Help to Buy is a government scheme aimed at helping more aspiring homebuyers purchase property. The scheme falls into two parts: an ‘equity loan’ and a type of insurance for mortgage lenders to help them offer more mortgages to people with small deposits. The Help to Buy equity loan is only available to homebuyers in England – money has been made available for Scotland, Wales and Northern Ireland to launch their own versions.
Checks and balances
The Help to Buy scheme is run by ‘Local HomeBuy agents’ appointed by the government to assess each application and make sure the buyer could not afford to buy a home without help – but can afford the mortgage repayments – using the Help to Buy scheme. So you can’t just choose to use the scheme if your income and savings suggest you can afford to buy without it.
How does the equity loan work?
The equity loan from the government is interest free for the first five years (not the mortgage!). You make two separate payments – one to the mortgage lender and one to the government. The Local HomeBuy agent appointed by the government will deal with the documentation and arrange the loan side of things. After five years you pay the government 1.75% interest on the loan, rising every year by the level of Retail Price Inflation (RPI) plus 1%.
Note that if you default on the payments on your equity loan, the government, which has a legal charge on your property, can pursue you for the money. You can pay back the loan at any time but you have to repay a minimum of 10% of the amount you owe at a time. As the government owns a stake in the equity of your property it shares in any increase in the value of your home – or any decrease. If, for example, you have bought a property for £200,000 using a £40,000 equity loan the government owns a 20% stake in your home. If, say, you sell for £250,000 five years later, the government gets back 20% of the sale price = £50,000.
What if the property loses value?
If you sell your home and you haven’t paid off the loan, you have to pay the government back its percentage stake. So if your property has fallen in value you have to repay the same proportion of the reduced value. Using the example above, if you bought for £200,000 with a £40,000 equity loan (20%) and sold, say, five years later for £150,000, you will owe the government 20% of £150,000 = £30,000. That is £10,000 less than you were loaned in the first place and the government takes the hit.
Help to Buy Part II
The second part of the government’s Help to Buy scheme is completely different from the loan scheme. It aims to encourage mortgage lenders to offer more mortgages to peoplewith smaller deposits by making it less risky for them to do so. This part of the scheme does not involve any active participation on the part of the borrower who should simply benefit from access to a larger number of mortgage deals.
**At present, this scheme has been stopped by the Government**