Help to Buy mortgages

Buying a home is often one of the biggest financial decisions people make in their lifetime. For first-time buyers in the UK, getting onto the property ladder can seem daunting, especially when faced with high property prices and the need for a substantial deposit. The government’s Help to Buy mortgage scheme is designed to alleviate some of these pressures, making homeownership more attainable for those who might otherwise struggle.

The scheme involves a government equity loan which supplements the buyer’s deposit and reduces the size of the mortgage required. This means lower monthly repayments and potentially more favourable mortgage rates. However, like any financial commitment, it’s important to understand the ins and outs of the scheme before deciding if it’s right for you. This guide will answer some key questions about the Help to Buy mortgage scheme and provide information to help you make an informed decision.

What is the Help to Buy mortgage?

The Help to Buy mortgage is a scheme introduced by the UK government to assist first-time buyers and those looking to move home but struggling to raise a deposit.

In the Help to Buy: Equity Loan scheme, the buyer needs to put down just 5% of the property’s value as a deposit. The government then supplements this with a 20% equity loan, reducing the amount you’d need to borrow as a mortgage from a lender to 75% of the property’s sale price. This effectively lowers your loan-to-value ratio, giving you access to a wider selection of mortgage deals and potentially lower interest rates. The equity loan is interest-free for the first five years.

The Help to Buy scheme is even more generous for those looking to buy in London, where the cost of property is significantly higher. The London Help to Buy scheme offers an equity loan of up to 40% to help manage the high prices in the city.

In April 2021, the scheme underwent a revamp in England to include regional property price caps. This adjustment was made to ensure the scheme benefits those who need it most, reflecting the variations in property prices across different regions.

While these arrangements apply to England, separate but similar Help to Buy schemes are also available in Scotland, Wales, and Northern Ireland, recognising the different property markets in these nations.

It’s worth noting that these schemes are primarily applicable for new-build properties, and potential buyers should ensure they fully understand the terms of these loans and their future financial implications. As always, seeking independent financial advice is recommended before deciding to go ahead with these schemes.

How does Help to Buy work?

Here’s how it works:

Assume you want to buy a property outside of London that costs £300,000.

1. First, you need to provide a deposit, which is 5% of the property’s cost. For a £300,000 property, 5% amounts to £15,000.

2. Next, you can apply for a government equity loan, which can cover up to 20% of the property’s cost. In this case, 20% of £300,000 is £60,000.

3. The remaining amount, which is 75% of the property price, would need to be covered by a mortgage from a commercial lender. 75% of £300,000 equals £225,000.
   So, with the Help to Buy scheme, for a £300,000 property, you would need a deposit of £15,000, an equity loan of £60,000, and a mortgage of £225,000.

In this scenario, the Help to Buy scheme reduces the amount of your mortgage loan from a potential £285,000 (if you only had the 5% deposit) to £225,000. By lowering the loan-to-value ratio of your mortgage to 75%, you become eligible for a wider range of mortgage deals with potentially more favourable interest rates, making the loan more affordable.

Please note that the equity loan is interest-free for the first five years. After this period, you will need to start paying interest on the loan. The specific terms and conditions can vary, so it’s crucial to understand all aspects of the agreement before committing to this scheme.

How does Help to Buy work after five years?

Once the sixth year begins, interest fees will be applied to the Help to Buy equity loan. It begins at a rate of 1.75% of the loan’s value, then rises each year after that by any increase in the Retail Price Index plus 1%.

This is not a repayment of the loan principal but a fee on top of it. You will still have to repay the equity loan itself in full, but you have up to 25 years to do so, or sooner if you sell your home.

The exact amount you pay back for the equity loan depends on the market value of your house at the time because the loan is a percentage of the cost of your home. If the market value of your home increases, the amount you owe on your equity loan will also increase. Conversely, if the value of your home falls, the amount you owe on the equity loan will decrease.

What properties qualify for the Help to Buy mortgage scheme?

