Help-to-buy equity loan scheme accounts for eight in ten purchases made by first-time buyers, according to data released by the Ministry of Housing, Communities & Local Government. Help-to-buy equity loan scheme was introduced back in 2013 by England, Scotland and Wales to help first-time buyers to get on the property ladder. Within a year since the scheme has been launched, the number of properties purchased rose to 210,964, which was only 171,053 in 2017.
How Does It Work?
Once you are eligible for the scheme, the government will lend you up to 20% of the cost of your new property. The cash deposit will be up to 5% and loan-to-value will be 75%. The scheme allows you to borrow less money so that you can save money in interest. You will pay the interest only on the amount you borrow from the lender and the loan under equity scheme is interest-free for the first five years. As the waive-off time expires, you will start paying interest on your loan. The loan will be repaid in full after 25 years or when your mortgage ends, whichever comes first.
Here is an example:
Suppose your new house costs £200,000. To buy a mortgage for first-time buyers, you must have a cash deposit of 5% that will amount to £10,000. You will get £40,000 from Help-to-buy equity loan scheme. The loan-to-value will be 75%, which amounts to £150,000. For better understanding, consider the below illustration:
You must meet the eligibility criteria to get money under the government’s equity loan scheme. These include:
1 – Whether you are first-time buyers or looking for moving home, you can apply for the scheme but it is restricted to new-build homes.
2 – The home you buy, however, must be worth of £600,000.
3 – You can neither sublet your property nor exchange your old property for a new home.
4 – You must not own any other property at the time you buy a new one.
Help-to-buy equity loan scheme has been increasingly popular among first-time buyers. In 2018, the number of property purchases has been three times larger than those made in 2013, when the scheme was introduced. As compared to 2013, when the property purchased using the scheme were 12,467 rose to 42,748 in 2018. Take a look at the table:
Different places in the UK follow different criteria under the scheme:
Are There Any Challenges With The Help-To-Buy Scheme?
There are several challenges you may face if you are planning to take out government’s equity loans.
1 – Interest rates
The loan is interest-free for the first five years only. Later, you will start paying interest that keeps fluctuating as per the Retail Prices Index and fees. This is the major concern of homebuyers. Otherwise, you will end up selling your property before the fifth year is up. Further, there is no guarantee that you will make enough return if you enroll in this scheme.
2 – Prices and availability
Properties available under the scheme are very limited and the prices of new build homes are outrageously high. Buying a new home under the new scheme seems to be more expensive because of inflated prices.
What Are The Alternatives?
It is likely that you do not qualify for the government’s equity loan scheme and you do not feel like applying for it, you have several other alternatives to get your foot on the property ladder.
1 – Apply for a shared ownership scheme
Shared ownership comes into the picture when you cannot own 100% of your house. The scheme allows you to buy a share of your home and pay rent on the remaining share. However, you are eligible for this scheme only when your household earnings are less than £80,000 and £90,000 if you are based in London. You can take out a mortgage to buy the share of your property if you do not have enough savings to finance it. Make sure that you use a first-time buyer mortgage calculator to know the overall cost of your mortgage.
2 – Try to have a bigger deposit
If you apply for a mortgage, you will have to arrange a minimum of 5% of the cash deposit, which means you can borrow up to 95% of the value of your new house. Of course, the larger the loan-to-value, the higher the interest rate will be. Isn’t it better to make a larger deposit when you are not certain about the return you will make through the scheme? The higher the deposit, the lower the mortgage and the lower the interest rate will be. This is because it mitigates the risk of the lender.
3 – Parents can help as guarantor
Asking your friends for acting as a guarantor will definitely be a trouble, but your parents do not need to give a second thought to it. Even if you do not have a larger deposit or your creditworthiness is in question, ask your parents to act as a guarantor. Make sure that your parents’ credit scores are good. It gives a chance to your lender to call upon them to repay in case you miss any repayment.
The Bottom Line
Help-to-buy equity loans are the best solution as long as you have the repayment capacity. However, you must analyze the return you could make before applying for the mortgage under this scheme. The fact of the matter is, you should concentrate on having a larger deposit to save your money in interest.