How changes to the Help to Buy Equity Loan scheme could affect you
The Government’s Help to Buy Equity Loan scheme is set to change next year. Laura Vanstone, Licenced Conveyancer in Coodes Solicitors’ Residential Property team, outlines the changes, how it could affect those looking for help when buying a property and the impact of coronavirus.
The Help to Buy Equity Loan scheme was introduced in 2013 to support those looking to buy a home in England but struggling to save up for a deposit. First time buyers and others meeting the guidelines could receive a loan from the Government of up to 20% of the purchase price of a new build home.
Since its launch, more than 270,000 new build properties have been purchased using the scheme. Around 80% of purchasers have been first time buyers with an average property price of £266,849.
What is the Help to Buy Equity Loan scheme?
The current Help to Buy Equity Loan scheme allows those eligible to buy a new build property with as little as 5% deposit. Buyers can receive a loan from the Government of up to 20% of the purchase price and have a 75% mortgage.
For example, buying a house with a £200,000 price tag will require a 5% deposit of £10,000 and mortgage on £150,000. The loan will cover the remaining £40,000.
The loan is interest free for the first five years but buyers will need to pay a £1 monthly management fee for the duration of the loan. From the sixth year, buyers must pay a monthly interest fee of 1.75%. This will rise each April by the Retail Price Index (RPI) plus 1% until the loan is repaid. The loan must be paid back when:
- You sell the property
- You pay off your mortgage
- You come to the end of the equity loan term
Buyers can pay off the loan at any time – either in full or in 10% chunks before the end of the loan period. Buyers must pay back 20% the value of the property at the time of repayment. For example, if you bought the property for £200,000 and received a 20% government loan of £40,000 but the value of the property has increased to £210,000 at the time of repayment, you will need to pay back 20% of this value, which is £42,000.
How is the scheme changing?
The Help to Buy Equity Loan scheme will change from April 1 2021, with a new scheme running until March 2023. The new scheme introduces regional property price caps and is restricted to first time buyers only. The price cap for the South West will be £349,000.
The rules for repaying the loan are very much stay the same, with no interest for the first five years. However, from the sixth year, the monthly interest fee will increase each year by RPI plus 2% (instead of 1%). Buyers will still have to repay the loan when the property is sold or when the mortgage is paid off.
Those eligible under the new scheme can reserve a plot from December 16 2020 with a registered developer.
You can find out more about the new equity loan scheme on the Help to Buy website.
If you’re a first time buyer looking to take your first steps of the property ladder, take a look at our previous blog on the top seven things all first time buyers need to know.
What if my new build has been delayed due to the coronavirus?
The first national lockdown meant that many industries had to stop, including construction, resulting in many new build properties falling behind schedule. Buyers can still benefit from the current Help to Buy scheme despite delays. The deadline for construction to finish in order to comply with the equity loan scheme has been extended from the end of December to February 28 2021. The deadline for the legal completion will be March 31 2021.
The Government has introduced an extra measure to protect existing customers who have experienced severe delays as a result of coronavirus. Homes England will work with those who had a reservation in place before June 30 2020 to assess their situation and look to provide an extension where necessary. If eligible, they will have until May 31 2021 to legally complete.
More information for equity loan customers regarding the impact of coronavirus is available on the GOV website.
Are other Help to Buy schemes available?
The equity loan scheme isn’t the only help available for people looking to buy a home. Help to Buy: Shared Ownership allows you to buy part of a property while paying rent on the rest.
Buyers can purchase from 25% to 75% of a house using a deposit and mortgage while paying rent on the remainder. Over time, you can buy bigger shares as and when you can afford to do so – this is called staircasing. It’s worth checking which shared ownerships allow staircasing up to 100%.
There are also other government-backed schemes available. More information can be found on the Help to Buy website.
It is important for anyone who is considering buying a new build property to check whether they can meet the required timescales for the schemes and to seek professional legal advice.