Here are the primary qualifications a property must meet:

1. New-build homes: The Help to Buy: Equity Loan scheme is applicable exclusively to newly-built homes. This is to encourage the construction of new homes and stimulate the housing market.
2. Price cap: The home must be under a certain price, which varies depending on the region in the UK. For example, in England, the price cap for properties eligible for the Help to Buy scheme ranged from £186,100 in the North East to £600,000 in London. However, these caps may have changed, so it’s important to check the current caps on the government’s Help to Buy website.
3. Primary residence: The property purchased must be your only residence. Help to Buy is not available to assist buy-to-let investors, landlords or those looking to own a second home.
4. No subletting: After buying a home with Help to Buy, it’s not allowed to sublet it or rent out any part of it.

Remember to always check the most recent guidelines and rules, as these may change over time. The specifics of the scheme can also vary between England, Wales, Scotland, and Northern Ireland, so it’s crucial to check the details from reliable local sources or the official government website.

Am I eligible for Help to Buy?

To be considered for the Help to Buy scheme in England, both you and the property you intend to purchase must meet certain criteria.

For your personal eligibility:

Age: You must be at least 18 years old.

First-time home buyer: You should be a genuine first-time buyer, meaning you have never owned a home in the UK or abroad, nor have you ever obtained any form of Sharia mortgage finance.

Financial capacity: You must be able to afford the fees and interest payments related to the equity loan after the initial five-year interest-free period.

Deposit: You need to have saved at least a 5% cash deposit of the property price.

In terms of the property:

Type of home: The property must be a newly built home.

Primary residence: You should intend to live in this home as your primary residence.

Registered builder: The home must be sold by a home builder registered with the Help to Buy scheme.

Sole property: The home you buy should be the only property you own. The scheme is not applicable for second homes or buy-to-let properties.

As for application:

Individual or joint application: You can apply as an individual or jointly with others. However, all applicants must meet the qualifying criteria.

Marriage, civil Partnership, or cohabitation: If you’re married, in a civil partnership, or cohabiting, you are required to make a joint application.

Please note this guidance is specific to England. The Help to Buy schemes in Scotland and Wales have separate eligibility criteria, so it’s important to refer to the respective guidance for those regions if you plan to purchase a property there.

How much can I borrow?

The amount you can borrow with a Help to Buy equity loan depends on a variety of factors:

1. Property value
2. Location
3. Deposit
4. Mortgage affordability

For example, if you’re looking to buy a house that costs £200,000, you would put down a 5% deposit (£10,000), apply for a 20% equity loan from the government (£40,000), and then need to secure a mortgage for the remaining 75% (£150,000).

How does Help to Buy work in London?

The Help to Buy scheme in London works similarly to the rest of England but with one crucial difference – the amount of equity loan the government provides.

Due to the generally higher property prices in London, the UK government provides a larger equity loan of up to 40% of the purchase price of a new build home, rather than the 20% offered elsewhere in England.

Let’s consider an example for a home that costs £400,000 in London:

1. Your 5% deposit would be £20,000.

2. The government’s 40% equity loan would amount to £160,000.

3. You would then need to secure a mortgage for the remaining 55%, which would be £220,000.

Remember, from the sixth year, you’ll start to pay interest on the equity loan. The loan itself is repayable after 25 years or sooner if you sell your home.

As with the standard scheme, the property you’re buying must be a newly-built home, sold by a Help to Buy registered home builder and be your only residence. It must also fall under the price cap for the Help to Buy scheme, which was £600,000 in London.

How does Help to Buy work outside of London?

Outside of London, the Help to Buy scheme still aids homebuyers in purchasing a new-build home with just a 5% deposit, but the amount of the government equity loan differs. Instead of the 40% offered in London, the government provides a loan of up to 20% of the property’s cost.

Here’s how the scheme works:

Deposit: You need a minimum deposit of 5% of the property price.

Government Equity Loan: The government provides an equity loan covering up to 20% of the property price. This loan is interest-free for the first five years.

Mortgage: The remaining amount (up to 75% of the property price) would need to be covered by a mortgage.

For instance, if you were buying a house priced at £200,000:

• Your 5% deposit would be £10,000.
• The government’s 20% equity loan would be £40,000.

• You would then need to secure a mortgage for the remaining 75%, which is £150,000.

