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Understanding How Help To Buy Can Help You Purchase Your New Build Home

Understanding How Help To Buy Can Help You Purchase Your New Build Home

01 February 2017

You’ll have heard the term ‘Help to buy’ and may be wondering if this is something that is both useful to you and indeed accessible to you as you explore your new build home purchase. With this in mind we have got together with Mortgage Bureau to put together this article, designed to help you understand some of the key concepts and frequently used terms used when discussing the Help to Buy scheme.

There are 3 schemes offered by Help to Buy; Shared Ownership, Help to Buy: ISA and the Help to Buy Equity Loan Scheme. For the purposes of this article, we will focus on the Help to Buy Equity Loan Scheme. 

It’s important to note that you don’t need to be a first time buyer to access this scheme; it can be successfully used by buyers in a variety of different situations.

What is ‘Help to Buy’ and where did it come from?

The Help to Buy Equity Loan Scheme was launched to keep the housing market moving. It is applicable to new homes only and allows first time buyers and home movers to purchase a new property with a deposit of as little as 5% of the purchase price. 

Up to a maximum of 20% in England (up to 40% in London) of the purchase price is available to the buyer through an equity loan funded by the Government through the HCA.

This higher deposit contribution can make obtaining a mortgage more accessible; and can enable purchasers to apply for a larger mortgage than they would have initially been able to.

The Help to Buy Equity Loan Scheme is available for properties up to the value of £600,000 in England, and £300,000 in Wales. It’s also available in Scotland & Northern Ireland (terms vary).

How does it work?

You will need a minimum of 5% cash deposit. Help to Buy will lend 20% of the purchase price, leaving you to obtain a 75% mortgage to make up the rest

Example:                                                                                                                                                    
Purchase Price £200 000                                                                                                                     
Purchasers’ deposit £10 000 (5%)                                                                                                       
Government Equity Loan £40 000 (20%)                                                                                                
Mortgage required £150 000 (75%)

You will pay no interest during the first 5 years on the loan. From year six a fee of 1.75% is payable on the loan, which rises annually In line with the Retail Price Index plus 1%

The example below shows how fees are calculated & how it would work on a loan totalling £40,000. 

Start 

of year 

Help to Buy equity loan assistance 

Estimated RPI %+1 

Fee percentage 

Annual fee due 

Estimated monthly payment 

£40,000 

6% 

0% 

£0 

£0 

£40,000 

6% 

0% 

£0 

£0 

£40,000 

6% 

0% 

£0 

£0 

£40,000 

6% 

0% 

£0 

£0 

£40,000 

6% 

0% 

£0 

£0 

£40,000 

6% 

1.75% 

£700 

£58 

£40,000 

6% 

1.86% 

£744 

£62 

£40,000 

6% 

1.97% 

£788 

£66 

£40,000 

6% 

2.08% 

£832 

£69 

10 

£40,000 

6% 

2.21% 

£884 

£74 

 

  • Source HCA Help to Buy Buyers Guide

Be sure to understand that this fee does not contribute towards repaying your loan; it’s simply a charge for having it. We’ll talk about how to pay it off later.

When is Help to Buy not available? 

The Help to Buy Equity Loan is not available under the following circumstances

  • If you, or anyone entering in to the purchase own another property
  • If this is a Buy to Let purchase 
  • If you are entering in to a Part Exchange deal with the developer

Finding Your Help to Buy Property

In order to know the price range of property you should be looking at, first of all you will need to know how much you can borrow, whether the repayments on this are affordable to you & the minimum deposit you will need. Mortgage Bureau will help you with all of this & check you fit the Help to Buy criteria. Your advisor can help you with this.

Identify the developments in the areas in which you want to live and establish if they offer the Help to Buy Equity Loan scheme. Go out and visit sites to get a feel for what’s being built & whether it feels right for you. 

Once you’ve found a property you’re interested in, you will need to complete a “Proceed to Purchase Qualification” which establishes whether you fit the lenders qualification.  Your advisor can tell you the documents you’ll need in order to obtain a Decision in Principle with the chosen lender. (An explanation of a decision in Principle can be found on our Affordability Fact Sheet.)

You can now pre-reserve the property you want after paperwork is completed and documents are signed.

Your advisor will send all of the paperwork to the Local Help to Buy agent & liaise with them to get Authority to Proceed for you.

What happens if I sell the property?

The loan must be repaid when a property is sold, so, if the Government gave you a 20% loan and you haven’t paid any of it off, by the time you come to sell you’ll pay back 20% of the sale price, regardless of whether this is more or less than what you paid for the property in the first place.

How do I repay the loan if I don’t sell?

You can make repayments of the loan after year one. The cost is calculated at the market value at the time you want to repay, so if the property has gone up in value you will pay more, if it goes down, you will pay less.  The minimum repayment is 10% of the market value at the time of repayment and valuation & legal costs will apply.

