A Guide to Help to Buy

If you are finding it difficult to get onto the property ladder and struggling to save enough to put down as a deposit, it maybe be worth considering one of the various Help to Buy schemes currently available through the government.

Generally, these products tend to be aimed at first time buyers, however, existing homeowners are able to utilise these products too as long as both types of buyers meet the current criteria. It is also worth noting here that the Help to Buy Equity Loan cannot be used in conjunction with the Shared Equity Scheme, however, both can be used in conjunction with the Help to Buy ISA.

Help to Buy and Lifetime ISA

Let’s kick start our guide with the ISA which is available for first time buyers only. The Help to Buy ISA allows you to place an initial deposit of £1,000 into the account along with your first month’s contribution of £200. You are only allowed to contribute £200 per month into this account until you reach £12,000 which is the maximum the government will apply the 25% top up to. This fund can only be applied for and drawn on by a solicitor when purchasing your first house giving you a total deposit of £15,000 which includes the governments £3,000 contribution.

The Lifetime ISA allows you to save a lot more money per month with a cap set at £4,000 a year until age 50. Should you save £4,000 for the full 32 years from age 18 to 50 you would be eligible for an incredible £32,000 bonus from the government. The important thing to remember with the Lifetime ISA is that the money has to be used for the purchase of your first property or kept in till age 60. If you decide to take the money out for any other reason before April 2021 you will be hit with a penalty of 20% which means you will be left with the money you put in the account in the first place with no bonus. After April 2021 the penalty goes up to 25% which means you will be left with less than you originally put in the account. To demonstrate the maths:

  • Pre April 2021

  • £1000 paid in

  • 25% bonus of £250

  • Total of £1,250 in the account

  • 20% penalty for withdrawal which equates to £250

  • You’re left with your original £1,000

  • Post April 2021

  • £1000 paid in

  • 25% bonus of £250

  • Total of £1,250 in the account

  • 25% penalty for withdrawal which equates to £312.50

  • You’re left with £937.50

Shared Ownership

Shared Ownership allows you to purchase a share of a property ranging from 25-75%. You then pay rent on the remaining equity of the property to the housing association or private developer who owns it. As time goes on, you are allowed to purchase more of a share in the property, which is termed staircasing, until you eventually own it in full. You can look for a mortgage yourself for the portion you are buying, however, some lenders do not offer shared ownership mortgages so it is always better to let a mortgage adviser do this for you, as they know who to go to and where you can get the best rates that suit your circumstances.

For more information check out our Top 5 Reasons To Use A Mortgage Adviser.

Stamp duty can be paid in 2 ways on shared ownership. You can pay the full amount upfront or pay it on just the proportion you are purchasing. If you choose the latter, any first-time buyer exemptions to stamp duty are not applicable and you will have to pay it each time you purchase a larger share of the property. Should you choose the first option you will still qualify for any first-time buyer exemption.

Equity Loan

With an equity loan, you have to provide a 5% deposit on the property as a minimum. Help to Buy will then offer a loan of up to 20%. This means when you go to a mortgage lender you now only have to ask them to fund 75% of the property value which provides you with 2 benefits. As 5% deposits are much scarcer even under more normal circumstances you now have access to a lot more products on the market and you are also likely to see much better rates with a 75% Loan to Value compared to a 95% Loan to Value.

For the first 5 years of the equity loan, the only payment you make is a £1 a month management fee alongside your normal monthly mortgage payment. From year 6 onwards you start to make an additional payment which is equal to 1.75% of the loan as interest and this rises each year by the retail price index (RPI) + 1%. For example, if in year 6 the RPI was 5% then you add the 1% to give us an overall increase of 6% and then increase the original 1.75% by this. In practice, this means 1.75 x 1.06 which gives us 1.86% which will be the new interest rate for year 7. This method continues until the loan is paid back through the purchase of more equity or staircasing.

While the loan is still outstanding, there is no guarantee that the monetary value of the loan will stay the same. It will always remain the same percentage you took out in the beginning. To illustrate this if you bought a property for £250,000 with a 20% loan worth £50,000 and the home later values at £270,000 your loan to repay also increases to £54,000.

You can buy the chunks of the loan back with a minimum threshold of 10% of the loan being purchased at any one time. Each time you wish to purchase back chunks of the loan, either directly or through mortgaging you are required to have it valued via Help to Buy at a cost of £200 to determine the cost as explained above.

This must be used on new build properties and the value cannot exceed £600,000. There are different limits on value around the UK which makes it worth while speaking to a mortgage adviser if you are looking at an equity loan.

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