As with the London scheme, the property you’re buying must be a new build, sold by a Help to Buy registered home builder and be your only residence. However, the property must also fall under the regional price cap for the Help to Buy scheme. The price caps outside of London are:

• North East: £186,100
• North West: £224,400
• Yorkshire and the Humber: £228,100
• East Midlands: £261,900
• West Midlands: £255,600
• East of England: £407,400
• South East: £437,600
• South West: £349,000

Are there any extra fees?

Yes, there are some additional costs and fees that you should be aware of when considering the Help to Buy scheme:

1. Interest payments: The government’s equity loan is interest-free for the first five years. However, starting from the sixth year, you’ll need to pay an interest fee of 1.75% on the loan amount, rising annually by any increase in the Retail Price Index (RPI) plus 1%.
2. Management fee: There’s a £1 monthly management fee from the outset, which is paid alongside your mortgage and other bills.
3. Repayment of loan: The equity loan must be repaid after 25 years or earlier if you sell your home. The amount repaid is based on the percentage of the market value of your home at the time of repayment, not the amount you initially borrowed. If the property’s value increases, so does the amount you owe.
4. Legal fees: Just like with any property purchase, there will be solicitor fees for dealing with your property purchase and the legal paperwork involved in the equity loan.
5. Mortgage fees: Depending on your mortgage product, you may have to pay application or product fees to your lender or other costs like valuation fees.
6. Reselling fees: If you plan to sell your home before the equity loan is fully repaid, you will need to have the property valued and may also need to pay a selling or redemption fee.

The Help to Buy equity loan is just one part of buying a home, and all the usual costs associated with buying a property and taking out a mortgage will still apply. These could include stamp duty, moving costs, and costs for decorating and furnishing your new home.

It’s important to consider all these factors and ensure you have a full understanding of all potential costs before deciding if the Help to Buy scheme is right for you.

Should I use the Help to Buy scheme?

The decision to use the Help to Buy scheme depends largely on your individual circumstances, and there are both advantages and disadvantages to consider.

Advantages of Help to Buy:

1. Lower Deposit: The scheme allows you to buy a home with a smaller deposit (as low as 5% of the property price).
2. Larger Equity Loan: The government provides an equity loan of up to 20% of the property’s price (or 40% in London), which is interest-free for the first five years.
3. Better Mortgage Rates: As the equity loan decreases your loan-to-value ratio, it could potentially give you access to more competitive mortgage rates.
4. First Step on Property Ladder: For first-time buyers who may struggle to save for a larger deposit, this scheme can provide a viable way to buy a property.
   Disadvantages of Help to Buy:
5. Limited to New Builds: The scheme can only be used to buy new build properties from participating developers.
6. Price Caps: There are regional price caps on the value of properties you can buy under the scheme.
7. Future Fees: After the first five years, you’ll need to start paying interest on the government loan, and this can add to your monthly costs.
8. Potential Negative Equity: If property prices fall, you could end up in negative equity (where the outstanding mortgage is more than the property’s value).
9. Repaying the Equity Loan: The loan needs to be repaid after 25 years or when you sell the property, and the repayment could be more than you borrowed if your home has increased in value.

Given these factors, it’s essential to carefully consider your situation, future plans, and financial stability. Weighing the potential benefits against future costs and limitations is crucial. Speaking to a financial advisor or mortgage broker can be very helpful in understanding your options and making an informed decision.

How long does it take to process a Help to Buy mortgage application?

The exact time it takes to process a Help to Buy mortgage application can vary widely, depending largely on your personal circumstances, the lender’s processes, and how quickly all necessary documentation can be provided. That said, it’s common for the process to take several weeks to a couple of months.

