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Equity Loans – understanding how they work

New homes are often advertised with Equity Loans being available to approved buyers, under the FirstBuy scheme. Equity loans offer an alternative to the Shared Ownership scheme for people having difficulty buying a home buying a home, by providing a top-up loan of up to 20% of the price.  

The Equity loans scheme is available on selected properties in England, to approved buyers such as people who are currently living in social or rented accommodation, and who would not otherwise be able to afford to buy a home.  

With an equity loan, you have to fund at least 80 per cent of the purchase price with a mortgage and your own savings (deposit). You will need to obtain a mortgage from a qualifying lender, and the amount you can borrow on mortgage will depend upon the lender’s criteria. The remaining amount is then met equally by the government and the house builder.

So you might finance a purchase like this:

Your savings (deposit) £10, 000 5% of purchase price
Mortgage £150, 000 75% of purchase price
Equity loan £40, 000 20% of purchase price
Total purchase price £200, 000  

You will also have to be able to pay any stamp duty, land registry fees, Solicitor’s costs and any other fees payable on completion. Your Conveyancing Solicitor will tell you how much will be payable.

Get expert advice from an independent Conveyancing Solicitor 

As with all property purchases, it pays to get expert independent advice as early as possible. A Conveyancing Solicitor will be able to explain the workings of the scheme in more detail, to ensure that you fully understand how it works. With a quote from Fridaysmove you can be assured of getting a Conveyancing Solicitor who will be working just for you and will guide you through the whole home-buying process.

When you buy a home with an equity loan the title will be in your name, so you can sell your home at any time.  

Equity loans are registered against the property title as second charges. This means that the loan has to be repaid when you sell.  

Unlike an ordinary loan or mortgage, the amount you owe on an equity loan changes according to how much your home is worth. The proportion of the total value remains the same, but the amount you owe will rise or fall with the value of your home.

So in the above example, if the value of the property had increased to £220, 000 when the property was sold, you would have to repay £44, 000 on the loan. But if the value went down to £190, 000 you would only pay £38, 000.  

The equity loans are interest free for the first five years. After that, you will pay a fee on each of the equity loans of 1. 75%, rising annually by the increase (if any) in the Retail Price Index (RPI) plus 1%.

In addition, you can make voluntary part repayments of the equity loans. This is known as ‘staircasing’.

The loans are provided through ‘HomeBuy agents. ’ The developer will put you in touch with the agents who will decide if you can buy a home this way.  

Fridaysmove will be pleased to give you a quote for Conveyancing fees on your NewBuy home purchase. Click here or phone 0800 038 6446 now.

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