THE HELP TO BUY EQUITY LOAN SCHEME FOR NEW BUILDS – NEW RULES COMING IN 2021
WHAT IS THE HELP TO BUY EQUITY SCHEME?
The original help to buy equity scheme which was launched on the 1st April 2013 and was expected to end in 2021. The government recently announced that it is to be extended until 2023. The extension, from 2021 to 23 will now be restricted to first time buyers only.
The government loans, to the value of 20% of the property, allows for the first five years of the loan to be interest free. The help to buy equity loan scheme is available for new build homes only in England and Wales. The government brought this scheme in to help first time buyers get on the property ladder and the original scheme also catered for those wanting to move to a better property.
From 2021 there will also be regional caps introduced which will reduce the maximum value of a home which can qualify for the scheme.
With a Help to Buy equity loan the government assists those eligible by lending up to 20% of the total cost of a newly built house. There are other requirements to be eligible to take up the loan, such as a 5% cash deposit and the ability to obtain a mortgage for the remainder of the house price which is the 75% balance of the total cost. The maximum purchase price for the property to qualify is £600,000 until the new extension to the scheme begins.
The loan offered by the government though interest free for the first 5 years has a small management fee each year until the interest becomes payable in year six.
HOW DOES THE SCHEME WORK?
The first requirement is that you need is to be able to put down 5% of the total value of the property you want to buy as a cash deposit.
Thereafter the government will lend you 20% ( 40% if you live in London) of the sale price.
Additionally, you have to be able to borrow the rest from a mortgage company, and the mortgage has to be a repayment mortgage.
The maximum term you may take to repay the government’s help to buy equity loan is 25 years. Furthermore, you must repay the same percentage, of the sale proceeds as the initial equity loan, for example, if you receive an equity loan of 20% of the purchase price of your home, you must repay 20% of the proceeds of the future sale.
An example of how the loan scheme works:-
- House selling price – £300,000
- Deposit 5% – £15,000
- Government Equity Loan 20% – £60,000
- Mortgage 75% – £225,000
HOW IS THE INTEREST CHARGED
In the first five years of the loan, there is no interest to be repaid, however, there is a small annual fee charged.
At the start of the sixth year, the rate of interest charged is 1.75% and beyond the sixth year the rate rises by inflation based on the Retail Price Index (RPI) plus 1% each year.
An example of interest rates for paying back the loan:-
- Years 1 to 5 – no interest
- Year 6 – 1.75% interest rate on the loan
- Year 7 onward – 1.75% interest plus RPI +1%
When you sell your home, or when the mortgage is repaid, the equity loan must also be paid. The repayment of the equity loan has additional terms attached to it. When repaying the equity loan you are obligated, under the terms of the loan to also repay a share of the increased in value ( assuming there is an increase ).
- House purchase price – £300,000
- House sale price – £360,000
- Increase in value – 20%
- Equity loan repayment £60,000 + 20% of the profit £12,000 total £72,000
- Mortgage – £225,000
- You receive – £63,000 plus any capital repayment from the mortgage
The equity loan itself can be paid back at any time, not just upon the sale of the house. Alternatively when the five year’s interest-free time has concluded you could approach your mortgage provider and ask them to increase the mortgage and repay back the equity loan this way. If the mortgage rates are more advantageous and you qualify for the increase in the mortgage this approach could save you money.
The National Audit Office (NAO) recently undertook a report on the effect of these Equity Loan Schemes and their findings were very positive.
The report found that the advantages for buyers using this scheme are generally, the speed at which a property can be purchased. Not to mention that properties purchased through this scheme enabled buyers to afford a larger property, thus assisting families to acquire a more suitably sized home.
Another positive area, with long term a effects, was mortgage companies were willing to offer lower rates because the amount of equity being put into the property was higher. Indeed, if the deposit paid is 25% making the loan to value ratio 75% rather than 95% allowing for the 5% that the buyer had without the equity loan, the mortgage rate offered with the larger deposit is reduced and the repayments are lower.
WERE THERE ANY ADVERSE EFFECTS FROM THE SCHEME?
In one or two areas the scheme did have some negative effects;
Whilst in the first five years of the equity loan there is the advantage of the interest free element it is after the five year period comes to an end that buyers can find that difficulties arise;
From year six the scheme begins to make repayments of both the mortgage and the loan more difficult. The addition of interest and the ensuing increased repayment amount of the equity loan raises the cost of the repayments and for some they become less easily affordable;
Finding a remortgaging deal would financially make sense at this point but they are not always easy as few lenders offer them;
Buying a new build is very likely to be more expensive, so the potential savings through the scheme are, in reality, reduced. Many second hand properties of similar size are found to be cheaper, though the costs of maintenance of an older property should also be considered;
The NAO found that buyers taking advantage of the help to buy equity loan scheme tended to purchase more expensive homes, by approximately 18% more than the overall average figure against all house purchases;
It was also considered that new build houses came with a premium attached to them but were generally of higher spec and with the advantage of the 10 year NHBC guarantee. So anyone buying through the scheme generally paid inflated prices;
A final concern was one of negative equity, taking into account all of the above disadvantages, this can be of particular concern in times such as these where the belief is currently that house prices may take a downturn.
THE NEW HELP TO BUY EQUITY LOAN SCHEME AND REGIONAL CAPS
In conclusion the scheme which was to end in 2021, will continue for a further two years until 2023. The new scheme will have some changes to the criteria which seems to limit it’s availability. The government, in changing the scheme, is attempting to address some of the previous criticism of the inequity of the scheme, such as buyers on large incomes being able to take advantage of it. The maximum house price was originally £600,000 bringing the income bracket to a high level to meet the criteria to afford the remaining 75% mortgage.
Other changes from the 2021 scheme are that the scheme will only be available to first time buyers, and a relevant regional cap will apply.
Proposed house price regional cap:-
North East – £186,100
North West – £224,400
Yorkshire and the Humber – £228,100
East Midlands – £261,900
West Midlands – £225,600
East of England – £407,400
London – £600,000
South East – £437,600
South West – £349,000
These figures are clearly intended to reflect the price of similar-sized houses around the country, and London is the only area which still holds the original figure of £600,000.
The original scheme ends in March 2021, so for those who would be outside of the new criteria perhaps it would be prudent to consider acting before then.
How can Express Conveyancing help?
Each month, we help customers purchasing a new build property, using the Help to Buy scheme and are extremely familiar with the scheme. If you are a first-time buyer, buying your first new build property or a property mover, looking to buy a new build home, using the scheme, we can help.
Please contact us today or obtain an instant conveyancing quote using our quote generator below –