17 February 2021. MoneySavingExpert.com: ‘The New Help to Buy Equity Loan: How the scheme works in England & who qualifies’ By Kit Sproson | Edited by Johanna Noble
The Government’s Help to Buy Equity Loan scheme is designed to help those struggling to save for a deposit for a home to get on to the housing ladder in England, by giving a loan worth up to 20% of the property value (40% in London), which is interest-free for the first five years.
Here are our need-to-knows…
1. The scheme’s for first-time buyers ONLY
The definition of a first-time buyer is:
- Someone who’s never owned a property at any point in the past.
- Someone who’s never done so whether in the UK or abroad.
- And if you’re buying with a partner, they have to be a first-time buyer too.
For a complete definition of what a first-time buyer is for the purpose of the equity loan scheme, see the Help to Buy website.
There are also other options available to help first-time buyers on to the property ladder – read our First-Time Buyers’ Guide for the full lowdown.
Got a Help to Buy ISA or a Lifetime ISA? These existing schemes are also aimed at wannabe homeowners, but are separate from the Help to Buy Equity Loan scheme. If you’ve already got a Help to Buy ISA or Lifetime ISA (or if you’re thinking of applying for a Lifetime ISA), these CAN be used with an equity loan.
Took out an equity loan between 2013 and 2020? Then you’re part of the OLD equity loan scheme.
2. The max property price depends on where you’re buying, eg, in London it’s £600k, in the North East it’s just £186k
Regional price caps restrict how much the property you’re hoping to buy can cost, and the difference between the two ends of the scale is substantial.
In London, for example, a property can be worth up to £600,000, while in the North East the maximum property price is £186,100. Here’s a breakdown of the regional price caps from highest to lowest:
- London: £600,000
- South East: £437,600
- East of England: £407,400
- South West: £349,000
- East Midlands: £261,900
- West Midlands: £255,600
- Yorkshire and The Humber: £228,100
- North West: £224,400
- North East: £186,100
If you’re unclear about whether the property you’d like to buy is in a specific region or on the border between two regions, it’s best to check with your local Help to Buy agent who should be able to provide more information.
3. You need to be buying a NEW-BUILD home
Help to Buy equity loans can only be used to purchase new-build homes. In other words, you can’t use the equity loan to purchase a home that’s already been lived in.
You can also only reserve homes that are built by Help to Buy-registered homebuilders, meaning the equity loan won’t be available on all new builds, so make sure you check carefully. You can find which homes are available in your area through your local Help to Buy agent.
4. You need a 5% deposit. Then you can get a Government loan of up to 20% (up to 40% in London)
To qualify for an equity loan you’ll need a deposit worth at least 5% of the property you hope to buy.
With the equity loan, you can borrow up to 20% of the property’s value (40% in London). What the equity loan is doing is essentially ‘topping up’ your deposit – the aim being to give you access to cheaper mortgage rates. This is how the numbers work in brief:
- You put up at least a 5% deposit.
- You borrow up to 20% of the value of the property (40% in London) you intend to buy – this is the equity loan. It’s up to you what percentage you take, as long as you put down at least 5% yourself as a deposit.
- You apply for a mortgage to cover the remaining cost (the minimum the mortgage can be is 25% loan to value, or LTV – the percentage of the property value you’re loaned as a mortgage. In other words, the proportion you’re borrowing).
If you’re buying in the North East, for example, an equity loan could be worth up to £37,200, as the maximum property threshold is £186,100. You’d need a 5% deposit, which is £9,305.
In London, the maximum you could borrow through the equity loan would be £240,000, which is 40% of £600,000. You’d need a deposit of £30,000.
Remember that whatever you borrow with an equity loan will be separate from your actual mortgage. In effect, you’ll be taking out TWO separate loan agreements.
Can I put down more than a 5% deposit?
Yes, you can put down a deposit bigger than 5%. For example, you could put down 30% yourself and still get a 20% equity loan, meaning you’d only need a 50% LTV mortgage.
What you need to remember though is that mortgage rates won’t get any cheaper below 60% LTV (a 40% deposit). So it’s unlikely that taking out an equity loan if you’ve got a deposit bigger than 40% (whether that’s just deposit or deposit plus equity loan) will give you any advantage.
5. You’ll still need to get a mortgage for the amount not covered by your deposit or the equity loan
If you’re applying for an equity loan you’ll still need to be accepted for a mortgage. The mortgage deal you apply for should be cheaper than normal though. That’s because:
- The mortgage amount you’re borrowing will be smaller (meaning interest is charged on a smaller sum).
- The interest rate you’ll be charged should also be lower, as rates generally get cheaper the smaller your mortgage.
Typically mortgages get cheaper at 90%, 80%, 75% and 60% loan to value (LTV). If you’ve got a 5% deposit and a 20% equity loan you’ll only need to apply for a 75% mortgage, which’ll have a cheaper rate than a 95% mortgage.
It’s worth noting though that even if your LTV is smaller because you’ve taken out an equity loan you still might not get access to a mortgage lender’s most competitive rates at that LTV band. That’s because some lenders charge a premium for mortgages where an equity loan is being used.
