher, as this is calculated at 20% of the value of the property at the time of redemption. Additionally, if you are selling your property for more than the market value, you are required to pay back the percentage based on the sale price. If you are selling for less than the market value, you will still be required to pay the figure based on the market valuation.
With the current scheme not due to come to an end until 2021, and further schemes announced running from 2021 until at least 2023, the number of people benefiting from the scheme looks likely to continue to increase.