Here’s a rough guide to the steps involved and their timelines:

1. Property Reservation: Once you’ve found a property you wish to purchase and confirmed it’s eligible for the Help to Buy scheme, you’ll reserve it with the builder. This often involves a reservation fee.
2. Help to Buy Authority to Proceed (ATP): You’ll need to complete a Property Information Form with the help of the house builder and submit it to your local Help to Buy agent. They’ll assess your eligibility for the scheme and issue an Authority to Proceed if you’re eligible. This process can take around 4 weeks.
3. Mortgage Application: Simultaneously, you’ll apply for a mortgage from a lender participating in the Help to Buy scheme. The time it takes for mortgage approval can vary greatly depending on the lender and your circumstances, but typically this can take anywhere from a few weeks to a couple of months.
4. Conveyancing Process: While your mortgage is being processed, your solicitor will conduct the necessary property searches and deal with the legal aspects of the home purchase. This usually aligns with the timeframe of the mortgage application.
5. Exchange of Contracts and Completion: Once your mortgage offer is issued, your solicitor can proceed to exchange contracts with the seller. After contracts are exchanged, a completion date is agreed upon. This can usually happen within 2-4 weeks.

In general, it’s reasonable to anticipate a period of 2-3 months from the start of the process to moving into your new home, but it could be longer depending on a variety of factors.

How does the Help to Buy scheme differ in England, Scotland, Wales and Northern Ireland?

The Help to Buy scheme differs slightly across the countries within the UK. Here’s a brief overview of how the scheme operates in England, Scotland, Wales, and Northern Ireland.

England: In England, the Help to Buy: Equity Loan scheme is available to first-time buyers for new-build homes only, with a maximum purchase price set according to the region. Buyers need a minimum of 5% deposit, and the government provides an equity loan of up to 20% of the property’s value (40% in London), which is interest-free for the first five years. As mentioned above, You can no longer apply for a Help to Buy: Equity Loan for properties in England. https://www.gov.uk/help-to-buy-equity-loan

Scotland: The Help to Buy (Scotland) Affordable New Build Scheme also offers government loans towards the purchase of a new-build property. It’s open to first-time buyers and existing homeowners, with a maximum threshold price. The Scottish government will take an equity stake of up to 15% of the value of the property.

The Help to Buy (Scotland) schemes are also now closed. For further details, please visit: https://www.gov.scot/policies/homeowners/help-to-buy/

Wales: The Help to Buy – Wales scheme provides a shared equity loan to buyers of new-build homes. The scheme supports the purchase of homes up to a specific value, purchased through a registered Help to Buy – Wales builder. The buyer’s minimum deposit is 5% of the purchase price, and the Welsh Government will provide a shared equity loan of up to 20% of the purchase price. For further details, please visit: https://www.gov.wales/help-buy-wales

Northern Ireland: Northern Ireland has a different scheme called the Co-Ownership scheme. This allows you to buy between 50% and 90% of a property (new builds or resales) and pay rent on the share you don’t own. You can increase your share in the property at any time in 5% chunks, this is known as ‘buying out’. For further details, please visit: https://www.nidirect.gov.uk/articles/co-ownership

Remember, the specifics of these schemes can change over time, and it’s important to check the latest updates from official government websites or consult with a financial advisor or mortgage broker for the most recent and accurate information.

How do I find a Help to Buy mortgage lender?

Finding a Help to Buy mortgage lender involves a similar process to finding a standard mortgage lender. However, not all lenders offer Help to Buy mortgages, so you’ll need to verify that they participate in the scheme. Here’s a step-by-step guide on how you can find a suitable lender:

1. Research Online: The first step is usually to look online. Many banks, building societies, and other financial institutions have information on their websites about whether they participate in the Help to Buy scheme.
2. Use Comparison Websites: You can use mortgage comparison websites to compare different Help to Buy mortgage deals and lenders. Ensure that the website covers Help to Buy mortgages specifically.
3. Visit a Mortgage Broker: A mortgage broker can help you find a suitable lender and deal. They have expertise in the area and may have access to deals not available directly to the public. Make sure the broker is registered and regulated by the Financial Conduct Authority (FCA) for your protection.
4. Speak to a Help to Buy Agent: In England, Help to Buy agents can provide advice and guide you through the property buying process. They can also help you find a participating Help to Buy lender.
5. Check the Government Website: The UK government’s Help to Buy website provides information about the scheme and may also provide links to participating lenders.

Remember, when choosing a mortgage deal, it’s not just about the interest rate. You should also consider other factors like the loan term, the lender’s customer service, the type of interest rate (fixed or variable), and any associated fees. Always do your due diligence and seek professional advice if needed.

Which banks offer Help to Buy?

