Julia Rampen from Mirror Money Online asked Matthew Graves to walk us through Help to Buy equity loans.
Help to Buy equity loans are designed to help first-time buyers and second-time buyers up the housing ladder. Here’s how it works – and how to you can get the best deal.
Could you reduce the monthly payments on your home?
The Help to Buy equity loan scheme is designed to help both first-time buyers and those wanting to move home. Under the scheme, you can buy a newly built house straight from the house builder.
The government will help you fund up to 20% of the price of the house through an equity loan. This acts as a 20% deposit.
Because the government will lend you such a large deposit, you will be able to take advantage of some of the lowest mortgage interest rates available.
What you need to do
You will still need to have your own deposit. The minimum deposit you’ll need is 5% – although most lenders are asking for 10%. This is because lenders believe the more of your own money you put down, the more likely you are to keep up the payments on your mortgage.
You need to borrow the rest of the money with a traditional mortgage. Only a few lenders are part of the Help to Buy scheme, but these include some of the biggest names like Halifax, Nationwide and NatWest.
You will also need to buy your house from a site where the builder is registered on the scheme (most builders are).
You will need the help of a qualified Help to Buy mortgage adviser and the approval of your local Help to Buy agent before you can proceed with a purchase.
The first thing you need to do is to submit a ‘Property Information Form’ to the agent. This will be assessed within four working days. Once this has been agreed, you will be able to apply for a mortgage.
The maximum full purchase price is £600,000.
How much you pay – and for how long
The government’s equity loan will need to be paid back within 25 years – or earlier if you sell your house.
The equity loan from the government is interest free for the first five years. After this time you will pay an ‘administration fee’ of 1.75% of the value of the equity loan, rising each year in line with inflation, plus an additional 1%.
You must also pay off your mortgage.
Remember you will have to pay the equity loan back. The equity loan is 20% of your home’s value – not a fixed amount. So if the value of your house goes up by 10% by the time you sell it, you will need to pay 10% more back to the Government.
The equity loan is interest free for the first five years, and the interest rate is very low for the year after that. But following this, it will shoot up quite dramatically.
Pay off the equity loan
There is a way to avoid this higher rate. Pay off the equity loan or remortgage all that you have left to pay to another lender. This way, you pay the government back in one go and have the whole mortgage with one lender.
Remember, you will need to be able to afford this on your future earnings. So don’t stretch yourself with a huge loan unless your wages are likely to rise quite sharply.
Buying a new build home
Help to Buy equity loans only apply to new build homes. What difference could that make?
New homes usually come with a 10 year guarantee, so any defect will be fixed by the builder
You can negotiate on the price just like on the open market – builders may give you as much as 10% off
Help to Buy in practice
• You want to buy a house of £200,000.
• You put down a 10% deposit of £20,000
• The government puts down its 20% deposit, called an equity loan, for £40,000.
• This leaves you with just £140,000 to borrow from the mortgage lender.
Help to Buy stages
You contact the Help to Buy agent, find the house and apply for a mortgage
You become homeowners! Now you’re paying off the mortgage.
After five years, you start paying the Government back for the equity loan. You’re still paying the mortgage.
If you want to cut your costs, you pay off the equity loan or remortgage to a lower rate.
You may decide to sell your home. The Government will take a cut based on the remaining equity loan.
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