Your friends used it to buy a starter home, your sister is stashing money in one of its Isas, and government ministers brandish it as one of their recent successes. But what is Help to Buy exactly and can it help you get on the property ladder?
Help to Buy is an umbrella term for a series of government schemes designed to enable people, especially first-time buyers, to purchase residential property in an increasingly expensive housing market. Currently, there are two active components of the programme: Help to Buy equity loans, with a special provision for property in London, and Help to Buy Isas.
Help to Buy Equity Loans
This is the most high-profile and popular of the schemes and generally what people—and newspaper articles and politicians—mean when they refer to “Help to Buy.”
Under the scheme, the buyer contributes a deposit of at least 5% which the government tops up with an equity loan of up to 20% of the home’s value (15% in Scotland). In London, where housing prices are steeper, the equity loan can be extended to 40% of the home’s value. The buyer them takes out a mortgage on the remaining value of the property. Because the buyer is borrowing only 75% (or in London, 55%) of the home’s value, he or she will be eligible for better mortgage rates.
The equity loan is interest free for five years, after which the Government charges an annual fee, beginning at 1.75% of the loan’s value in the sixth year and increasing each year in line with inflation, as measured by the Retail Prize Index (which, as of May 2018, was 3.3%) plus 1%. It’s important to remember that you’ll be repaying the equity loan in addition to mortgage repayments.
Crucially, the Help to Buy equity loans can only be used to purchase new-build homes under a certain value. In England this maximum is currently £600,000. In Wales homes must be worth less than £300,000 and in Scotland, less than £230,000.
Under the scheme, if you purchased a home in England for the maximum eligible value of £600,000, you would need a deposit of at least £30,000 (5% of the home’s value). The government would then give you an equity loan of up to £120,000 (20% of the home’s value). You would then secure a mortgage of £450,000 on the remaining 75% of the home’s value. After five years, your repayments of the equity loan would begin at £2,100 a year (1.75% of £120,000).
In the London, you could obtain an equity loan of £240,000 on the same property and your repayments of the equity loan would begin at £4,200 in the sixth year.
Who Qualifies for a Help to Buy Equity Loan?
Help to Buy equity loans can only be used on new build homes. You don’t have to be a first-timer buyer (although more than 80% of people who use the scheme are) but critically, you must be intending to live in the property most of the time. You therefore cannot obtain a Help to Buy equity loan to purchase a second home or a buy to let property.
Help to Buy Isas
Help to Buys Isas is a tax-free savings account for people saving to buy their first home. For every £200 put into the Isa, the government will contribute an additional £50, up to a maximum of £3,000. You can contribute £1,000 when you first open the account, with the government top-up giving you £1,200 to begin. You can then contribute an additional £200 every month.
This means over you can save up £12,000—in under 5 years if you’re contributing the maximum each month—and receive a government top up of £3,000. You then have £15,000 that can then be used as a deposit on a home worth up to £250,000 (up to £450,000 in London). Critically, the government bonus is only paid when you purchase an eligible property.
Anyone can open a Help to Buy Isa but to qualify for the government bonus, you must be a first-time buyer. Unlike the equity loan, the Help to Buy Isa can be used on any residential property; it doesn’t have to be a new build. But it does have to be your intended primary residence.
If you’re buying a property with another person you can both open Help to Buy Isas and earn a maximum government bonus of £6,000 to add to your deposit.