Help to Buy Equity Loan: What’s changing?

Government support for first time buyers is ever changing, and the latest initiative to be updated is their Equity Loan scheme. Here’s everything you need to know about the Help to Buy changes.

The first thing to note is that the new scheme is due to run from April 2021 to March 2023. If you’re a first-time buyer in England, you’re eligible for an Equity Loan. However, you can only get such a loan if you’re buying a newly built home. 

This clause (which is inserted into lots of these government schemes) will be highly annoying for many, as it limits choice for consumers and serves to boost the profits of the UK’s homebuilders. Moreover, you have to buy your home from a homebuilder registered with the scheme, thus limiting choice even further, as only the larger homebuilders are likely to be registered.

The first-time buyer needs to provide a 5% deposit. Thereafter, they can borrow, from the government, a minimum of 5% and up to a maximum of 20% (40% in London) of the full purchase price of a newly built home.  

The rest of the purchase price should be covered by a repayment mortgage (yes, the scheme even specifies the type of mortgage you have to have).

You want to buy a new-build property in Leicester for £200,000. You would need to put down £10,000 (ie 5%) as a deposit. You would then borrow £40,000 via the Equity Loan Scheme (ie 20% of the value of the home—the maximum allowable in that region). The remaining £150,000 would be covered by a commercially available repayment mortgage. As a point of note, a lot of the big lenders are already onboard, including Halifax, NatWest and Santander.

The government has stipulated property price caps by region. As you would expect, the regions with the cheapest properties have the lowest cap, and the opposite is true too. Here are the price caps by region:

The good news is this: You do not pay any interest on the equity loan for the first five years. Although, oddly, you do have to pay a monthly £1 “management fee” (which continues throughout the period of the loan).  

After the five years is up, you also have to start making interest payments on the Equity Loan. You can also repay all or part of your Equity Loan at any time. Although, any part payment must be at least 10% of what your home is worth at the time of the repayment.

The interest you pay in year six has been set at 1.75%. Thereafter, each year it’s set to rise by the Consumer Price Index (CPI) measure of inflation plus 2%. For example, if CPI rate of inflation was 3%, the interest rate you pay the following year would be 105% of 1.75% (ie 1.84% rounded to two decimal places).

Yes, there’s a big one: If the value of your home rises, so does the amount you owe on your Equity Loan. So, if your property doubles in value, the amount you owe the government doubles too. (In fairness, it does work both ways: if the value of your home falls, the amount you owe on your Equity Loan falls too.)

In addition, you also have to repay your Equity Loan in full:

In this writer’s opinion, no. It’s a straight jacket of a scheme, and should only be used as an option of last resort.

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