Help to Buy Equity Loan Scheme: Everything you need to know

31st July, 2020, by Steve Parker MNAEA

Launched in 2013, the government’s Help to Buy Scheme has been designed to help home buyers struggling to save for a deposit to get on to the housing ladder. Having helped more than 272,000 home buyers since 2013, the current scheme is open to both first-time buyers and existing homeowners and will run until March 2021. From then onwards, a new Help to Buy scheme restricted to first-time buyers only, will come into place and run until 2023. New regional price caps will be introduced to sales prices, which could reduce the maximum value of homes that can be bought through the Equity Loan Scheme.

So, with all these changes going on, could now be the best time to buy your dream home?

Read on to learn how taking advantage of this scheme can get you on the housing ladder quicker than you originally thought ensuring a smaller deposit and better mortgage rates.


How does Equity Loan Scheme work?

Available only for new-build homes, the Help to Buy Scheme allows you to purchase a property with a value of less than £600,000 for just 5% deposit, with an equity loan from the government, worth up to 20% of the property’s value (or up to 40% if you live in London). This means that you will only need a 75% mortgage (55% in London) to cover the remaining cost.

As an example, let’s suppose you want to buy a new-build property for £300,000. With the Help to Buy scheme, you could put down a 5% deposit (£15,000), apply for an equity loan worth up to 20% (£60,000), so you would only need to get a £225,000 mortgage.

But how does this help me in practice?

Given that most lenders are looking for 10% deposit when buying their first home, the loan enables you to fatten up your deposit, giving you access to cheaper mortgage rates. With the house prices having risen considerably over the past five years, this gives you the opportunity to potentially buy your house for less than if you have to wait. It also means that you could potentially afford a more expensive property.


The interest rate you will be charged

But what’s even better is that the government-backed loan is interest-free for the first five years and low interest after that – interest in year six is 1.75%, increasing by 1% plus inflation based on the Retail Prices Index, after that. So, if you can repay the loan in the first five years, you’ll never pay any interest. However, you don’t have to worry about repaying the loan until you come to sell your property, or at the end of your mortgage term (max 25-year term) – whichever comes first. In this case, the amount you pay back is the same percentage of the value of your home. Technically, this means that if the value of your home falls, so does the amount you owe on your equity loan and the other way around.

Let’s suppose that you have bought a property for £300,000 and you sold it for £330,000.
Here’s how it works:

Increase in Value: 10%

Equity Loan Repayment: £66,000 (£60,000 + 10% profit)

Mortgage: £225,000

Your Share: At least £39,000


Am I eligible for an Equity Loan?

Equity loans are only available to first-time buyers or previous homeowners who no longer own a property. From 2021, the scheme will be restricted to first-time buyers only. You can only use an equity loan to purchase a new-build property in England with a price tag of up to £600,000. Moreover, you’ll need to already have at least a 5% deposit to be eligible for an equity loan and as always, you will have to prove you can meet the mortgage lender’s criteria, which means you should be able to cover the monthly repayments, and your credit score will have to be up to scratch. Finally, you can’t use the above scheme to buy a second home or a property to rent out.


How do I find an Equity Loan?

Speak to one of our expert agents today and we will guide through the process answering any questions you may have. With a wide selection of brand-new apartments and houses across Nottingham and a wealth of local knowledge, we are here to ensure you find your dream home –
a place that perfectly fits your needs, budget and lifestyle.