An overview of the new Help to Buy: Equity Loan scheme

The new equity loan scheme has been designed to help first-time buyers to take their first step on the property ladder. It started welcoming applications in December 2020 and is set to run until 31 March 2023.

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Who is eligible?

This scheme is available to first-time buyers who are buying their main residence and is only available on new build properties. Buyers will still have to meet their mortgage lender’s criteria with regard to how many multiples of income they can borrow, and they still have to pass a credit score. They will also need to find a five per cent deposit to put down on the property and cannot use their Help to Buy ISA to provide the deposit.

How much can they borrow?

A buyer can borrow up to 20 per cent of the property value, or 40 per cent if they are buying in London. There is also an upper limit on how much they can buy a house for depending on whereabouts in the country the property is located:

North East £186,100
North West £224,400
Yorkshire and the Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
London £600,000
South East £437,600
South West £349,000

How much will it cost?

The help to buy loan is interest-free for the first five years; after this, it is chargeable at 1.75 per cent for a year. After year six, the interest on the equity loan will increase by the Consumer Price Index (CPI) plus two per cent.

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The loan must be repaid after 25 years, or earlier if the property is sold. On sale, the borrower must pay back the equity they borrowed; for example, if they borrowed 20 per cent of the property purchase price, they must pay back 20 per cent of the sale price even if the property has gone up in value.

It is possible to pay the Help to Buy loan back in tranches of 10 per cent at a time, which can be especially useful if someone is buying in London and they have borrowed 40 per cent of the property purchase price. This is called ‘staircasing’ and means that a buyer can eventually own the whole property.

The government equity loan scheme is a great idea for first-time buyers who can use it to get on to the property ladder; however, it could work out quite expensive if they keep the loan for the maximum 25 years, as they will have to pay interest on it. It could also work out quite costly if they are able to sell the house for significantly more than they brought it for.