Example:                                                                                                                                                                
Original Purchase Price £200 000 – original 20% loan = £40 000                                                                         
Sale Price £220 000   - loan amount to be repaid = £44 000                                                                                                                                                                                                                    

There are a number of ways in which you can repay the loan. Remember whilst you have 25 years in which to do this, it’s best to start planning early. Your circumstances are likely to change over a 25 year period. 

Young children can mean significant childcare costs now which you may not have in future, you may also be able to increase your working hours once children are of school age, or have a job that has the opportunity for career progression, enabling you to earn more. You might not even need as much space in future as the family grows up and flies the nest. 

Here are just a few ideas to consider:

  1. Try to save regularly & repay a proportion of the loan once you have built up a savings pot.  
  2. Overpay into your mortgage to increase your equity, this can be drawn down via a future remortgage or further advance. (Subject to terms and conditions).
  3. Ear mark known future inheritance.
  4. Consider down-sizing when your family has grown up & use your equity from the sale towards repaying the loan.
  5. Consider if you could use your pension lump sum towards repaying your loan. (You should take Independent Financial Advice on this.) 
  6. If property values rise you may be able to remortgage and raise capital in order to repay some / the entire loan (subject to terms and conditions).
  7. Sell an asset such as a car / caravan.

Is Help to Buy Right for me?  

Very few things in life are perfect and Help to Buy is no different – it will be more suitable for some purchasers than others. On the plus side, you will usually be able to get lower interest rates, on Help to Buy than if you were having to buy a home without it, as lenders calculate the Loan to Value on your deposit + the equity loan. 

Do bear in mind that the equity loan is Tax Payers money and the amount that you ultimately end up repaying will be linked to the value of your home at the time that you repay it, so it could be more, or it could be less than the original figure when you bought your home.

There may also be other options available to you in addition to Help to Buy – this will be dependent upon your circumstances including how much you earn, how much of your income is committed to things other than your mortgage and also the level of deposit you have. But don’t worry about having to sort these out for yourself as your advisor will be able to tell you about all of the options available to you, which lenders do them and how much it will cost.

Frequently Asked Questions                        

What is Help to Buy?                                                                                                                                          
It’s a scheme offering an "equity loan" to assist in the purchase of a new home. The Government will loan up to 20% of the value of a new build home.

Can anyone buy a house using Help to Buy?                                                                                                    
If you have a 5% deposit & want to buy a new build home, you’ll be able to access the scheme. Also read ‘When is Help to Buy not available’ section above.

What if I don’t have a deposit - can I still get a mortgage?                                                                            
To access a mortgage, you will need a minimum 5% deposit  

Do I automatically qualify for a mortgage if I qualify for Help to Buy?                                                                              No, you’ll need to pass lender credit and affordability tests in the usual way to ensure you’re able to pay back the mortgage. Your advisor will help you with this.

How much can I buy for?                                                                                                                               
ubject to mortgage approval you’ll be able to purchase a property up to a value of £600,000 in England and £400 000 in Wales.

Can existing homeowners access the scheme?                                                                                             
Yes. The scheme is available to home movers as well as first-time-buyers, however the Help to Buy purchase cannot complete before the sale of existing property. 

Can an interest only mortgage be obtained using Help to Buy?                                                                     
No, Help to Buy is only available on capital repayment mortgages. 

Can a Help to Buy property be rented out?                                                                                                   
No, it’s only available on properties to be occupied by the individual(s) taking out the mortgage. 

Is Help to Buy available to an incorporated company?                                                                                    
No, Help to Buy mortgages are only available to an individual/individuals.  

I’m not an EEU citizen can I still use Help to Buy?                
Yes, providing you can get a mortgage – Ask your advisor

Is there a cap on your household income?
No, there is no household earnings maximum

How much mortgage will I need?
You can’t take a lower amount of mortgage than the scheme calculates you can afford. This is because Help to Buy aims to give you the help you need to buy but no more than that and with limited resources available, the Government wants to help as many buyers as possible. Mortgage Bureau will help you with this.

What’s the minimum mortgage I can take?
The minimum mortgage amount must be 25% of the overall purchase price, so you can put in a bigger deposit than 5%  

Can the developer give me incentives under the Help to Buy scheme?                                                                   Incentives from the developer are limited –Ask your advisor and developer.

How long can I have the mortgage over?
The standard mortgage term is 25 years, however up to 40 years can be considered

What age can I go up to on Help to Buy?                                                                                                              
The maximum age at the end of the mortgage term is usually 70 years. 

How does the equity loan work?                                                                                                                     
The Government provides an equity loan of up to 20% of the value of a new build property. The loan is interest free for the first five years. From year six a fee of 1.75% is payable on the equity loan, which rises annually by RPI inflation plus 1%. 

When will the equity loan have to be repaid?                                                                                               
The equity loan can be repaid at any time after year 1 and must be repaid within 25 years (or the terms of the mortgage whichever is the lower), or on sale of the property. 

You may have to pay an early repayment charge to your existing lender if you remortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.  

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