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Help To Buy Scheme – What First-Time Buyers Need To Know

Help to Buy - Money and purse on the table

The Help to Buy scheme offers a much-needed aid for first-time buyers looking to step onto the property ladder. And let’s face it, we need all the help we can get. 

COVID has hit some millennials hard… For people aged 25-39, unemployment was the second-highest in the summer of 2020. On top of that, house prices have been rising – the average cost of a UK home increased by £25,000 in the 12 months leading up to August 2021! 

Luckily, there is some help out there for those of us wanting to move away from renting. One of which is the Help to Buy scheme. 

The guide is broken down into sections. Find the link for your location and click – you will find all the details applicable to you there.

Steps to get on the ladder

Help to Buy scheme (England & Wales)

For first-time buyers of England and Wales, you are in luck because the government is offering extra help for people getting on the ladder. The new Help to Buy Equity Loan scheme was launched on 1st of April 2021 and runs until March 2023. The government will now lend you up to 20% of the value of a new build home, up to 40% in London – and you only need a 5% deposit 

Let’s look at the most important info you need to know about the Help to Buy scheme.

What do you get exactly?

With the Help to Buy Equity Loan, the UK government will help you tackle that intimidating deposit.

In England, the Government will lend you a minimum of 5% and a maximum of 20% of the total asking price of your dream house (in London, the maximum is 40%). First-time buyers in Wales have to finance at least 10% of the house from the Equity Loan.

Why is it worth it taking this scheme? You can reduce your costs. The interest rate is smaller for this loan than for your regular mortgage. Furthermore, the first 5 years are interest-free. (More on this in a bit).

Consider the following scenario. If you’ve got your heart set on a £150,000 house, you have £5,000 in savings (since you’ve been saving the pennies) and it’s finally time to be getting on the ladder, buying a new home doesn’t have to be stressful 

Let’s breaking it down, this is how your total home buying costs could look like:

  • Your deposit: £5,000 = 5%
  • Help to Buy Equity Loan: £30,000 = 20%
    • Year 1-5: Interest-free
    • Year 5+: Interest is set 1.75% and will rise in line with Retail Price Index plus 1% year on year 
  • The mortgage you need to take out: £115,000

This scheme is great because 5 years interest free repayments means your costs are much lower than your average mortgage. You want to max out the government aid to save some of your hard-earned cash, especially when mortgage rates are expected to rise! 

Who is eligible?

From 2021, only first-time buyers can take part in this scheme. This means that both, you and the person you want to purchase the house with must meet the following criteria:

  • You cannot have purchased a property or residential land previously (within the UK or abroad)
  • You cannot have taken part in any form of sharia mortgage financing

Are there restrictions on the houses you can buy?

You can only reserve new build homes using the scheme. And heads up… The housebuilder company must also be a registered partner of the Help to Buy: Equity Loan.

You also have to be mindful of the new regional price caps. These could potentially limit the price range of the homes you can choose from. More info about this on the Help to Buy website.

Region Max. house price for the Help to Buy
North East £186,100
North West £224,400
Yorkshire and the Humber £228,100
East Midlands £261,900
West Midlands £255,600
East of England £407,400
London £600,000
South East £437,600
South West £349,000
Wales £250,000

How exactly do you apply?

You will need to take a couple of steps before you apply for the Help to Buy scheme. 

Let’s start with some practical advice. Before you start the application process for the Help to Buy Equity Loan, it is important to have the following items in place:

  • The fee for reserving your house (usually between £500 and £1,000)
  • At least 5% of the house price as a deposit at the exchange of contracts
  • Other costs on completion (e.g. stamp duty, mortgage costs, legal fees)

Are you eligible ?

If you are prepared, you have the budget to cover the costs above, you can finally start the Help to Buy process. Begin by looking at property sites and searching for new build homes. 

Pro tip: Getting On The Ladder makes this easy. Our website will list high-quality newly built properties in your area. Find five-star houses perfect for first-time buyers. 

In the next steps, you will need to check whether the development company is a registered partner of the Help to Buy scheme. Look for the HM government logo. If the company is registered, you can reserve the home. (This is where you’ll need to meet the reserve price.)

To apply for the Equity Loan, you’ll need to fill out the Property Information Form. The form will ask for specific information about your finances and the house you wish to purchase. To complete the application, you’ll need to send the filled-out Property Information Form and the homebuilder’s signed reservation form to your Help to Buy agent. 

The agent will be the one to judge your eligibility. If everything checks out, you will get the  Authority to Proceed (valid for 3 months). With this document in hand, you can now start applying for a repayment mortgage. 

This is also the point where your conveyancer will get legal guidance and the forms to complete. Send these to your Help to Buy agent and you can proceed to purchase your house.

You can find more information about this process via this website

What is the cost of the Help to Buy Equity Loan?

The first 5 years are the sweet period. The first 5 years of the Equity Loan are interest-free.

From the 6th year, the interest fee rises to 1.75% of the sum you borrowed. This will increase annually in line with Retail Price Index plus 1% year on year.

You also have to pay £1 each month for management fees starting from the month you start the scheme.

How do you repay the loan?