For instance, Barclays offers a two-year fix at 75% LTV for 1.7%, but if you’re using an equity loan you’ll pay 1.84%. On a £150,000 mortgage, 1.7% is equal to £614 a month (capital and interest repayment), while 1.84% is £10 more a month at £624.
Need help finding the right mortgage deal for you?
Mortgages are complicated products, so if you’re unsure where to start we’ve got other guides and tools…
- Cheap Mortgage Finding – including how to find a good mortgage broker.
- Mortgage Best Buys – use our tool to compare the best mortgages for you.
- First-Time Buyers’ Guide – get the full lowdown on what it means to be a first-time buyer.
- Mortgage Calculators – we’ve got eight calculators to compare mortgages, from ditching your fix to saving for a deposit.
6. Equity loans are INTEREST-FREE for the first five years
One of the biggest draws of the equity loan scheme is that equity loans are interest-free for the first five years. If you pay back your equity loan in full by the time these five years are up, you will not have paid a PENNY in interest on it.
While you won’t pay interest for the first five years, you will have to pay a £1 monthly management fee from day one till the loan is paid off, so it’s not totally free in years one to five.
7. Then after five years you’ll start paying interest on the equity loan, until you pay it back
If you don’t repay your equity loan within five years, you’ll start being charged interest on it. Interest is only charged on the original amount you borrow, but can add £100s or even £1,000s to your annual costs. In brief, here’s how it works:
- Interest kicks in on the fifth anniversary of your equity loan (ie, from year six).
- The initial rate in year six is 1.75%.
- That underlying rate (initially 1.75%) then increases every April by the Consumer Prices Index (CPI) measure of inflation plus 2%, until the loan is paid off. This is complex to work out, so see this example below…
Let’s imagine CPI stands at a constant 1%, so when you add two percentage points to it, it means the underlying interest rate will climb by 3% each year. If the interest rate in year six is 1.75%, then based on the 3% increase your equity loan interest rate for year seven would be 1.8025%. Getting geeky, that’s 3% of 1.75% which is 0.0525%. Added to 1.75% it gives you a new interest rate of 1.8025%.
8. Careful! Buying your home on the ‘wrong’ day might mean you’re charged MORE interest on the equity loan
Interest payments on your equity loan after five years could be even more expensive depending on which day of the year you complete your home purchase…
MSE research has shown that the cheapest months to use Help to Buy are between January and March, with December being the most expensive. This bizarre quirk could end up costing some homeowners £1,000s more over the life of an equity loan.
9. If property prices rise you’ll owe more when paying the equity loan back (PLUS the interest from year six)
When you take out an equity loan, the Government owns a stake in your home. If your equity loan is equivalent to 20% of the value of your property, the Government essentially owns 20% of your home until you repay the loan. That percentage stays the same regardless of the home’s value, but if the property value rises or falls then the value of the Government’s share will rise or fall with it. In short (and disregarding interest here):
- Property prices rise: You’ll have to give the Government more than it originally lent you.
- Property prices remain the same: You’ll have to pay back the same amount you borrowed.
- Property prices fall: You’ll have to pay back less than the amount you borrowed.
You won’t necessarily feel this impact until you come to repay the equity loan, but that may be sooner than you think if you plan to trade up (or down) at some point in future. If the value has dropped then that may make it a good time to pay the loan back if you have the spare cash, even if you don’t plan to sell up.
10. It could be harder to ‘trade up’ if property prices rise
Let’s look at this from one perspective (but you can twist this round if the opposite happens). If you want to buy a more expensive property after five years, then if property prices jump it could make the gap between the equity you own and the value of the place you want to buy even greater.
- Scenario 1: Imagine you were given a £20,000 equity loan to buy a £100,000 home, and that property eventually rises in value by 30%. The home is now worth £130,000, but the equity loan is worth £26,000. That means between you and your mortgage lender you own £104,000 of the property. If you want to buy a £200,000 home you’ll need to find an extra £96,000.
- Scenario 2: On the other hand, let’s say you never took the equity loan in the first place and just used a 5% deposit. Your home might now be worth £130,000 after the 30% rise in value, and between you and your mortgage lender you own all £130,000. If you want to buy a £200,000 home, you’ll need to find an extra £70,000.
Of course, you may have needed the loan to buy your home in the first place, or you might have needed the loan to access cheaper mortgage rates offered by lenders. All this shows the dilemma you face if you have a choice of buying the standard way or via an equity loan.
And remember, rising and falling property values have other consequences. For example, if you needed the loan just to get on the ladder, rising values naturally grow your share which adds to your personal wealth. Similarly, decreasing property prices can mean other issues, such as negative equity.
11. Equity loans can work out cheaper in the short-term, but will come with a hefty price tag in the long-run
If you’re a first-time buyer but you don’t have enough money for a mortgage, maybe the equity loan scheme is the only option available to you if you want to get on to the property ladder. If you’ve already got at least a 5% deposit, and you can get a traditional mortgage, there are pros and cons to this scheme.
