Quick Guide: Help To Buy Equity Loan

Quick guide image

Quick guide image There have been mixed views on Help To Buy since it launched in April 2013.

However, for many it has been the lifeline that allowed them to buy their first home.

If you're not familiar with what it is, then read on to find out how it works in England (different rules apply in Wales which are not covered here).

 
 

Eligibility

  • You must be buying a new build home from a developer registered with the scheme.
  • The maximum purchase price of a new home is £600,000.
  • You cannot own any other property whilst you have the equity loan.
  • You cannot sublet or rent out a home you have purchased with the help of an equity loan.
  • You do not have to be a first time buyer.
  • How it works

  • You must contribute at least 5% of the purchase price yourself.
  • You can apply for a Help To Buy Equity Loan for up to 20% (40% in London) of the purchase price.
  • The remainder is obtained with a Help To Buy mortgage, available from a wide range of lenders.
  • The mortgage cannot equal more than 4.5 times your household income to qualify for an equity loan.
  • The following example shows how much money comes from each source for a property being bought at £250,000 with a maximum equity loan.

    England excluding LondonLondon
    Source of fundsPercent of valueAmount Percent of valueAmount
    Buyer's deposit5%£12,5005%£12,500
    Equity loan20%£50,00040%£100,000
    Mortgage75%£187,50055%£137,500

    What does it cost?

  • An equity loan is interest free for the first five years that you have it.
  • From the sixth year, you are charged an interest fee of 1.75% of the loan value each year.
  • The interest fee increases each year after that by the retail prices index plus 1%.
  • You also pay £1 per month as a management fee from the start of the equity loan.
  • The following example show what the fees would be each year for an equity loan of £50,000.
    An RPI rate of 5% has been used for illustrative purposes only, the future rate of inflation cannot be predicted and may be higher or lower than that used.
    It is a reasonable assumption that your interest fees will increase year on year from year six.

    YearRPI+1%Interest fee %Annual management fee Annual interest fees
    1 to 5N/A0%£12 per year£0
    6N/A1.75%£12£875
    75%1.84%£12£920
    85%1.93%£12£965
    95%2.03%£12£1,015
    105%2.13%£12£1,065

    How much is paid back?

  • The equity loan must be repaid within 25 years or when you sell the property.
  • You repay the same percentage that you borrowed, based on the price you sell for.
  • If your property value goes down then you may pay back less than you borrowed for the equity loan.
  • The following examples shows what this means.

    ScenarioProperty priceEquity loan %Equity loan £
    Purchase£250,00020%£50,000 borrowed
    Sale price increased£300,00020%£60,000 repayable
    Sale price decreased£200,00020%£40,000 repayable

    You can repay all or part of the equity loan at any time. The minimum repayment you can make is 10% of the market value of your home. See the example below for a staged repayment. There is a £200 (inc VAT) administration fee for making a repayment.

    ScenarioProperty priceEquity loan %Equity loan £
    Purchase£250,00020%£50,000 borrowed
    Price at partial repayment£270,00010%£27,000 repayable
    Price at remaining repayment£240,00010%£24,000 repayable

    This is just a brief overview of the scheme and does not constitute a recommendation.
    You can find out more by reading the Buyer's Guide and visiting the Equity Loan section of the Help To Buy website. Maxwell Moore is not responsible for the content of external websites.

    If you are interested in finding out more, or are considering buying with a Help To Buy Equity Loan then get in touch with us and we'll be happy to help.