What is a Help to Buy mortgage?
This is the term for a variety of government-backed schemes and products to help first-time buyers and existing homeowners purchase a property.
There’s no specific Help to Buy mortgage per say, but there are lenders in the market who have specific products for the different schemes. These schemes are:
- Help to Buy equity loans
- Help to Buy ISA’s
- Forces Help to Buy
- Help to Buy shared ownership
In this guide, we explain how the different parts of Help to Buy work, the pros and cons of these mortgages, and where you can help expert help if you’re thinking of using Help to Buy to purchase a home.
Help to Buy mortgages – am I eligible?
Help to Buy is open to first-time buyers and existing homeowners. In order to be eligible, you must:
- Have saved a deposit of at least 5%
- Be looking to buy a home worth £600,000 or less
- Be buying a property you intend to live in most of the time
- Agree to not let out the property or use it as a second home
- Agree to take out a repayment mortgage
What is the Help to Buy equity loan scheme?
The equity loan scheme offers a loan to people who want to buy a new-build property.
The size of the loan you can get depends on where in the country you live – in England and Wales, you can borrow up to 20% of the property’s value; in Scotland, you can borrow 15%.
This loan allows you to buy a new-build property with a deposit of just 5%, and get a mortgage for the remaining amount (75% of the property’s value in England and Wales, and 80% in Scotland).
For more information on the scheme you can contact your local Help To Buy Agent.
How the loan works
Equity loans are interest-free for the first five years, save for a monthly £1 administration fee. After this, you’ll pay interest 1.75% of the loan and then rises every year at the rate of the Retail Prices Index plus 1%.
The crucial thing to know here is that the loan is an equity loan – you’re borrowing 20% or 15% of the value of the property when you buy it.
It will need to be repaid in full either after 25 years, when your mortgage term ends or when you sell the home – whichever happens first.
You will repay the ‘market value’ of the loan at the time, rather than the amount of cash you originally borrowed.
So, if you were taking buying a property worth £200,000 and taking an equity loan of £40,000, and wanted to repay it five years later when the property was worth £250,000, you’d have to repay 20% of the higher property value, or £50,000.
If the property falls in value, you’ll repay a lower amount.
Maximum property values
The Equity loan scheme places a limit on the value of the property you can purchase. In England, the maximum property value is £600,000.
In Wales, the maximum is £300,000, while in Scotland, the maximum is £200,000.
What is London Help to Buy?
The London scheme offers extra help for first-time buyers and home-movers in the capital.
Using this, you can apply for an equity loan of up to 40% of the value of a new-build property, rather than the 20% offered elsewhere in the country.
The loan is available for new homes in Greater London priced up to £600,000. As with the standard Help to Buy scheme, you will need to have a deposit of at least 5% of the property’s value and you won’t be able to let it out or use it as a second home.
What is Forces Help to Buy?
These scheme helps people in the armed forces get an interest-free loan to build up a deposit to purchase a property.
If you qualify for this, you can borrow up to 50% of your salary interest-free, to a maximum of £25,000. It must be repaid in monthly instalments over a 10-year period.
If you qualify for the maximum loan, that would mean monthly repayments of £208.33.
What is a Help to Buy Isa?
Help to Buy Isas are designed to help people save up for a mortgage deposit. If you save using a Help to Buy Isa, the government will give you a 25% bonus when you buy your first home.
You can make an initial deposit of up to £1,000 when you open a Help to Buy Isa, and then save up to £200 each month.
To get the maximum government bonus of £3,000, you’ll need to save £12,000, which will take around four-and-a-half years if you pay in the maximum amount each month.
Anyone aged 16 or over who has never bought a property can open a Help to Buy Isa, and if you’re saving to buy a home with someone else, you can each open an account and earn a combined bonus of up to £6,000.
There are limits on the value of the property you can buy using a Help to Buy Isa – it’s £250,000 everywhere except for London, where the limit is £450,000.
Shared ownership sees you using a minimum 5% deposit to buy a share in a property, between 25% and 75% of the property’s value. You pay rent on the remaining amount, which is owned by a housing association.
We’ve explained this in detail in our guide to shared ownership.
What is a Lifetime ISA?
Not strictly part of the Help to Buy family, the government introduced the Lifetime Isa to help younger people save for their first home or their retirement.
Lifetime ISA’s allow you to save more than a Help to Buy ISA, but there are pros and cons.
Ask The Help To Buy Experts
Want to know more? Call us today on 0330 1355914 and one of Mint FS experts will be happy to help or complete our contact form and we will call you back.