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The help to buy equity loan is an initiative aimed at helping prospective homeowners with small deposits by providing them with access to five-year interest free loans of up to 40% of their property’s value. Unlike its predecessor, the Firstbuy scheme, which catered exclusively to first-time buyers, this programme is open to home-movers and first-time buyers alike, though it’s been far more popular with the latter, who account for over 80% of the property purchases made using the help to buy equity loan. Since its introduction in 2013, over 195,000 new-builds have been purchased with the assistance of the loan, demonstrating the widespread appeal and value it holds for small deposit borrowers.
In order to qualify for this loan, aspiring homeowners need to provide a deposit of at least 5% of their desired property’s value. The scheme then allows them to take out a five-year interest free loan of between 20%-40% of the property’s value depending on the location of the property (40% in London, 20% everywhere else). Combined, their deposit and equity loan then function as an effective deposit with which they are able to apply for special help-to-buy mortgages at lower loan-to-value (LTV) bands than they would have otherwise been eligible for. The rates offered by lenders on such mortgage products are often extremely competitive, which means that, with the help of the scheme, borrowers with small deposits now have access to mortgage rates traditionally reserved for those with deposits of at least 25-45% of their property’s value.
The equity loan comes with no interest or repayments for the first five years; after this time, the interest rate rises to 1.75% and then by retail price index + 1% each year thereafter. Borrowers are not required to pay back any of the principle of the loan until they’ve moved home, though the option is there if they want it.
When it comes to repaying the equity loan, borrowers will be required to pay back the same proportion of their home’s new market value as the proportion that was initially funded by the loan. So, if, for example, they took out a loan of 20% of their property’s value in 2013, they would be expected to pay back 20% of their property’s new value in 2017, regardless of whether property prices have risen or fallen. If, therefore, property prices rise – a very likely occurrence – they will be required to pay back a greater sum than they initially borrowed. This repayment will of course come out of the sale price of the property – borrowers won’t be expected to come up with funds that they do not have – but it’s a consideration that should be taken into account, nonetheless.
As stated earlier, the help to buy equity loan is open to both first-time buyers and home-movers; there are however a number of eligibility criteria that need to be met in order for prospective property purchasers to qualify for a help to buy equity loan:
Imagine that you’re trying to purchase a new-build home worth £550,000 and you only have a deposit of £27,500. Assuming that the property you’re looking to buy is outside of London, then under the help to buy equity loan scheme you will be able to acquire a help to buy loan of 20% of your desired property’s value. In this example, the equity loan will amount to £110,000, and you will pay nothing on this for the first five years after you purchase your home (save £1 per month in administration fees). Combined with your deposit, you will then have £137,500, which will qualify you for a help to buy mortgage with a 75% LTV. Many of these mortgage products offer a fixed rate of around 1.75% for the first two years of the mortgage, meaning that you can expect to be paying something in the region of £2,350 per month. If, on the other hand, you were to take out a 95% LTV mortgage with a deposit of £27,500 and a loan size of £522,500, you could expect an interest rate of around 2.9% and monthly payments of about £3,700. This example demonstrates the huge potential value that the help to buy equity loan can give to small deposit borrowers: with a 5% deposit on a property worth £550,000, the equity loan could save borrowers around £1,350 per month in mortgage payments.
Your home may be repossessed if you do not keep up with monthly payments of your mortgage.