Unlocking Homeownership: A Complete Guide to the Help to Buy Equity Loan

The dream of homeownership remains out of reach for many first-time buyers today. With high home prices and strenuous mortgage requirements, it can feel impossible to get your foot in the door. But the government’s Help to Buy equity loan program provides a pathway to make buying your first home attainable

In this comprehensive guide, we’ll explain everything you need to know about the Help to Buy equity loan scheme Read on to learn about eligibility, how it works, costs, repayments, and more so you can determine if this program is right for you

What is the Help to Buy Equity Loan?

The Help to Buy equity loan helps first-time buyers purchase a newly built home with just a 5% deposit The government provides an equity loan to cover up to 20% of the purchase price (40% in London), You obtain a mortgage for the remaining 75-80% of the home’s value

This lowers the amount you need to save for a deposit. It also reduces your monthly mortgage payments since you’re only borrowing on 75-80% of the price.

The program is available across England and operates similarly to other low down payment programs like FHA loans in the United States. Help to Buy equity loans make ownership attainable for buyers who may not qualify for a conventional 95% LTV mortgage.

Am I Eligible for a Help to Buy Equity Loan?

To qualify for a Help to Buy equity loan, you must meet certain criteria:

• First-time buyer status

• UK resident

• Property purchased under £600,000 (or £437,600 in Wales)

• Property will be your only residence

• Property purchased from a registered Help to Buy builder

• Can qualify for a 75-80% first mortgage

• Have at least a 5% deposit

There are also household income caps that vary by region. Your total income must be under £80,000 a year (or £90,000 in London).

How Does the Help to Buy Equity Loan Work?

Let’s walk through an example to understand how you’d use a Help to Buy equity loan:

• You purchase a home for £200,000.

• You put down a 5% deposit of £10,000.

• The government provides a 20% equity loan of £40,000.

• You obtain a 75% regular mortgage for £150,000.

For the first 5 years, the equity loan is interest-free. In year 6, you’ll start making monthly interest payments on the £40,000 at a rate of 1.75%. This rate increases annually based on the Consumer Price Index.

You can repay the equity loan at any time. But after 25 years, you must repay the equity loan in full. When you sell the home, you’ll repay 20% of the market value at that time.

What Are the Costs and Fees?

Aside from interest payments in year 6 onward, there are a few other costs to know:

• Deposit – You must pay a minimum 5% deposit. Saving this upfront can be challenging.

• Mortgage fees – You’ll pay standard mortgage fees like appraisal and legal costs on your main mortgage. Shop around for the lowest rates.

• ** Monthly management fee** – This £1 monthly fee pays for administration of your equity loan.

• Valuation fee – You must get an independent valuation when making equity loan repayments. This costs around £200-300.

• Early repayment charges – Check if your mortgage lender charges exit fees for repaying the equity loan early.

Overall, costs are very reasonable. Just budget for interest payments kicking in after 5 years.

How Do I Apply for a Help to Buy Equity Loan?

Follow these steps to get started with the Help to Buy process:

• Find a property – Search for new-build homes from registered Help to Buy builders in your area.

• Get pre-approved – A lender will assess if you meet eligibility and can qualify for a mortgage.

• Reserve home – Put down a reservation fee with the builder to secure the home. This usually ranges from £500-£1,000.

• Submit final application – Work with a Help to Buy agent to complete the equity loan application.

• Use solicitor – Hire a solicitor to handle the legal work and conveyancing. This costs around £1,000-£1,500.

• Sign contracts and close – Once approved, you’ll sign the mortgage and equity loan contracts and set a closing date.

The entire process takes about 2-3 months from reserving a home to closing day.

Pros and Cons of Help to Buy Equity Loans

Let’s weigh the notable advantages and disadvantages of the Help to Buy equity loan scheme:

Pros

• Lower deposit requirement

• Potentially lower mortgage rates

• Pay interest on only a portion of the price

• Fixed extra repayments over 25 years

• Flexibility to repay equity loan at any time

Cons

• Limited to new builds

• Interest payments after 5 years

• Monthly fees

• Home value capped

• Must repay after 25 years

Carefully consider both sides before moving forward. An equity loan makes buying easier but also comes with long-term costs.

Alternatives to Explore

If the Help to Buy equity loan isn’t a fit, here are a few other low down payment programs to consider:

• Shared ownership – You buy 25-75% of a home and pay subsidized rent on the remainder.

• Forces Help to Buy – Equity loans for service members with a £0 deposit.

• Affordable housing schemes – Reduced price properties aimed at first-time buyers.

• 5% deposit mortgages – Available from some lenders if you have pristine credit.

• Guarantor mortgage – A relative or friend guarantees they’ll cover mortgage payments if you can’t.

• Save longer – Delay buying 1-2 more years to boost your deposit savings.

Explore all options to find the right path into homeownership for your financial situation.

Is Help to Buy Right for You?

While not a fit for all buyers, the Help to Buy equity loan provides a real opportunity for first-timers to achieve their property aspirations sooner. If you qualify and are comfortable with the long-term costs, it can help you clear the biggest hurdle – the down payment.

But make sure to run the numbers carefully and have a plan for interest payments before jumping in. Homeownership is a big commitment with or without the equity loan program.

By understanding how Help to Buy works, the pros and cons, and alternatives, you can make an informed decision. Use this guide to take your first step onto the property ladder one way or another!