The help-to-buy equity loan scheme is not associated with the help-to-buy ISA. The equity loan scheme provides consumers with the opportunity to purchase a new build property for a maximum price of £600,000, by making a 5% personal deposit. Often, for new build property purchases, a deposit of at least 15% is required by mortgage lenders. The equity loan offered by the help-to-buy agency will cover up to 40% of the property’s purchase price (maximum of 40% in Greater London and 20% outside). Therefore, after consumers have deposited 5% from personal sources, the mortgage lender will provide up to 75% finance for the purchase. This means that the loan-to-value percentage for the mortgage will be a maximum of 75%. Whereas, if borrowers only finance a property purchase through a mortgage and disregard the equity loan, a 95% loan-to-value mortgage would be required. As discussed in previous articles, the higher the loan-to-value percentage for a mortgage, the greater the interest rates offered to borrowers. This means that the equity loan scheme gives borrowers access to lower mortgage interest rates that would otherwise have been forgone. Consequently, overall mortgage costs in the short-term are reduced for borrowers of the equity loan. Another benefit of the equity loan is that no repayments are payable during the first five years. The only payment required is a monthly £1 management fee. Therefore, during the first five years, the borrower will make significant savings on monthly mortgage repayments.
- Only available for new build properties
- Minimum of 5% personal deposit required
- No repayments payable for equity loan during the first 5 years
- Available for first-time buyers and homeowners
- Maximum of 20% equity loan available outside of Greater London
- Maximum equity loan is £120,000 outside of Greater London
- Maximum of 40% equity loan available in Greater London
- Maximum equity loan is £240,000 in Greater London
- Provides access to lower mortgage interest rates from a 5% personal deposit
- Maximum purchase price is £600,000
However, the equity loan scheme is not without its flaws. The first issue arises at the application stage for an equity loan. The borrower must apply directly to the help-to-buy agency. The process of acquiring approval for an equity loan can take many weeks. Unfortunately, your allocated mortgage broker cannot proceed with a full mortgage application until the borrower has received an ‘Authority to proceed’ form. This form is issued once a borrower has been approved by the help-to-buy agency. Furthermore, the affordability formulas for mortgage lenders differ to those used by help-to-buy agencies. Therefore, even if an applicant acquires an agreement in principle from a lender, the help-to-buy agency may still refuse to lend.
There are other issues with equity loans that borrowers rarely comprehend. The most significant area of concern derives from the calculation of the equity loan repayments after 5 years. As implied by its name, the equity loan repayments are based on the appreciation in the property’s valuation. For example, if a borrower acquires a 20% equity loan, repayments will be based on 20% of the property’s valuation after 5 years from the property’s purchase date. Therefore, if the property significantly increases in value which has occurred in the south of England over recent years, repayments may be surprisingly high. For full details of the help-to-buy scheme, we encourage you to visit the following link: https://www.helptobuy.gov.uk/equity-loan/equity-loans/
Despite the drawbacks of the help-to-buy equity loan, it is still a popular scheme among prospective property investors. For a free consultation on the topic, we encourage you to click ‘Contact Us‘ to submit a mortgage enquiry form.