Help To Buy – Q&A with our property expert
1 – What is the Help to Buy Scheme?
The Help to Buy Equity Loan was bought in by the government in April 2013. This was aimed at First Time Buyers and those looking to move home to purchase a new build residential property with a smaller deposit than usually required by most mortgage lenders. In 2020 the scheme was updated so it is only available to First Time Buyers.
2 – How does it work?
Under the scheme, buyers contribute a 5% deposit to which the government added up to an extra 20% of the property value therefore leaving the remaining 75% typically to be mortgaged. The loan is interest free for the first five years. There were some restrictions with the scheme, in London the property had to be worth less than £600,000. There are varying amounts depending on which County you live in. In London, the scheme would entitle those using it to a 40% loan across the same time period.
3 – What else do I need to be aware of?
It is important to note the 20% (or 40% in London) figure is 20% of the value of the property on the day of valuation for the purchase, not the original selling price.
4 – If I already have a help to buy mortgage, what are my options at the end of the five year interest free period?
- Paying interest on the loan: At the end of the five years interest is set at 1.75% and will rise in line with Consumer Price Index CPI plus 2% year on year. You will receive a Direct Debit Mandate from Target which means that £1.00 is paid every month for the management of the equity loan, until the 5 years and 1 month. After this time the interest rate is applied.
- Pay the loan off: You could of course pay the loan back. Whether this be through savings or by re mortgaging your property and/or increasing your borrowing.
5 – How easy will it be to re mortgage and buy the government out?
This really depends on how much equity there is in the property. If you are in a position where the house value has increased significantly or you have overpaid your mortgage you may find yourself able to buy it out comfortably. Or you may find you are in a better financial position now and can afford a larger mortgage. Please note, when increasing your borrowing the usual checks of affordability will apply when submitting an application.
We recommend starting the re mortgage process a few months before the interest free period is up as it can take a while to arrange the paperwork with the mortgage supplier, valuers and Target who manage the Help to Buy scheme.
6 – What happens if my property isn’t worth what we paid for it?
If the property is in negative equity, it might be best to pay the interest until you are in a position to move. Overpaying your current mortgage will help this, or depending on your local market, it might be a temporary problem.
7 – Are there any additional costs I should be aware of?
With most new builds there are Estate charges to consider. These need to be up to date in order to proceed.
If you are re mortgaging then there will be the usual mortgage fees and solicitors’ fees to budget for.
8 – When do I need to take action and will I need a solicitor?
Once you have decided that re mortgaging is for you, get in touch with a conveyancing solicitor who can talk you through what to expect and a rough timeline. It is recommended that you allow 3-6 months for this to go through, to avoid any interest charges on the Help to Buy loan.
When selling your property, you will have to contact Target, advise that you are selling, inform them of the Solicitors you are using and complete the relevant paperwork with them. You will then have to have a RICS Valuation undertaken on your property, which will provide the details of the amount to be repaid. There is a fee involved for this which has to be paid direct to Target.
9 – What happens if I want to sell the house before the end of the 5 years?
If you decide to sell at any point, having a Help to Buy loan on the property will not affect the sale. On completion, 20% of the agreed sale price will be paid back to the government. For example, a house is sold for £300,000, £60,000 will then be used to pay off the loan and taken from the sale funds therefore reducing your pot of money to take forward. It is important you factor this in to your figures when planning for a future purchase.
10 – Can I rent the property out whilst I still ‘owe’ the equity loan to the government.
The government are asking home owners with Help To Buy loans on the property to request permission before they can legally rent out the property. Mortgages cannot be changed to a Buy to Let mortgage until the equity loan has been repaid in full.
The guidance and contact details are available on this government website. How to sublet your Help to Buy home – GOV.UK (www.gov.uk)
Our Residential Conveyancing team have years of experience in dealing with all things Help to Buy. If you have any questions or would like to discuss your own circumstances, please contact the team.
*This article is provided for general information purposes only and does not constitute legal or any other professional advice.