Help to Buy Equity Loan: 270,000 homes bought using the scheme since 2013 — here’s how it works
Straight forward guide to the “Help to buy equity scheme”
Help to buy schemes introduced by the government is aimed at making that first step on the property ladder into a new home more achievable. Since the inception of the scheme the government has spent £16.05 billion on it meaning a serious investment in time, effort and resources and so a serious consideration for first time buyers.
The government incentive platform uses an “equity loan” model to provide the homeowner with 20 to 40% of the total cost of your newly built home. Therefore reducing the balance the buyer is required to mortgage over and above any deposit. These platforms require a 5% deposit or more and an arrangement of a mortgage to the value of 25% or more to make the scheme work. Interest charged on the loan is zero for the first 5 years it is in operation and whilst you own the home.
An example purchase would be………..
Using a property value of £200,000
Buyer deposit = 5% or £10,000
Gov Loan = 20% or £40,000
Balance to mortgage = 75% or £150,000
Paying back the equity loan
As we have said earlier the first 5 years of the equity loan are free of charge for interest purposes. The only fee associated is a £1 monthly management fee payable via direct debit. At year 6, the monthly management fee continues and you then start to pay interest at the rate of 1.75% on the remaining equity loan. The interest then rises each year by the RPI or Retail Prices Index plus 1% until your loan is repaid.
The loan itself is only required to be settled in full when you either pay off the mortgage owed in its entirety, sell the property or come to the end of your equity loan term. You can however choose to repay the loan early, in full or using 10% chunks prior to the end of the loan agreement period.
Please note that the amount you borrow at the start of your agreement is a percentage of the property value of your new home. As time passes you expect the overall property value to increase, therefore the original % you took out as a loan will reflect this increase, meaning the amount or loan you ultimately repay reflects the same % but will equally increase in terms of overall £’s to reflect any growth in overall property value. In straight forward terms, as your property rises in value, so does the amount you owe via the equity loan. To be completely fair, should the property decrease in value at all, then so would the amount owed in terms of loan %.
An example of this working
Home value £200,000 (at purchase point)
20% equity loan of £40,000
Property then sold for several years into arrangement at £210,000
Repay your 20% equity loan, £42,000 (increased in line with overall property value growth).
Pay off 75% mortgage, £150,000
It is fair to say that the schemes have been popular, more than 270,000 properties across England have been purchased using the assistance of the scheme. Nearly 25,000 of these were taken up in London alone. In London, due to the increased property prices, the scheme offers an enhanced rate of 40% equity loan value compared to the 20% seen in wider areas. This enhancement in London has assisted up to 83% of the property purchases made according to the Ministry of Housing, Communities and Local Government.
What are the potential downsides?
There is of course a risk that property prices can fall, meaning the potential for negative equity on the property. According to a report conducted by the Financial Conduct Authority, buyers that use the Equity Scheme are statistically more likely to experience this.
This however reflects what property buyers will have paid in terms of a premium for now owning a brand new home, estimates suggest as much as 20% is paid. If local existing housing outpaces this new build, then prices could be seen to drop and dependent on timing, if a property is needed to be sold, the value of it could be less than what was paid.
This same report also reflected that buyers using the scheme had more exposure to economic downturns and changes in economic circumstances, plus potential for less remortgaging options available to them should this be experienced.
How do 1st-time buyer mortgages compare?
If you consider that once the equity scheme charges interest after year 5, the expected annual interest is expected to sit at around 5.2% This of course is payable in addition to the mortgage vehicle you will have set up with a lender.
Looking at 1st-time buyer mortgages available at the time of this article, using HSBC and TSB sample arrangements, they are currently offering 3.4% APR or Annual Percentage Rate. Making their arrangements appear cheaper.
So what do we do?
The answer to this depends on your circumstances. There are options available now to help bridge the gap of those with significant deposits and those without. The government equity scheme and lenders are making more innovative products all the time to help make house purchase more achievable for the many. If you haven’t the deposit access to reach 1st time buyer mortgages then the equity scheme could be a great alternative to finding a new property.
More than 270,000 new-build homes have now been bought using the Government’s Help to Buy Equity Loan across England, with 24,461 of these sales taking place in London.
Under the scheme, which launched in 2013, the Government provides a loan of up to 20 percent of the purchase price of a property to help buyers struggling to raise the full deposit.
However, due to higher average house prices in the capital, the potential government contribution towards a London home was increased to 40 percent in February 2016, since when 83 percent of the total number of Help to Buy Equity Loan purchases in London have been made, according to the Ministry of Housing, Communities & Local Government.
The majority (77 percent) of London buyers after February 2016 used the full 40 percent equity loan, while only two percent of homes were bought using a loan of less than 20 percent.
How the sums stack up for London buyers
Currently, a London buyer spending the maximum £600,000 allowed would need a £30,000 deposit, their Government loan would be for £240,000 and they would require a mortgage of £330,000.
While the scheme has been lauded for helping struggling first-time buyers, there are no limits on who is eligible to buy, only on what they can purchase using the loan. This is set to change next year when the scheme will be limited to first-time buyers only.
The average household income of Help to Buy Equity Loan applicants in London is just over £70,000. However, 12,734 households with an income of over £100,000 have also taken advantage of the scheme.
“Five percent of properties funded by Help to Buy have been for £500,000 or more, with five percent of buyers also earning £100,000 or more. In these instances, you have to argue that the use of the scheme is unnecessary and simply fuels luxury purchases at the expense of the taxpayer,” said Marc von Grundherr, director of estate agents Benham and Reeves.
The government has spent £16.05 billion on the scheme since its inception.
How the Help to Buy Equity Loan works
The scheme can be used to buy a new-build property costing up to £600,000 with a maximum loan in London of £240,000, or 40 percent of the sales price. The buyer must contribute a cash deposit of at least five percent and get a mortgage on the remainder of the sale price.
There are no fees or interest to pay on the government loan for the first five years. After this, the loan will start accruing interest and the buyer must start to pay the Government back.
When the home is sold, the Government recoups the same equity share of the property as was originally lent – so if the Government contributed 40 percent of the value to buy a new home, the owner will repay 40 percent of the value at the time they sell.
It must be the buyer’s only property and cannot be rented out. It must also be advertised as Help to Buy by a developer registered under the scheme. Find out how to apply here.
The current Help to Buy scheme runs to March 2021, when the replacement, restricted to first-time buyers only, will come in and run until March 2023.
What are the downsides of the Help to Buy Equity Loan?
A recent report from the Financial Conduct Authority warned that buyers using the Help to Buy Equity Loan are more likely to face negative equity if property prices fall.
This is due to the premium buyers will have paid for a brand-new home, which is estimated at as much as 20 percent.
Unless local house price rises outpace this, new-build homeowners could end up selling their home for less than they originally paid for it.
The report also said that these buyers were potentially more exposed to changes in economic conditions and could have fewer remortgage options available to them.
How does Help to Buy compare with first-time buyer mortgages?
Once the government loan starts charging interest after five years, the annual percentage rate is expected to be 5.2 percent. This will be payable in addition to the mortgage.
Meanwhile, first-time buyer mortgages from TSB and HSBC are currently on offer with 3.4 percent APR, making monthly repayments significantly cheaper.
“Help to Buy was never meant to be a permanent fix, and it is great to see that both providers and lenders are already innovating to fill the gap, launching more higher loan-to-value mortgages that reduce the deposits first-time buyers need,” said Craig Hall, head of broker relationships and propositions at Legal & General Mortgage Club.