Do I need 'help to buy' mortgage advice?
Updated 25 March 2020
If you are struggling to buy a home, there are various forms of help available. These include equity loans (which enable you to have a smaller deposit and mortgage), special savings products to help you raise a mortgage deposit (the Help-to-Buy ISA and the Lifetime ISA), and shared ownership schemes.
Though largely aimed at first-time buyers, some schemes are open to existing homeowners. Please note that a shared ownership scheme can’t be used in conjunction with a Help-to-Buy equity loan, but either can be used together with a Help-to-Buy ISA or a Lifetime ISA.
Here you can find out more about each kind of scheme.
The Help-to-Buy scheme (equity loans)
The government’s Help-to-Buy scheme helps people in England to buy a new-build home (similar schemes are available in Wales, Scotland and Northern Ireland). It works by offering an ‘equity loan’ covering up to 20 per cent of the home’s purchase price. This means your deposit can be as little as 5 per cent, with a 75 per cent mortgage to cover the rest – greatly increasing your chances of securing a mortgage deal, and of being able to afford the repayments.
The loan is always the same percentage of the property’s price, so will increase if your home increases in value. So if you take out a 20 per cent equity loan on a £250,000 property (worth £50,000) and the home later sells for £270,000, you have to repay £54,000. If the value of your home falls, you repay less.
Properties valued at over £600,000 are not eligible for the Help-to-Buy scheme.
Fees and interest
There is virtually nothing to pay on your equity loan for the first five years of ownership, except a nominal management fee of £1 per month. From year 6 onwards, however, you have to pay interest on the loan (as well as the management fee) at a rate of 1.75 per cent initially, rising with the Retail Price Index (RPI) plus 1 per cent.
So if the RPI is 5 per cent in year 6, your interest rate would increase by a factor of 6 per cent in year 7, to become 1.86 per cent (because 1.75 multiplied by 1.06 is 1.855, which is then rounded up).
This means, for an equity loan of £50,000, your interest repayment in year 6 would be £875. Adding the management fee, this comes to £887 (or just under £74 per month). This isn’t a huge sum but it is worth bearing in mind – it will increase every year, and unlike your mortgage repayments the money isn’t going towards your investment. This rule is designed to encourage people either to buy more equity in their home or sell it and move into full ownership after a few years.
Buying more equity (‘staircasing’)
You can repay all or part of your equity loan at any time, by buying more equity (in 10 per cent minimum chunks) at the property’s current market value. You could do this using lump sums or by remortgaging to a bigger mortgage if you can. Owning more equity will reduce the size of your interest repayments on your equity loan.
There is a special form of the Help-to-Buy scheme in London. This offers double the size of equity loan, covering up to 40 per cent of the total purchase price. Bear in mind however that a larger equity loan will mean a smaller share of any increase in the property price, as well as larger interest repayments.
Am I eligible for Help-to-buy?
You can apply for the Help-to-Buyer scheme whether you are a first-time buyer or an existing homeowner. However, the home must be a new build selling for £600,000 or less, and you must not own any other property (other than the home you are selling). You cannot rent out a property bought through the Help-to-Buy scheme.
Not all mortgage providers will offer mortgages for Help-to-Buy arrangements, so contact a mortgage broker to find the best one for you.
Help-to-Buy ISAs and Lifetime ISAs
There are two kinds of ISAs that are specially designed to help you save up a deposit for your first home. The Help-to-Buy ISA lets you save up to £12,000 and provides a bonus of 25 per cent (bringing the total up to £15,000) when you complete the purchase of your first home.
A Lifetime ISA offers a similar 25 per cent bonus when you use it to buy your first home, but you can save up much more in it (up to £4,000 per year, for a maximum bonus of £32,000). You must be aged under 40 (and over 18) to open one. Find out more about these ISAs.
Another way to buy a home affordably may be through shared ownership. Instead of taking out an equity loan, you buy a percentage of the property with a mortgage and deposit and pay rent on the remainder. You then have the option of increasing your share later (‘staircasing’) by buying more of the property, until you own it outright.
The bank of Mum and Dad
If you don’t want to use one of these help-to-buy schemes, remember that there are several options available for buying a home with help from your family.
Which options are right for me?
A mortgage broker or financial adviser can help you decide whether to opt for a Help-to-Buy ISA or a Lifetime ISA, and whether to apply for an equity loan or shared ownership, or neither of these.
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