Buying a new home is a serious financial stress. Not everyone has all the money they will require to buy a new home. Many people require some kind of financial help. This is where the Help to Buy loan comes in. This Help to Buy is a government scheme that helps people with home ownership. The scheme is present in England, Scotland, Northern Ireland and Wales. However, the scheme in each place differs from the other slightly.
Help to Buy Loan – Equity Loan Scheme
This scheme applies to two categories of people:
- People who are buying home for the first time.
- People who are moving out of their old home and planning on moving into a new home.
There are 3 special condition to this scheme.
- The home to be purchased should not have a price above £ 600,000.
- Sub-letting the newly purchased home is forbidden.
- The newly purchased home should be the only properly in possession of the buyer.
The Equity Loan Scheme of a Help to Buy Loan states that:
- Homebuyer has to make a deposit of 5% of the asking price of the house.
- 20% of the price of the property or the house will be given by the government under the Help to Buy loan scheme.
- The remaining price of the property has to covered by a mortgage taken out from a bank.
So, keeping the above conditions in mind, the Equity Loan Scheme can be nicely illustrated with a quick numerical example as shown in the table below:
|Property Price assumed to be £ 300,000||Money Break Up||Percentage||Actual Amount|
|Cash to be deposited by the buyer||5%||£ 15,000|
|Cash that will be provided by govt. under Help to Buy||20%||£ 60,000|
|Cash that will come from a mortgage||75%||£ 225,000|
Concerned Fees of Equity Loan Schemes Under Help to Buy Scheme
Let us take a quick look at the fees that are attracted on the equity loan schemes of Help to Buy Scheme:
- No fees at all for initial 5 years from the date on which the home is owned by the buyer. The buyer is free to pay back the amount paid by the government without paying any additional fees.
- In case the buyer fails to repay with 5 years of grace period, the government will put a charge of 1.75% of the actual loan amount. As per above example, fee charged will be 1.75% of £ 60,000. This fee is applicable for the 6th year only.
- If by 6th year the whole of the loan is not paid back, the government will use different fee structure to charge the buyer. The formula for the charge will be (1 + Existing Retail Prices Index) % of the loan amount. Thus, if the retail prices index is say 1.6%, the government will be charging, as per above example, (1 + 1.6) % of £ 60,000. Which simply means 2.6% of £ 60,000. Interestingly, retail prices index may fall or rise. If it falls, the buyer will have to pay less charges. If it increases, the buyer will have to pay more charges to the government.
Before any kind of charges are applied, the agent for the Help to Buy loan will inform the buyer and then apply the charges. Once the charges are applied, an automatic payment is set with the bank. The buyer will receive a loan statement every single year.
Some Important FAQ About Equity Loan Schemes Under Help to Buy:
Q: What if I want to sell the property bought under equity loan scheme under Help to Buy?
Answer: Yes, you can do that. However, you have to pay the loan amount in full before doing so. Just remember that the loan is an equity loan and the amount you pay back depends on the equity during the time of sale. For example:
|Property Purchase and Sale Price||Money Break Up||Percentage||Actual Amount|
|Purchase price assumed to be £ 300,000||Cash that will be provided by govt. under Help to Buy||20%||£ 60,000|
|Sale price assumed to be £ 400,000||Cash to be repaid to the government||20%||£ 80,000|
Q: How long will the government allow to repay the loan amount?
Answer: You have to repay the loan in full once you sell your property or after 25 years from date of property purchase. The repayment amount will always depend on the equity at the time or repayment.
Q: Is partial repayment is possible? For instance, is it possible to repay say, 20% of the loan in bulk and then repay the remaining amount gradually?
Answer: Of course it is possible. As before, when you make the partial payment, the equity on the property will be a determining factor in the actual amount to pay off partially.
Q: What about the mortgage payments?
Answer: The mortgage payments are to be made alongside the repayment of the loan from the government. The mortgage is from a bank and you will be liable to pay back the bank on time as agreed upon during taking out the mortgage.
Q: Is it wise to opt for equity loan schemes under Help to Buy?
Answer: This is a very difficult question to answer. There are several factors you need to consider.
- First and foremost, you need to consider is the repayment of the mortgage alongside the loan.
- Second thing you need to consider is the time period you will require to repay the loan. You turn out a winner if you repay within the first five years because you will not have to pay any charge. However, the longer you take to repay, the bigger will be the amount you repay.
- You are bound to may regular payments for the loan. The problem is that it is an equity loan and the government will own 20% of the property. How if the equity increases and you fail to repay within the first 5 years, you end up paying even more to the government. Usually equity on a property rises unless there are flaws in the property that leads to negative equity buildup.
- Also consider the hidden costs like legal fee and stamp duty and all. These costs can add up to 7% of the total property price. The equity loan will not cover up this cost. It is a completely separate cost whether or not you take the loan. So, if you were thinking that this loan will help you to cover that cost, you were wrong!
- Also, it may happen that price of the house falls over time leading to negative equity. If that happens and you plan on paying the loan by selling off the price, you will be at a loss because though government will get a greater amount if equity increases, government will not accept a lower amount if equity falls. You will have to repay at least the amount you have borrowed plus any extra charges. So, this loan actually makes sense if you plan on staying in the house for a significant number of years. Always remember that a new property value depreciates as soon as it is purchased and it takes quite some time for the value of the property to appreciate.
Q: Who is eligible for the loan?
Answer: Anyone who is willing to buy a new property (and make it the only property in possession) and is capable of paying 5% of the deposit required is eligible for the loan.
Q: How to get this loan?
Answer: You need to approach an agent who has been authorized by the government. Find your nearest agent by following this link.