Help to buy equity loan was introduced in 2013 by the UK government to help individuals who are trying to get on the property ladder but are unable to do so due to either not having a healthy deposit or struggling to find a mortgage.
How does help to buy equity loan work?
Suppose you want to buy your own property and have a 5% deposit of the asking price. The government lends you a further 20% of the value of the property. And the remaining 75% amount now has to come on mortgage.
To make it simpler let’s say you would like to buy a property which is currently on the market for £150,000. You have a deposit of 5% (£7500) to put down and get further 20% under help to buy equity loan. If added together, the total down amount now stands at £37,500 and the remaining £112,500 has to be on mortgage.
(£150,000 x 5% = £7500 (your deposit)
£150,000 x 20% = £30,000 (equity loan from government)
£150,000 – £37,500 (£112,500 mortgage)
Help to buy eligibility criteria:
You have to be 18 or over.
The property has to be a new build and is available through participating building companies.
There is no bar on how much you earn (no maximum income restriction).
You have a minimum deposit of 5% of the full sale price.
Your mortgage must not be less than 25% of the full sale price.
Help to buy equity loan is not available to individuals who already own a property.
Homes bought under this scheme cannot be rented out or part exchanged or sublet.
You must have the right to live in the UK on permanent basis.
The property price must not be more than £600,000.
The mortgage you apply under this scheme has to be on repayment basis.
What not to forget:
Help to buy equity loan does not guarantee that you will get the mortgage. You will still need to meet lender’s income and affordability checks to make sure you can afford the payment.
The equity loan can be paid early in instalments of 10% or 20%
One of the best thing about help to buy equity loan is that you will not be paying any interest on the 20% loan you receive from the government for at least first five years. However from the sixth year you would be paying an admin fee of 1.75% per year on it.
The admin fee will be subject to increase as per the Retail Prices Index plus 1%.
What is important to remember is that your mortgage repayments will not bring down the help to buy equity loan as they would only affect your mortgage. The yearly fee you will start to pay after 5 years will not decrease the loan amount either.
You will need to pay the equity loan in full if you have paid your mortgage or when you sell your house.
If you decide to sell your property, you will have to pay the market value of your loan and not what you had borrowed. For example if your help to buy equity loan amount was £30,000 for a property with a market value of £150,000; And when you sold the property its market value had increased to £200,000 making the value of the loan to £40,000 (£200,000 x 20% = £40,000). Likewise if the property value had gone down and the sold price was £100,000, the loan amount would be£20,000 (£100,000 x 20% = £20,000).