Important Tip: Help to Buy Equity Loan Still Intact
Although one portion of the government's Help to Buy scheme for first-time home buyers expired at the end of 2016, the second part of that scheme remains intact. Of course, we are referring to the Help to Buy Equity Loan that makes it possible for first-time buyers to get onto a property ladder with a 5% deposit.
The main porton of the Help to Buy scheme was intended to assist first-time buyers looking to purchase an existing home with minimum deposit. Under the scheme, the government would guarantee a certain percentage of the mortgage offered by a bank or building society. This guarantee gave lenders reasonable confidence that they could offer finance up to 95% without excessive risk. It is this part of the Help to Help scheme that has since expired.
The Help to Buy Equity Loan works a little bit differently. If you are a first-time home buyer thinking that you've been left out in the cold by the government, that's not necessarily so. You can still buy a home with the assistance of Help to Buy if you meet the criteria.
How the Equity Loan Works
Qualified first-time buyers can get a government equity loan of up to 20% on a new-build property. So let's say you can build a new house for Â£150,000. A government equity loan would supply Â£30,000, you would contribute a deposit of Â£7500, and your lender would provide a mortgage covering the remaining Â£112,500.
The equity loan really just makes up the difference so you can still buy a home with a 5% deposit. Your lender is fine with this because they get to maintain a 75% loan-to-value ratio, thereby limiting their risk of loss. As for the government, they are willing to provide equity loans for two reasons:
- the programme allows them to continue pushing ahead with their housing goals; and
- the sale of any property purchased with the loan results in a 'profit' for the government.
The idea of the government making a profit on Help to Buy equity loans is something first-time buyers should consider before agreeing to purchase through this scheme. Keep reading to learn why.
What Happens When You Sell?
In exchange for offering an equity loan, the government expects to be repaid. Repayment takes place in two ways.
First, the borrower begins paying interest on the equity loan five years after purchasing the property. The current rate is 1.75%, and it is linked to inflation. Second, the buyer is obligated to repay what was borrowed, and possibly more, at the time of sale.
If the borrower took an equity loan of 20%, he or she must repay the government 20% of the sale price. If he/she borrowed 10%, he/she must repay 10%. Assuming the value of the home will rise over time, the government stands to receive more money than it loaned out.
Shop around for Loan Products
The Help to Buy Equity Loan is just one option for purchasing a home with a smaller deposit. Fortunately, several banks have decided to continue servicing people with lower deposits despite the expiration of the main portion of the Help to Buy scheme. For example, Halifax and Nationwide are just two examples of banks that introduced 95% LTV mortgages in January to make up for the loss of government assistance.
Always remember that you should shop around for loan products before you decide what to do. There are plenty of options for getting into your first home even if you don't have a full 25% deposit.
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