The government has recently launched the latest version of the Help to Buy: Equity Loan scheme. You might be wondering if it’s right for you. So, here is our handy guide to the benefits and considerations of Help to Buy.
Through the Help to Buy equity loan, the government lends first time buyers money towards the deposit for a new build property. The government will lend 5% – 20% of a property’s value (40% in London) and the buyers need to provide 5% themselves.
One of the main benefits of the scheme is it can make buying your first home easier. This is because you only need a 5% deposit and saving up the deposit is often a significant hurdle to home ownership.
However, there are some things to consider before deciding if the Help to Buy route is right for you.
Firstly, are you a first-time buyer? If you are, great! If not, you won’t be eligible, so speak to your advisor about other options. Secondly, there are regional price caps in place. This means you can only buy a home up to a certain value, and that value depends on where the property is. Ask your adviser for more information about the price caps in your area. Finally, the money borrowed from the government is interest free for five years and uses an interest only repayment plan. So, for the first five years, you would only pay a £1 management fee to the government because there is no interest to pay off initially. This is not the same for the loan from the bank, which you start paying back right away.
Year six is when things start getting a little complicated. You will start paying a monthly interest fee, which currently sits at 1.75%. So, if you bought a property for £200,000 and had borrowed 20% (£40,000) from the government, you would be paying £300 in interest each month. This is on top of your payments to the bank. The total sum paid is linked to the value of the home and not the borrowed amount.
Additionally, because the payments only cover the interest, you would need to pay back the original government when you move house or the mortgage term ends. The amount you owe is calculated as a percentage of the value of the property. So, using the previous sample, if your house had jumped in value to £250,000 you would have to pay back £50,000. Alternatively, if it fell to £150,000, you would only need to pay back £30,000.
You can pay back the government loan in stages. However, each payment needs to be at least 10% of what your home is worth when you make the payment. This can get complicated. Here at Town and Country we have experienced advisors who can assist you with your decision.
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