Since its inception in April 2013, the Government’s Help to Buy scheme has helped thousands of first-time homebuyers into ownership through the provision of an equity loan.
This year, the scheme has also been extended to include non-first time buyers who are purchasing a new build property, which should boost the initiative’s popularity as many people continue to battle with the cost of living crisis.
Under the current rules, the scheme must only be used to buy your main residence and cannot be used to purchase a second home or buy-to-let property. Buyers must have a deposit of at least 5% of the purchase price, and in return, the Government will lend 20% (40% in London) of the purchase price.
It’s an initiative that, if used correctly, can deliver significant financial benefits to prospective homeowners – so how exactly can people apply and what is the process for paying it back?
The application process
If you are married, in a civil partnership or living with a partner as if you were married, then a joint application is required.
By searching online for new homes available to buy through the scheme, it is possible to reserve your home with the homebuilder for a fee of no more than £500 – this fee will be refunded if your equity loan application is unsuccessful.
Using an eligibility calculator tool, Help to Buy agents will check your monthly income and outgoings, including household bills and mortgage repayments to assess whether you’re a suitable candidate. If you can afford the monthly fee and interest payments, then you will be asked to fill in a Property Information Form to provide personal and financial information.
Once your application has been approved, an ‘Authority to Proceed’ document will be issued, allowing you to move forward with the purchase. Remember, once eligibility has been confirmed, you are responsible for arranging a repayment mortgage, which should be less than 4.5 times your annual income.
From this point, your conveyancer will handle the exchange of contracts, which involves explaining the equity loan contract and your legal responsibilities. During this consultation, you will be asked to sign a legal declaration confirming you are a first-time buyer, before paying at least 5% of the deposit.
During the completion stage, your lender will pay the homebuilder the full amount of the repayment mortgage, before you legally own the new home and can move in.
Repaying your equity loan
Whilst the application process is widely understood, the way to redeem a Help to Buy charge is less known. Whilst the loan itself does not need to be repaid for 25 years, many owners prefer to pay it off partially or fully before the interest rates kick in.
The equity loan is interest-free for the first five years, after which point you’ll be charged 1.75% which will increase by the Consumer Price Index (CPI). You must repay the same percentage of the proceeds of the sale as the initial loan – this means if your home rises in value, so does the amount you owe, but if the value falls then the amount you owe on your equity loan will too.
Currently, there are three ways to redeem a Help to Buy charge, these include:
- Sell your home: If you decide that now is the right time to sell, then you can redeem the charge as part of the sales process. However, it should be noted that there are additional steps involved in this process, so it is best practice to seek professional support from the outset.
- Remortgage your home: If you can borrow a suitable amount to repay the existing mortgage and Help to Buy loan, then you can also remortgage with your current or new provider. This means you do not have to move from your property if you wish to live there longer than the initial interest-free period.
All of these methods involve paying an administrative fee to your Help to Buy provider and are subject to you obtaining an RICS Valuation Report, which will also include a figure for redemption.
Make a complex process simple…
To the untrained and inexperienced eye, the application and redemption processes can seem complex, which then creates a lot of unnecessary confusion and uncertainty despite the scheme being designed simply to help first-time buyers.
In the current economic climate, the opportunity to secure a new build property with financial support from the Help to Buy scheme is one that shouldn’t be passed up.
With the right financial and legal support, you can find the perfect home and map out a redemption plan that has a reduced impact on your personal funds.
If you have been impacted by any of the issues discussed, contact an experienced property team for advice and guidance.
