A government scheme aimed at helping first time buyers get on to the property ladder has been extended for 2021.
The Help to Buy scheme has been running since 2013, with the aim of helping those unable to afford a deposit for a property. This is done by offering a Government supported equity loan to cover the majority of the deposit.
The 2013 – 2021 Equity Loan Scheme ended on the 15 December 2020 for new applications but remained open for existing applications until 31 March 2021, to allow for completion of the transaction by the end of May.
Help to Buy 2021- 2023 began accepting applications from December 16th, 2020 and runs until 31st March 2023.
If you are yet to apply for a Help to Buy loan or are wondering whether the scheme could be right for you, here is everything you need to know.
What Is The Help To Buy Scheme?
Help to Buy works by providing those who qualify with an equity loan towards the cost of buying a property. Equity loans work by allowing you to borrow money using your home as collateral.
You need to contribute at least 5% of the sale price of your new-build flat or house as a deposit. The government lends you up to 20% of the sale price or up to 40% in Greater London. You apply to borrow the rest from a mortgage lender, on a repayment basis.
For the first 5 years, the loan is interest-free. In year 6, you start paying interest on the loan, at an initial monthly interest rate of 1.75%. The interest rate will rise each year, in line with the Consumer Price Index. These interest payments do not go towards paying off the government loan.
The loan must be paid back in full according to the agreed terms, or the property could be repossessed. The interest payments begin either at the end of the equity loan interest free period after 5 years or when you pay off your mortgage. Also, if you sell your home or if you do not follow the agreed terms set out in your loan, you may be asked to repay the loan back sooner.
If the property increases in value and you go to sell it before you have paid off the loan, you’ll repay the amount you borrowed at the current market rate, rather than the rate at the time you took out the loan.
That means if you borrowed 20% for a house worth £100,000 through the Help to Buy Scheme (£20,000), and the property doubles in value over time so that it’s worth £200,000, the 20% would become £40,000.
Although Help to Buy offers a much-needed cash boost for those struggling to get on the property ladder, it’s definitely worth considering all of the financial implications at the time you take out the loan, as well as keeping an eye on your credit score.
Help To Buy 2021-2023 Requirements
With the 2021 Help to Buy Scheme, all borrowers applying must be first time buyers. This is one of the main differences with the previous 2013 – 2021 version, since before the scheme was more flexible to include those who had previously owned a property.
Buyers must be at least 18 years old and unable to buy on the open market. As with any mortgage you wish to take out, you will need to provide financial proof of your circumstances and income.
In this case, the Help to Buy scheme will need confirmation you’re not in a position to raise the deposit yourself along with the person you’re buying the property with if applicable.
The home must be a new build and purchased from a registered home builder. Before you apply, check which home builders in your area are providing Help to Buy homes.
Regional Help To Buy Price Caps
Due to varying costs of living throughout the UK, the Help to Buy scheme has regional price caps for the total cost of the property it will allow you to buy. These are as follows:
East Midlands – £261,900
East of England – £407,400
London – £600,000
North East – £186,000
North West – £224,400
South East – £437,600
South West – £349,000
West Midlands – £255,600
Yorkshire and The Humber – £228,100
The current average property price across the UK is £229,748 according to the Nationwide Building Society which does make the scheme quite generous in that the price caps are mostly in line with the national or regional averages.
What Deposit Is Needed For Help To Buy 2021-2023?
For a Help to Buy home, your deposit will need to be at least 5% of the full value of the home.
You may also be required to pay a reservation fee to secure your home.
To Sum Up:
Help to Buy 2021 – 2023 is a scheme for first-time buyers which is now open for new applications. If you qualify, it will allow you to navigate the hurdle of raising a larger deposit for a property, by providing a government loan to cover the difference.
The loan needs to be repaid in full, and you may end up paying back more than you borrowed, especially if the property dramatically increases in value and you sell it before you’ve paid the loan back.
And remember, this new scheme is only for First Time Buyer’s wanting to buy a new build property from a registered homebuilder. The new 2021-2023 scheme runs to March 2023.
What are the advantages of the Help to Buy Scheme?
If you want to move home but cannot quite afford the deposit, the Government’s Help to Buy scheme could make a big difference.
You get help buying a home enabling you to get on to the property ladder, boosting the housing market, and helping the wider economy
You need a smaller deposit to buy a home through Help to Buy which is set at a more manageable level of 5%. This is much lower than many other mortgage options meaning you could buy more quickly and own a brand new property
There is no interest on the Help to Buy loan during the first five years. However although there are no loan fees due in the first five years, the amount owed can still increase during that time. The equity loan will rise and fall with the housing market, so if the house value increases in value, so will the amount owed.
For first time buyers in particular, these first five years can be some of the most financially strenuous, so a few years of breathing space may be viewed as an advantage.
Mortgage payments would still be made during this time (which will include interest charged by the mortgage lender), but no interest will be added to the Help to Buy loan.
There is the potential to access cheaper mortgage rates depending on individual circumstances. The fact you will need to borrow less overall may also mean being able to qualify for a mortgage in the first place. By needing to borrow a lesser Loan to Value, a more competitive rate of interest may be possible than if applying for a standard 95% mortgage.
You get a competitive Help to Buy loan rate (after five years). After not paying interest on the equity loan for five years, the initial rate of interest is 1.75% in the sixth year
After the sixth year, the rate of interest will increase by 1% plus any increase in the retail price index (RPI) which is a measure of inflation. If the RPI falls at any time your charges will still increase by at least 1%.
What are the drawbacks of Help to Buy Scheme?
Although Help to Buy may give you the opportunity to purchase a new build home that you may not otherwise be able to afford, there are some limitations to carefully consider.
The Help to Buy loan will become more and more expensive- Although you will benefit from five years without interest, after this time the rate of interest applied to your loan will increase each year. While you will only pay 1.75% in your sixth year, each year your loan fee will increase by 1% plus any RPI increase.
The creeping annual cost of fees could put pressure on your monthly budget. Also, should RPI increase dramatically in any 12 month period, so would the additional rate of interest applied to your loan.
The amount you will ultimately need to repay on your Help to Buy equity loan is not fixed. Instead it will fluctuate with the market value of your property because it is percentage-based. This means that if your property has risen in value you may have to pay significantly more than you originally borrowed.
Currently the Help to Buy scheme is only available on new properties which may limit the choice of home. It is also only offered by some developers so the choice of property will be limited too.
It may feel like paying a premium for buying new, so unless really wanting a new property, other options should also be considered.
The potential danger of negative equity as some property experts claim that the Help to Buy scheme has started to inflate house prices. They are concerned that it is causing a housing bubble that will burst when the scheme ends, trapping a vast number of buyers in negative equity.
If you are buying a new home as an investment in the hope you will be able to move in the short to mid-term this could be an issue – if you are planning on living in the property for many years this will be less of a problem.
You do not know if the terms might change. While you can only plan your finances based on information you currently have available, a future government could review and change the terms of the scheme.