Currently some first-time buyers are finding it hard following Coronavirus to find a low mortgage rate with a low deposit with a shorter term. Also, these buyers are finding it harder due to job losses to find a mortgage loan that fits their property needs. This is where the new help to buy scheme comes in, as with this equity loan buyers can borrow an equity loan of up to 20% and up to 40% in London. There is a threshold of how much you can spend on the new home, this is purely dependent on the area. For example, in the South East, buyers have a threshold of £437,600 with London being £600,000.
The first-time buyers of these new builds can apply from Autumn this year for the 2021-2023 scheme. It will be required that 80% of the property price is a mortgage that you will fund, with a deposit of at least 5%.
For the first five years of the loan, you will not pay any interest on the equity loan. After this, interest rates start at 1.75%, rising every April 'by the the Consumer Prices Index including owner occupiers' housing costs (CPIH) plus 2%. You pay a monthly management fee of £1 for the life of the loan.
Homes England, the lender, secures the equity loan as a second charge on your Help to Buy home. You must repay the equity loan when you sell the home, pay off your mortgage or reach the end of your loan term. But, you can repay all or 10% chunks of the loan any time before then.
An independent financial adviser and a solicitor may be able to help you decide if Help to Buy is right for you.' (Help to Buy. Gov 2020)
The larger the deposit you will put down, the lower the mortgage, for example if you put down a 10% deposit, you will have a 70% mortgage with a 20% equity loan from the Government.
How you would repay back the equity loan:
'For the first five 5 years:
- the equity loan is interest free
- you pay a £1 monthly management fee by Direct Debit
From year 6:
- you continue to pay the £1 monthly management fee
- you start to pay a monthly interest fee of 1.75% of the equity loan
- your interest fee will rise each year in April by the Retail Price Index (RPI) plus 1% until you repay your loan
You only need to repay the equity loan in full when you:
- pay off your mortgage
- sell your home
- come to the end of your equity loan term.
But you can choose to pay off your equity loan any time, in full or in 10% chunks before the end of the loan period.
The amount you borrow is a percentage of the value of your new home. And the amount you pay back is the same percentage of the value of your home.
This means, if the value of your home rises, so does the amount you owe on your equity loan. It works both ways, so if the value of your home falls, the amount you owe on your loan falls too.' (Help to buy scheme 2021-2023, Gov.uk, 2020)
For further information on this, please read more at https://www.helptobuy.gov.uk/equity-loan/help-to-buy-equity-loan-2021-2023/