Help to Buy: what you need to know  

Help to Buy has been a central part of Britain’s new build housing market since 2013. By allowing people to buy with just a 5% deposit, the scheme has helped many to step onto the property ladder and into a new build home.
It’s highly likely it will continue to be a vital route onto the property ladder until 2023, when the scheme is set to end. However, if you’re a buyer planning to use Help to Buy, there are some things you need to consider before starting an application – especially as it’s set to see some dramatic changes in June this year.

How Help to Buy works

Help to Buy provides a ‘top up’ equity loan from the Government that can be put towards purchasing a new build home. This loan is interest-free for the first five years and can cover up to 20% of the purchase price (or 40% for properties in London). This helps reduce the deposit amount needed – in many cases dropping it to just 5% – as buyers only need to secure around 80% of the value of the desired property from a mortgage lender rather than the full 95%.

Therefore, the purchase of a home with Help to Buy could look like this:

• A 5% deposit from you
• A 20%‘top up’ equity loan from the Government
• A 75% Help to Buy mortgage (provided by a mortgage lender)

So, for a home costing £200,000:

• You’ll pay a £10,000 deposit
• You can get a £40,000 equity loan
• You’ll need a mortgage of £150,000

Don’t overlook the fine prints

It’s important to remember that after five years, you’ll have to start making repayments on your Help to Buy equity loan. However, these payments are interest only and you will still owe the outstanding loan amount, which must be paid off in full either by the end of the loan term, when you pay off your repayment mortgage or when you sell your home. You also give up some of the growth in the property value against the equity loan.

When and why is Help to Buy changing?

Up until December 15th  2020, the Help to Buy scheme was open to anyone looking to purchase a new-build property. However, this has now changed.

Anyone applying under the current version of the scheme must be purchasing their first home. And if you’re buying as a couple, that means both buyers can’t have owned property in the UK, previously.

This isn’t the only change, though. Buyers using the scheme will also now have to adhere to new regional price caps:

How to apply for the new Help to Buy scheme?

Before getting started with securing a Help to Buy mortgage, you’ll need to make sure you can afford to pay:

• A fee to reserve your home (no more than £500)
• Your deposit for the mortgage
• Other fees on completion (such as any Stamp Duty, legal fees or other mortgage costs)

Once you’ve got these fees together, you’ll need to find a new build property that fits the Help to Buy criteria and pay the reservation fee.

As soon as you’ve reserved your dream home, you’ll then need to work with a Help to Buy agent who will help you apply for the loan. Normally, this will be your mortgage adviser. If you pass the mortgage and Help to Buy buyer affordability criteria, you will go through the government’s buying process.

The process from there has three steps:

• Authority to proceed – your eligibility for Help to Buy is checked and if approved you’ll be given an ‘Authority to Proceed’ which is valid for three months. This can be used to apply for a repayment mortgage;
• Mortgage offer and exchange of contracts – now you can sign the property sale contract and the Help to Buy equity loan contract. Once this is confirmed pay your deposit and will be legally bound to buy your new home; and
• Completing the purchase – in this final stage you’ll complete the purchase and confirm the sale with the Help to Buy agent via your conveyancer.

Can I still remortgage if I applied through the old scheme?

The most popular Help to Buy mortgages are those with two- or five-year fixed rate deals. This means at the end of your fixed period you’ll need to remortgage to avoid being moved onto your lender’s standard variable rate, which is likely to be more expensive than your fixed rate. Unfortunately, many lenders do not offer Help to Buy remortgaging deals and those that do often require borrowers to pay off the Help to Buy equity loan in full. This can be a challenge with many first-time buyers who might struggle to raise the funds to pay off the Help to Buy equity loan plus the accrued interest.

If you’re able to find a Help to Buy remortgage deal, you’ll need to notify the Homes and Communities Agency (HCA) and in some cases the developer to get consent to enter into remortgage. The remortgage may need to meet certain criteria and you’ll have to share certain documents and possibly pay some administrative fees.

What’s happening to the Help to Buy scheme after 2023?

Help to buy is set to end in 2023, but the Government recently announced a new mortgage guarantee scheme that will help to ensure 95% mortgages remain available, keeping the deposit burden for many first-time buyers at a minimum. That said, buyers still need to pass the affordability test, which can often be an even bigger barrier than saving a deposit amount.

Consider a 30-year fixed rate mortgage instead of Help to Buy

When we’re live, Perenna will be a solid alternative to Help to Buy. We’ll address the deposit and affordability challenges by offering fixed-for-life mortgages. Due to the interest rate being fixed for 30 years, we can provide you with a guarantee for monthly payments and offer loans up to 6 x household income. This approach will make it possible for many more aspiring homeowners to step into the first home they really want. We believe borrowers should not have to worry about future interest rates, except if they come down and with a Perenna mortgage you can move to a better deal after five years without early redemption charges.