Many of the UK’s high street banks, as well as some building societies and specialist lenders, offer mortgages under the Help to Buy scheme. Here are a few examples:

1. Barclays
2. HSBC
3. NatWest
4. Lloyds Bank
5. Halifax
6. Santander
7. Nationwide Building Society
8. Yorkshire Building Society
9. Leeds Building Society

However, please note that not all branches of these banks may offer the Help to Buy scheme, and the availability of the scheme can also depend on your personal circumstances and the specific property involved.

Can I get a Help to Buy mortgage with a poor credit rating?

If you have a poor credit rating, getting a mortgage can be more challenging, and this also applies to Help to Buy mortgages. However, it’s not impossible and largely depends on how ‘poor’ your credit score is and the reasons for it.

Lenders assess a range of factors when deciding whether to offer you a mortgage. These include your credit score, income, outgoings, and other financial commitments. They do this to assess how much of a risk you pose as a borrower – in other words, how likely you are to repay the loan. If you have a low credit score, lenders may see you as a higher risk.

When it comes to the Help to Buy scheme, keep in mind that there are two aspects to approval – the lender’s decision to offer you a mortgage and the Help to Buy agent’s decision to grant you an equity loan. While a poor credit score might make it harder to secure a mortgage, it doesn’t automatically exclude you from being approved for the equity loan part of the Help to Buy scheme.

That being said, some steps you could take if you have a poor credit rating include:
Improve Your Credit Score: Take active steps to improve your credit score before applying for a mortgage. This could involve repaying outstanding debts, not missing any further repayments, registering on the electoral roll, and correcting any errors on your credit report.

Use a Broker: A mortgage broker who has experience with clients who have poor credit could help. They will have a better understanding of which lenders are more likely to accept your application and may be able to give advice on improving your credit score.

Consider Other Options: If your credit score is very poor, you might want to consider other options for home ownership, such as shared ownership or improving your credit rating, before applying for a mortgage.

Always remember that it’s essential to ensure you can afford the repayments on any loan or mortgage you take out. Failure to make the repayments could result in you losing your home. If in doubt, seek advice from a financial adviser.

Can self-employed people apply for a Help to Buy mortgage?

Yes, self-employed people can apply for a Help to Buy mortgage. However, the application process might involve additional steps and requirements compared to those for individuals in standard employment.

As a self-employed person, you will need to provide more extensive proof of your income. Lenders will typically require at least two (sometimes three) years’ worth of accounts or tax returns to show a consistent income. They use this information to assess your affordability and whether you will be able to keep up with the mortgage repayments.

The lender may also take into account the nature of your self-employment. For instance, if your income is irregular or seasonal, the lender might average your income over the last few years to calculate an ‘annual income’.

Remember, being self-employed does not disqualify you from the Help to Buy scheme. However, your income and the stability of your earnings will be key considerations for the lender in assessing your mortgage application.

How can I repay my Help to Buy equity loan?

The Help to Buy equity loan can be repaid in a number of ways. It’s interest-free for the first five years. After this period, you’ll be charged a fee of 1.75% of the loan’s value, increasing each year by the Retail Price Index plus 1%. Here are the ways you could repay your Help to Buy equity loan:

1. Sell your home: The equity loan is repayable when you sell your home, based on the market value at that time. So if your home has increased in value, the amount you owe will have increased. If the home has fallen in value, the amount you owe will have decreased.
2. Remortgage: After a period of time, you may decide to remortgage your home to repay the equity loan. This might be a suitable option if your home has increased in value, as you could potentially borrow more on your mortgage to cover the repayment. It’s important to note that your lender would need to agree to this, and you’d need to be sure you could afford the higher mortgage repayments.
3. Staircasing: This involves buying back some or all of the equity loan from the government. You can usually do this in 10% chunks. The cost of buying back a part of the loan will depend on your home’s current market value, not what you paid for it.
4. Repayment at the end of mortgage term: If you haven’t repaid the equity loan by the time you’ve finished paying off your mortgage, you’ll need to repay it in full.

How do I calculate my repayments?