With the Help to Buy Equity Loan, there are no monthly repayments to reduce the total amount you borrowed. The monthly installments you pay from year 6 are only covering the interests. You do have the option though to repay the total Equity Loan or in part at any time. 

Otherwise, you will be required to repay the loan if one of these applies to you:

  • You reach the end of the loan term
  • You give back the repayment mortgage
  • You decide to sell your home
  • You breached the terms and the government asks you to repay the full amount

The amount you owe to the government at any given time is going to be calculated from what the value of the house you purchased is worth at the time. This means that if the market value of your home increases, the money you need to pay back increases too. On the other side, if it decreases, you owe less. 

Can you make part-repayments?

Part-repayments mean that you pay back only a portion of the money you owe. This means that the interest payments will only 

Let’s return to our first example. 

You borrow 20% of the purchase price – £30,000 – as a Help to Buy Equity Loan. 6 years after you bought your house, you decide to make a part-repayment. You give back £15,000 to the Government. After this transaction, you will only pay interest on the remaining sum you owe. 

Overall, by making early repayments, you lower your costs. However, there is a restriction. The sum you repay must be a minimum of 10% of the market price at the time of your home.

What is the timing of the scheme?

The second revision of the scheme started on the 1st of April 2021 and will run at least until 2023.

Help to Buy (Scotland)

The Help to Buy (Scotland): Smaller Developer scheme is similar for Scotland as the one in England – first-time buyers can get extra aid from the Scottish Government. Similarly, there are restrictions on the type of houses you can buy and the mortgage you can take out – the house must be a new build with a max price of £200,000 and the builder must be registered with the Help to Buy scheme.

You can find an in-depth description of the scheme on the Scottish Government’s website. In this section, we summarized the most important information you need to know.

What do you get exactly?

The Help to Buy is for you if you are looking for an affordable new build house. You can borrow a part of the purchase price of your new home from the Scottish Government.

The maximum that you can borrow with the Help to Buy Scotland is lower than in England. The Scottish Government will lend you a maximum of 15% of the total asking price of your dream house. 

You want to max out this 15% as the costs are much lower for the Help to Buy loan than other traditional mortgages. 

Keep in mind though that there is a limit on the minimum amount of repayment mortgage you can take out. You need to borrow at least 25% of the asking price from a registered lender.

Let’s see an example. You have your eyes set on a property priced at £150,000. You have been saving up for finally getting on the ladder so you have £7,500 in cash.

Breaking this down, this is how your total home buying financing will look like:

  • Your deposit: £7,500 = 5%
  • Mortgage: £120,000 = 80% (together 85%)
  • Help to Buy you can get: £22,500 = 15% (the maximum)

Who is eligible?

The scheme is fairly flexible – the limitations are more allowing than for English residents. Both first-time buyers and home movers can participate. However, the property you buy must be your sole residence, and you can’t have another house under your name even if it is a part-ownership. Buy-to-let investors are excluded from this scheme.

Other restrictions come from the properties that you can purchase.

Are there restrictions on the houses you can buy?

You can only reserve new builds using the scheme. And heads up… The housebuilder company must also be a registered partner of the Help to Buy (Scotland). See a list of the registered development companies on the Scottish government’s website.

Besides, you also have to be mindful of the price tag of your dream home. The maximum purchase price you can calculate with if you want to use the scheme is £200,000 for the 2020-2021 financial year.

How exactly do you apply?

You first need to check with the development company whose house you have your eyes set on purchasing. If they are part of the scheme, you are free to crack on with the application process. 

The next step is contacting an independent financial advisor. He will tell you the financing options you have. Furthermore, he is also going to be the one who refers you to an agent dealing with the Help to Buy scheme. 

Keep in mind though: before applying to the scheme via your agent, you will need to have already reserved your chosen house and received the full reservation agreement. If you have these in place, the agent will get in touch with you and let you know whether you are eligible for the scheme.

How do you repay the loan?

You can repay the money you owe to the Help to Buy loan whenever you wish to – a very sweet deal, indeed. 

However, you will be encouraged by your agent to ‘tranche up’ every 5 years or so. What this means is that you buy a bigger share in your shared equity home. When you tranche up you do need to purchase at least 5% of the current market value of your house – regardless of whether it is higher or lower than the original price you bought it for. 

Besides, should you decide to sell your home, you will need to pay back the Scottish Ministry the equity loan in full.

Are there additional financing matters you need to consider before applying?

There are a couple of financial aspects you need to consider before you apply for the Help to Buy scheme. 

You must have: 

  • The fee for reserving your house (if this is required by the home builder)
  • At least 5% of the house price as a deposit
  • Other costs on completion (e.g. land and buildings transaction tax, mortgage costs, legal fees)

Besides, you can’t forget about the cost of furnishing your house. After all, you do want to make your new home pretty before the house-warming party…

Summary

The Help to Buy scheme is an awesome opportunity for first-time buyers. It does have its limits though – like all great things in life. 

It is only valid for new builds and you also have to be careful about the price limits. However, the advantages of the lower mortgage costs sweeten the deal. Especially if you are looking for a fresh-fresh house as your first home. Check out our site and find the new build for you.

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