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What is Help to Buy and How Does It Work?

Help to Buy is a well known phrase, but not everyone is fully aware of how it works or what the scheme actually provides. This article looks at the Help to Buy scheme and provides a clear overview of how it helps with home ownership.

Help to Buy is a government scheme that helps aspiring homeowners acquire a house or flat with a deposit of only 5%. It offers equity loans that cover up to 20% of the sale price. At one time it also offered mortgage guarantees to lenders, but this program stopped at the end of 2016.  

It is important to note that Help to Buy cannot be used if you- 

  • Are buying a second home or rental property 
  • Want to buy a property that exceeds the scheme’s price limits 

These limits vary from one part of the UK to another. In England and Northern Ireland, Help to Buy may not be applied to homes valued at over £600,000. In Wales, the limit is £300,000. The maximum threshold in Scotland is £230,000.

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It should also be noted that Northern Ireland has an equity sharing scheme in which buyers can purchase up a 50 to 90% share in a home and the NI Co-ownership Housing Association will buy the remainder and charge a rent for its portion. 

Equity Loans 

To qualify for an equity loan, you need to have a deposit of at least 5% of the property’s sale price. The government will lend you an additional maximum of 20%, and you borrow the rest from a mortgage lender. 

For example, if you wanted to buy a home valued at £300,000, you would need to put down at least £15,000 as a deposit. The government would provide an equity loan of up to £60,000, and you would mortgage the remaining £225,000.  

No interest or fees are paid on the government loan for the first five years, but you will be charged 1.75% in the sixth year. After that, the interest rate goes up every year based on the Retail Prices Index plus 1%. (In other words, from year seven onwards, you pay 1.75% + the Retail Prices Index amount + 1%.) 

When you pay off the mortgage or sell the home, the equity loan must be repaid plus a portion of any increased value. For example, if you bought your home for £300,000 and sold it for £350,000, the increase in value is approximately 17%. Your equity loan repayment would be £70,200 (£60,000 + £10,200.) The £10,200 portion of the payment is equivalent to 17% of the £50,000 profit you made on the property. 

You can repay a portion (or all) of your equity loan at any time, with the minimum repayment percentage being 10% of your home’s market value. 

How to Get an Equity Loan 

To apply for an equity loan, contact a local Help to Buy agent to approach a developer who is registered with the scheme. 

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