The government’s Help to Buy equity loan scheme was launched in 2021 to enable first-time buyers outside London to borrow up to 20 per cent of the cost of a new-build property and first-time buyers in London to borrow up to 40 per cent.
Buyers must pay at least a five per cent deposit for the property and take out a repayment mortgage for a minimum of 25 per cent of the purchase price. The equity loan is provided on an interest-free basis for the first five years; after this, an interest rate of 1.75 per cent per annum applies, which increases annually. The scheme is only offered to people who plan to live in the property; therefore, buy-to-let properties are excluded.
How the scheme works
The scheme enables first-time buyers to purchase a new-build property from a homebuilder registered with the scheme at a more affordable rate and with a lower deposit than if they bought privately or without the support of a government scheme. It is designed to make buying a first home a more affordable proposition.
The loan of up to 20 per cent (outside London) and 40 per cent (in London) of the value of the property is provided interest-free for the first five years and only has to be repaid in full once the mortgage has been paid off, the property has been sold, or the loan term – usually set at 25 years – has come to an end.
To avoid rising interest rates, it is likely that many homeowners will choose to pay off all or part of their loan before this point.
Is there a catch?
Repaying the loan early is a sensible way of avoiding escalating interest rates; however, there are many costs associated with doing so that must be balanced against the expected savings.
The amount prospective home buyers can borrow is a set percentage of the value of the property rather than a fixed figure. The property value can go up or down over time; for example, 20 per cent of a property purchased for £200,000 is £40,000 but if the property increases in value to £250,000, the value of the loan to be repaid increases to £50,000. The homeowner is responsible for paying for a valuation of the property by an RICS surveyor should they wish to make a repayment. Administration fees will also be charged every time a repayment is made.
There is a legal process to be followed when making a Help to Buy loan repayment, even if the property is not being remortgaged. This is an additional cost to be considered. There is a significant amount of paperwork to be completed and the solicitor or conveyancer will transfer the money to repay the loan and obtain a sealed legal discharge to confirm the loan has been repaid. They will send this sealed legal discharge to HM Land Registry to remove the equity loan from the property’s title deeds.
It is likely that having this legal process carried out by an online conveyancing specialist, such as Sam Conveyancing, will be more cost-effective than hiring a local solicitor. It may also enable the process to be conducted in a more timely manner, which is important when the loan has to be repaid within three months of the property valuation.
If the property is sold before the end of the loan term, the loan must be repaid in full. This can be a consideration if the funds are needed to purchase the next property.