Is the Help to Buy Equity Loan a Good Idea?

The Help to Buy Equity Loan scheme was a government-backed initiative in England, designed to assist first-time buyers in purchasing new-build homes. While the scheme is no longer open to new applications as of October 31, 2022, understanding its structure and implications remains important for those who utilized it or are seeking to comprehend its function in the housing market.

Understanding the Help to Buy Equity Loan Scheme

The Help to Buy Equity Loan scheme facilitated home purchases by dividing the property’s cost into three components. Buyers contributed a minimum deposit of 5% of the property’s value. The government provided an equity loan, which could cover up to 20% of the property’s value outside London, or up to 40% for properties located within London. The remaining portion of the property’s price, typically up to 75% outside London and 55% in London, was covered by a traditional repayment mortgage from a commercial lender.

A significant feature of this equity loan was its interest-free period for the first five years of homeownership. Although no interest was charged during this initial phase, a nominal monthly management fee of £1 was payable from the start until the loan was fully repaid. The scheme was exclusively applicable to new-build properties purchased from homebuilders registered with the program. The government’s equity loan was secured as a second charge on the property, meaning it ranked behind the primary mortgage in terms of repayment priority.

Eligibility for the Scheme

To qualify for the Help to Buy Equity Loan, applicants needed to meet specific criteria, primarily being first-time buyers. Applicants could not have previously owned any other property. The property acquired through the scheme also had to serve as the buyer’s sole and main residence, prohibiting its use as a rental property or second home.

Property eligibility was equally defined. The purchase price of the property had to fall within specific regional price caps. For instance, in London, the maximum property price was £600,000, while other regions had lower, distinct caps to reflect local market conditions.

Financial Commitments of the Equity Loan

After the initial five interest-free years, the financial obligations associated with the Help to Buy Equity Loan changed. From the sixth year onwards, borrowers began incurring interest charges on the outstanding equity loan amount. The initial interest rate was 1.75% of the original equity loan value. This rate subsequently increased annually in April, based on the Consumer Prices Index (CPI) plus 2% for loans taken out from 2021 to 2023, or the Retail Price Index (RPI) plus 1% for earlier loans.

The amount owed on the equity loan is not a fixed cash sum but a percentage of the property’s current market value. This means if the property’s value increases, the amount required to repay the loan also increases proportionally. Conversely, if the property’s value decreases, the repayment amount would also reduce. Homeowners had the option to make partial repayments, known as “staircasing,” to reduce the outstanding equity loan. The minimum amount for a partial repayment was 10% of the property’s current market value, and a professional valuation was required before undertaking such a repayment.

Selling a Home Purchased with Help to Buy

When a homeowner decides to sell a property acquired through the Help to Buy Equity Loan scheme, the equity loan must be repaid in full. The repayment amount is calculated as the original percentage of the property’s sale price or its current market value, whichever is higher. For example, if a 20% equity loan was taken out and the property’s value increased, 20% of the new, higher value would be due.

Before the sale, a professional valuation by a Royal Institution of Chartered Surveyors (RICS) qualified surveyor is required to determine the property’s current market value and the government’s share. Once the sale is completed, the proceeds are first used to repay the outstanding mortgage, followed by the equity loan. Any remaining funds are then released to the homeowner.