The post that continues this affordable housing mini-series by looking at the details (and pitfalls) of the Help to Buy Equity Loan scheme.
Last week in Part 1 I delved into the details of Shared Ownership. Whilst it’s the right option for some, I concluded that it wasn’t right for me. In this Part 2, I look at the Help to Buy Equity Loan.
When I was looking into Shared Ownership prior to putting the offer in on the flat I’m hoping to buy, I also looked at the Help to Buy Equity Loan. Similarly, I concluded it wasn’t for me. Read on to find out why.
What is a Help to Buy Equity Loan?
The purposes behind the Equity Loan scheme is to help people get on the housing ladder who can only get together small deposits. It was, in particular, a response to a time when 95% mortgages went out of the window.
For Help to Buy in England (excluding London) you can borrow up to 20% of the property’s value from the Government (the “Equity Loan”). The other 80% must come from a combination of a deposit that you put down yourself and a mortgage. The deposit must be at least 5% and the mortgage must be for at least 25% of the value of the property.
In London, the Government recognises the higher price of houses so here you can borrow an Equity Loan of up to 40% of the property’s value. The other 60% must come from a combination of a deposit that you put down yourself and a mortgage. Again, the deposit must be at least 5% and the mortgage must be for at least 25% of the value of the property.
When do I repay the Equity Loan?
The Equity Loan must be repaid after 25 years or earlier if you sell your home. When it is repaid, it is repaid as a percentage of the value of the property at the time you sell it/when the 25 years is up. So if your Equity Loan was for 20% of a £200,000 property (i.e. £40,000) and you sell it when the property is worth £300,000, the amount you owe will be 20% of that £300,000 (i.e. £60,000), NOT the original loan you took out.
You can choose to make voluntary repayments of the loan at any time during your period of ownership (known as “staircasing”). Again, the repayment amount will be based on the market value of the property at the time you are repaying. So in the example above, if, instead of selling the property, you wanted to pay off half of the loan, this would cost £30,000, not £20,000 as per your original loan amount.
The minimum voluntary repayment is 10% of the market value at the time of repayment.
Who is eligible?
Help to Buy Equity Loans are available to both first time buyers and homeowners looking to move. However, you must not own any other property at the time you buy your new home. I am not entirely sure of the mechanics when you are trying to sell your old home at the same time as trying to buy the new one, but I believe that your solicitor/conveyancer must confirm you are selling your existing property.
The home you want to buy must be a new build costing up to £600,000.
Unlike Shared Ownership, there is no maximum income requirement.
What about Stamp Duty Land Tax?
Stamp duty is payable at the time of purchase, on the full purchase price of the home. However, there is then no further stamp duty to pay if and when you make further repayments or on repayment when the property is re-sold.
Can you sublet a property purchased with a Help to Buy Equity Loan?
In short, no, except in exceptional circumstances (e.g. you are a serving member of the Armed Forces). Note that it is “exceptional” circumstances; it is not enough that your circumstances change. For example, if you still have an Equity Loan outstanding and then move in with a partner, you can’t rent out your property.
If you want to sublet you must first repay the Help to Buy Equity Loan.
It is my understanding that taking in a lodger (i.e. when you would still be living in the property) is OK, although you may need approval from both your mortgage lender and Homes England (the Government body that administers the scheme).
Any other restrictions?
The scheme is only available for new build properties. This means that you’ll be paying the usual premium you find with new builds. One of the big criticisms of the Help to Buy scheme is that it has just lined the pockets of big property developers who have inflated the prices of their shoddily built properties in response to the increased demand.
You can’t purchase a second home if you have a Help to Buy Equity Loan. If you want to buy a second home you’ll have to pay the loan off first. And if you’re a married couple then any assets in one person’s name are treated as jointly owned.
You can’t extend or alter the property without Homes England’s permission – and the Government has indicated consent usually won’t be granted whilst your loan is outstanding.
What about reselling?
Homes England’s entitlement to a share of the future sale proceeds is secured through a second charge on your home (i.e. it will appear on the Land Registry’s records so you can’t sell without paying back the loan).
You can sell your home at any time and an independent valuer must decide what it is worth. Homes England will stop you from selling the property for less than market value. But if you sell it for more than market value then the amount of the loan you have to repay is still based on that higher amount you’ve sold for.
With the scheme still being quite new, some commentators have pointed out that one reselling issue likely to crop up in the future is that you can’t sell on to other people who want to utilise the Help to Buy Equity Loan scheme (as it’s only available on new builds). So that takes out a pool of likely buyers for your property.
Any nasty catches?
According to Which? one thing potential Help to Buy users need to be aware of is the potential problem with remortgaging down the line. There are relatively few lenders offering HtB remortgaging products and a number of these require you to pay off the loan first.
Anything else I should be aware of?
The Help to Buy Equity Loan is interest free for the first five years. From year six, interest of 1.75% is charged on the loan. This rises annually by the Retail Prices Index (RPI) plus 1%. So if RPI is 6%, then a RPI + 1% increase on 1.75% would mean the interest rises to 1.86%.
Fretful Finance view:
There is an argument that the Help to Buy Equity Loan has become a bit redundant now. The Government pushed them at a time when 95% loan-to-value mortgages were scarce, in order to assist people who couldn’t pull a deposit together. Now that 95% mortgages are widely available, that may be the best option for many, in order to avoid the restrictions, reselling and remortgaging issues outlined above.
Of course, there are greater negative equity risks with going for a 95% loan from a bank, and with the warnings of price crashes due to Brexit, some may feel more secure with the Equity Loan from the Government. After all, if prices crash then the amount you have to pay back also crashes.
For me, I could scrape together a 15% deposit (hell, the conveyancing process has dragged on so long I could now scrape together 20% if I wanted), so I never seriously looked into HtB.
Seems to me, whether a Help to Buy Equity Loan turns out to be a good idea really depends on what the market does. If you can repay the loan within five years (i.e. before interest kicks in) and house prices plateau or crash then it will have been a good deal. But if prices soar then it could prove to be a very expensive loan and you’d have been better off sticking with a larger loan from the bank, which won’t punish you (or reward you) for what the housing market is doing.
Check out details on the Government Help to Buy portal.