For those with the choice, there is no definitive answer to the question of whether using an equity loan is better than simply going with a normal mortgage – there are just too many variables to say.
While we have no crystal ball with which we can say a standard mortgage or an equity loan would work out better, what we CAN show you is roughly how much you can expect to pay in INTEREST over 25 years, depending on whether you’re using an equity loan or not. Our calculations make a number of assumptions (which might not be the case in reality), but in brief:
- For the first five years, an equity loan will be cheaper in interest. The difference in interest paid between an equity loan and high LTV mortgage is biggest during the first five years – partly as no interest is due on the equity loan (though you’ll still be paying interest on your standard mortgage).
- Even up to year 10, the equity loan might be cheaper in interest. We can’t say for certain, but – based on the scenarios we’ve used – even if you only repaid your equity loan after 10 years, it might still cost you less in interest overall than a high LTV mortgage.
- Beyond 10 years, the cost in interest of an equity loan can spiral. An equity loan will likely start costing you more in interest than a standard mortgage if you keep the equity loan for more than a decade. The difference in cost becomes most pronounced if you don’t pay back the equity loan until the end of your mortgage term, ie, after 25 years.
12. How to apply for an equity loan
Here are the steps you’ll need to take if you’re thinking of using an equity loan:
- The first thing you’ll need to do is reserve a home through a Help to Buy registered homebuilder. You can search for homes online through your local Help to Buy agent. Reservations should be no more than £500, and are refundable if you’re not approved for the equity loan.
- You’ll then need to apply for the equity loan itself, which, again, is done through your local Help to Buy agent. This will involve providing personal and financial information, such as details about your income. If you’re approved for the loan, the next step will be to apply for your mortgage.
13. This Help to Buy scheme is only available if buying a home in England, but a similar scheme is available in Wales
A Help to Buy scheme also exists in Wales (it’s also called Help to Buy). Its structure is similar to the scheme in England, the main difference being that you can only purchase a property worth up to £300,000. The loan is also interest-free for the first five years. For more information, see the Welsh Government website.
Scotland’s version of the Help to Buy scheme, known as the Affordable New Build Scheme and which can be used when buying new-build properties worth up to £200,000, closes to applications on 5 February.
There’s no Help to Buy scheme in Northern Ireland, but there are other options available for those struggling to get together a deposit.
14. There are different ways to pay back your equity loan
The rules are clear: you don’t have to repay the equity loan itself until you come to sell your property, OR at the end of your main mortgage term – whichever of these comes sooner. However, you don’t have to wait until either of these points. You can pay back the equity loan at any point you want.
So when should you repay the equity loan? Unfortunately, there are just too many variables for us to say exactly when the best time is to repay. We’ve already shown how an equity loan might compare with a normal mortgage in terms of total interest paid, but even this relies on a number of variables staying fairly constant.
If you’ve already got enough savings to repay the equity loan, and your finances elsewhere aren’t stretched, you might consider it a good option to repay the equity loan sooner than later. This may particularly be the case if your equity loan has decreased in value, or if you think that property prices are about to shoot up.
Whenever you’re thinking of repaying your equity loan, here are a few things to consider:
A. You can repay it but there are rules, eg, the minimum you can repay is 10% of your property’s value
You don’t have to pay off the whole equity loan in one go. But the rules state you have to repay at least 10% of the property’s current value. For example, you could repay 10% of the property’s current value if you took out a 20% loan, or repay 10%, 20% or 30% of the property’s current value if you borrowed 40%. If you borrowed less than 20% though, eg, a 15% equity loan, you could only repay the loan in full, as you must part-repay in multiples of 10%.
Whether paying off the loan in part or in full, you’ll need to have the outstanding loan amount assessed. This must be done via a valuation by a surveyor accredited by the Royal Institution of Chartered Surveyors, which’ll cost you a fee.
B. You can pay off the equity loan by remortgaging
If you’ve not got the savings to clear the equity loan, you could consider remortgaging. In effect this means borrowing more on your mortgage to pay off what remains of your equity loan. Whether or not remortgaging is the best option for you will depend on factors such as these:
- Payments will need to be manageable. Don’t stretch yourself with a massive mortgage unless it’s affordable.
- Check if you’re currently within your mortgage term. If you leave a fixed or ‘tracker’ mortgage period early, you could face big penalties. Read our Should you remortgage? guide for more info.
As you can see, this is complex, so it’s worth speaking to a mortgage broker to discuss your options. Our Cheap Mortgage Finding guide lists some of the top brokers around.
C. Don’t want to pay back the equity loan or sell up? You can stay put
Remember you don’t have to repay the equity loan until you sell up OR you reach the end of your main mortgage term. This means that if you’re not able to pay off the equity loan (or simply don’t want to), and you’re not intending on moving home, you can simply stay put and hold on to the equity loan.
You’ll need to take into account though that you’ll be charged interest on the equity loan from year six onwards, and the rate will increase each year until you repay the loan. And as we’ve said, keeping the equity loan for roughly 10 years or more can increase its overall cost.
Kit Sproson | Edited by Johanna Noble
Updated 17 February 2021