The repayments on a Help to Buy mortgage are influenced by several factors. Here’s how you could calculate them:

1. Your mortgage: This is the loan you take out with a mortgage lender to cover the remaining cost of the property after your deposit and the government equity loan. The amount of your monthly mortgage repayments will depend on the size of your mortgage, the term (length) of your mortgage, and the interest rate.
2. Your equity loan: For the first five years, the government’s equity loan is interest-free. Starting from the sixth year, you will be charged a fee of 1.75% of the loan’s value, increasing each year by the Retail Price Index plus 1%.

Given this, to calculate your total Help to Buy repayments, you need to:

• Determine your monthly mortgage payments. This is typically done using a mortgage calculator, where you input your loan amount, term, and interest rate. Remember that the mortgage loan amount is the remaining cost of the property after your deposit and the government’s equity loan.
• From the sixth year onwards, add the fee for the equity loan. This starts at 1.75% of the initial loan value and increases annually.

What is the impact of rising interest rates?

Interest rates can significantly impact your Help to Buy mortgage, especially if you’re on a variable-rate mortgage or coming to the end of a fixed-rate term.

1. Your mortgage payments: If you have a fixed-rate mortgage, your monthly repayments will stay the same until the end of the fixed term, regardless of what happens to interest rates in the meantime. If you’re on a variable-rate mortgage or your fixed term is about to end, and interest rates rise, your monthly mortgage payments will likely increase.
2. Equity loan fees: The Help to Buy equity loan is interest-free for the first five years. After the first five years, a fee of 1.75% of the loan’s value is charged, increasing each year by the Retail Price Index plus 1%. This fee isn’t directly affected by changes in the Bank of England’s interest rate. However, rising inflation, which can be linked to rising interest rates, would increase the Retail Price Index and hence the equity loan fee.
3. Remortgaging: If interest rates rise, remortgaging to pay off your equity loan might become more expensive, as the rates offered by lenders may be higher. This could impact your decision on when and if to remortgage.

In a scenario where interest rates are rising, it’s important to plan your finances carefully and consider seeking advice from a mortgage adviser or financial adviser. They can help you understand the impact on your specific situation and discuss potential options with you, such as remortgaging or overpaying your mortgage to reduce the outstanding balance faster.

Alternatives to the Help to Buy equity scheme:

If the Help to Buy equity scheme isn’t suitable for you, there are a number of other schemes and mortgage types that could help you get on the property ladder:

Shared ownership mortgages: This scheme allows you to buy a share of your home (between 25% and 75% of the home’s value) and pay rent on the remaining share. You can buy bigger shares when you can afford to, in a process known as ‘staircasing’.

Help to Build: This UK government scheme is designed to help self and custom home builders by providing an equity loan on the completed home. It’s similar to the Help to Buy scheme but is aimed at those looking to build their own property.

Guarantor mortgages: With a guarantor mortgage, a family member or friend guarantees the mortgage repayments if you can’t pay them. This can sometimes help you to borrow more than you would be able to otherwise.

Family assisted mortgages: This type of mortgage considers the income of family members when assessing affordability. Some versions allow family members to put up collateral (like their own home or savings) as security against the loan.

Deposit unlock scheme: This is a UK government scheme that allows first-time buyers to purchase a home with a 5% deposit while enjoying the lower interest rates normally associated with a 20% deposit. The scheme involves the mortgage lender taking out insurance to cover any losses if the buyer defaults.

First homes scheme (England): This scheme offers newly built homes at a discount for first-time buyers, key workers, and local residents. The discount should be at least 30% of the market value.

Homebuy scheme (Wales): This Welsh government scheme offers interest-free loans to help first-time buyers and others to buy a home on the open market.

LIFT scheme (Scotland): The Low-cost Initiative for First Time Buyers (LIFT) in Scotland includes the Open Market Shared Equity (OMSE) scheme and the New Supply Shared Equity scheme (NSSE). Both schemes offer help to low-income individuals and families to purchase a property

It’s important to understand that each scheme has its own set of eligibility criteria and conditions.

Speak to a Help to Buy expert

Speaking to a Help to Buy expert or a mortgage adviser is always a good idea when considering a major financial decision like buying a home. These professionals can provide valuable guidance tailored to your personal circumstances and help ensure you make the right choices.