25 Jul 2017
Author: Stephen Breen
First introduced by George Osborne in 2013, the Help to Buy equity loan scheme is still going strong and has helped more than 285,000 first time buyers get a foot on the housing ladder. If you’ve not yet considered Help to Buy, here’s what you need to know about the scheme and an overview of the other help available to you.
Help to Buy equity loan: how it works
The Help to Buy equity loan scheme is for first time buyers purchasing a new build property worth up to £600,000 in England (£300,000 in Wales or £400,000 in Scotland). Under the scheme, the Government loans up to 20% of the cost of your new build, with the balance being paid by your 5% deposit and a 75% mortgage. For those buying in London where prices are much higher, the Government will advance up to 40% of the property cost.
You won’t pay interest for the first five years of the loan, and you’ll only pay 1.75% in the 6th year. After that, the fee is calculated by reference to the Retail price index, plus 1%.
On the off chance that you don’t repay the loan before you move house, the Government will recoup what is owed from the sale proceeds. If, for example, you still owed the full balance, the Government would take 20% of the sale price – even if your property has increased in value.
Help to buy ISA and LISA
You can use the Help to Buy equity loan alongside other schemes such as the Help to Buy ISA and the LISA.
The Help to Buy ISA allows you to deposit up to £1,200 initially and then save up to £200 a month. The Government will then boost your savings by 25%. The ISA can only be used by first time buyers and the money will be released after exchange of contracts. You’ll need to save at least £1,600 to be eligible for the minimum £400 bonus and if you save the maximum £12,000 you’ll get the maximum £3,000 bonus. You’ll also earn interest on your savings. If you’re buying with a partner and they are also a first time buyer, you can both have a Help to Buy ISA and each claim a bonus of up to £3,000.
The new Lifetime ISA (LISA) is a rival for the Help to Buy ISA in that it allows you to save far more and earn a much bigger bonus. You can open a Lifetime ISA if you’re under 40 and you’ll be able to deposit up to £4,000 a year towards your first home. The maximum bonus is £32,000 although to get this you’d have to start saving the maximum amount at 18 and not use the money until you were 50. As for the Help to Buy ISA, both you and your partner can have a LISA if you’re both first time buyers under 40. You can also use the account as a pension but this is unlikely to be tax efficient unless you’re self employed.
Help to Buy shared ownership
Although the Help to Buy shared ownership scheme can be helpful for first time buyers, it is open to others too. If your household earns less than £80,000 (£90,000 in London) and you are either a first time buyer or you used to own a home but can no longer afford to buy one now, you’ll be eligible to take part in the scheme. This allows you to purchase between 25% and 75% of a property and rent the remaining portion. When you can afford to, you can buy an increased share in the property.
Currently around 200,000 homes are held on a shared ownership basis and thanks to the popularity of the scheme, thousands more are set to be built to meet demand.
Q: Can I still use the mortgage guarantee scheme?
Unfortunately, the mortgage guarantee scheme is no longer operating as of December 21 2016. This allowed buyers with a 5% deposit to get a mortgage at a decent rate, since the Government guaranteed part of the loan. However, since the end of the scheme, there are still around 30 lenders offering good rates to those with a 5% deposit so its demise is unlikely to have had an impact on the market.
What are these schemes doing for the housing market?
Whilst the existence of help to buy schemes gives first time buyers a much needed lifeline, the schemes are doing little to drive down prices. Instead it is thought that they allow first time buyers to purchase homes that would otherwise have been unattainable. This has had the effect of sustaining unaffordable housing prices rather than creating the pressure needed to reduce them.