Visit the governments Help to Buy website here.
Read more about Help to Buy Conveyancing
Chancellor George Osborne’s recent statement that Help to Buy for new homes is to continue up to 2020 was somewhat overshadowed by his announcement of a new garden city to be built at Ebbsfleet in Kent.
But the continuation of the Help to Buy scheme is confirmation that the government sees this as the way to encourage the building of new homes throughout the country.
For would-be buyers this means that there will be a wider choice of new properties to buy, as developers realise the benefits of the scheme and start to build more homes.
Buy a new home with just a 5% deposit
Help to Buy enables buyers to purchase a new home with a minimum 5% cash deposit. There are two ways of financing the balance.
The first way is for the buyer to get an ordinary mortgage for 75% of the price from one of mortgage lenders participating in the scheme. The government then provides the balance up to 20% in the form of an equity loan.
The second way is to apply for an ordinary mortgage of up to 95% of the price under the help to Buy mortgage guarantee scheme. This makes it easier to get a high loan-to-value mortgage, but the full mortgage repayments will have to be made from the beginning.
Help to Buy equity loans are an attractive proposition
The equity loan scheme is very attractive as it does not have to be repaid while the buyer owns the property, nor is any interest payable.
After the first five years fees are charged – in the sixth year the fee will be 1. 75% of the loan’s value, and it will then increase every subsequent year. The increase will be worked out by using the retail price index plus 1%. These fees will not reduce the amount of the loan.
When purchasing a new home with an equity loan there are no restrictions on any subsequent sale, unlike some shared ownership schemes. The property is registered in the names of the buyers, with the first mortgage and the equity loan registered as charges against the title.
Like any other mortgage an equity loan has to be repaid when the property is sold. However unlike an ordinary mortgage where the amount repayable is the amount originally borrowed less any repayments of capital, with an equity loan the amount repayable varies in line with the value of the property.
How equity loans work
For example, say buyers jointly purchase a home for £200, 000 paying a 5% deposit in cash. They could then get a 75% mortgage of £150, 000 from a high-street lender and obtain an equity loan for the balance of £40, 000.
If the property is sold later for more than £200, 000 the amount required to repay the first mortgage will be £150, 000 less the amount of capital repaid as part of the regular monthly repayments.
But the amount to repay the equity loan will not be £40, 000. Instead the amount will increase in line with the increase in the total value of the property. So if the property sold for £210, 000 i.e. a 5% increase in value, the owner would have to pay £42, 000 to repay the loan.
However the amount will decrease accordingly if the property is sold for a loss.
There is no requirement to repay the loan before the property is sold until the end of the term of the first mortgage. But it is possible to make repayments of capital to reduce the amount outstanding.
Payments have to be 10% or multiples of 10% of the amount of the loan adjusted in line with any increase or decrease in the value of the property at the time of payment.
Existing owners benefit from Help to Buy as well as first-time buyers
Both the equity loan scheme and the Help to Buy mortgage guarantee scheme are now available to people who have previously owned a home as well as first-time buyers.
If you want to take advantage of Help to Buy but own a property at present you will need to arrange completion of the sale of that property on or before completion of the purchase. Your solicitor will be happy to arrange that once a buyer is found, or you may be able to take advantage of a developer’s part exchange scheme.
Buying a new home can be very exciting, but it helps to employ a solicitor with plenty of experience of new-build purchases to smooth the conveyancing. We work with solicitors who have wide experience of all types of property purchases and bring you the best service at very competitive rates.