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Help to buy is a scheme from the government to help people get on the property ladder. It helps people who would not be able to save enough for a deposit, or who would not pass the affordability checks for the size of mortgage they would need.
With a Help to Buy purchase, the applicant purchases a percentage of the property only, often between 25% and 75%. The remainder is paid for by a government loan, which needs to be repaid within 25 years.
The full name of this scheme is Help to Buy Equity Loan, and because of the high property prices in London, the rules are slightly different for London properties compared to the rest of the country.
There is a similar, but separate scheme called Help to Buy Shared Ownership.
With both schemes, the applicant needs to put forward a deposit of 5%. This is much lower than would be required with a normal mortgage.
The government then contributes further to the deposit. For most of the country, this is capped at 20% of the value of the property. This means that the applicant would require a mortgage to cover the remaining 75%.
In London, housing can be severely unaffordable. The government will loan you up to 40% of the value of the property, which means your mortgage needs to cover 55%.
For the first five years, there is no interest to pay. The borrower pays back only £1 a month management charge via direct debit. After five years, a 1.75% interest rate is applied. This interest increases each year by the current RPI (regional price index) plus 1%.
You can choose to pay off the loan any time, in 10% increments or in full. Unlike with a mortgage, there is no Early Repayment Charge.
From 2021, the interest rates will rise to the CPI (Consumer Price Index) plus 2%.
You must pay it back in full if:
Yes. You must be a first time buyer, and you must live in the property yourself (i.e. you can’t buy to let). In London, the property you buy must be under £600,000 and it only applies to registered new-builds. In other parts of the country, lower regional caps apply.
If a property is eligible for the Help to Buy scheme, it will generally be advertised by the developer.
Speak to the developer, and if you want to proceed, you will pay a reservation fee of up to £500. Once your property is reserved, contact one of the government’s Help to Buy agents who will talk you through applying for the equity loan.
Shared Ownership is a scheme that combines renting and owning. It is also known as “part buy, part rent”.
Similar to the Equity Loan scheme, you purchase a proportion of your home (between 25% and 75%) and the government purchases the remainder. However, instead of repaying the government loan, you pay rent on the proportion of the property that they own. The rent you pay is determined by the proportion of the property that the government owns, but will be below market rates.
Another key difference is the deposit required. For the Equity Loan scheme, the borrower needs a 5% deposit of the property value. With the Shared Ownership scheme, the deposit is based on the proportion of the property that you are buying, not the full sale price. Over time, you may be able to purchase a greater and greater proportion of the property, so that eventually you own the full property. Each month your mortgage payments would increase and your rent would decrease. This is called “staircasing”.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATING EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.