Help to Buy equity loans

First-time buyers

Help to Buy equity loans

By Marie Kemplay

Article 3 of 8

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Help to Buy equity loans

Find out whether a Help to Buy equity loan could help you buy a new-build home and, if you're eligible, discover how to apply.

The government launched the Help to Buy scheme to make it easier for people with small deposits to buy their first property and for existing homeowners to move house. 

The first part of the scheme is Help to Buy equity loans. These are only available for new-build properties so, if you want a modern home, then a Help to Buy equity loan could be a good way to reduce the size of the deposit you need to save. 

This guide takes you through how Help to Buy equity loans work in England.

  • For expert impartial advice on getting a mortgage based on your personal circumstances, call Which? Mortgage Advisers on 0808 252 7987

Help to Buy equity loan: how does it work?

Help to Buy equity loans are available to first-time buyers and existing homeowners looking to buy a new-build property.

The government will lend you up to 20% of the property’s value. You will need to put down a deposit of at least 5% and get a mortgage to cover at least 75% of the property’s value.

So, if you wanted to buy a house for £200,000 with a 5% deposit you would need:

  • £10,000 deposit
  • £150,000 mortgage loan
  • £40,000 loan from the government.

Using an equity loan rather than going it alone has two key benefits: you will only need a 5% deposit and, as you’re only borrowing 75%, instead of up to 95%,  you will be able to access better mortgage rates.

According to official government statistics, 81,014 properties were bought using Help to Buy equity loans between 1 April 2013, when the scheme was launched, 30 March 2016. Of these, 81% were bought by first-time buyers. 

Go further: What is a mortgage? Find out in our video guide

Help to Buy equity loan: what you'll have to pay 

Although Help to Buy equity loans are interest-free for the first five years, after that, you will have to pay a monthly admin fee, which starts at 1.75% of the loan. It will then rise every year by any increase in the Retail Prices Index plus 1%.

Remember that the equity loan from the government will not decrease in size (unless you opt to repay part of it early). So, over time, the cost of the admin fee could become pretty expensive, especially if inflation increases substantially. You will also be paying these fees in addition to your mortgage repayments.

You will need to repay the equity loan in full after 25 years, when your mortgage term finishes or when you sell your home – whichever happens first. You will repay the market value of the loan at the time, rather than the same amount of cash that you were loaned. You can also choose to repay part of the loan early in chunks of either 10% or 20% of the total value.

Help to Buy equity loans: an example

The way Help to Buy loans work means that you could end up paying back more or less than you borrowed, depending on whether your home rises or falls in value. This is how it could work in practice:

• You take a 20% equity loan to buy a property worth £200,000 – so the loan is £40,000.
• When you come to sell, the property is worth £250,000.
• You repay £50,000 – this is 20% of the new value of your home, not the amount you borrowed.

How do I get a Help to Buy equity loan?

To be eligible for a Help to Buy loan, you need to be looking for a new-build home and also must:

• have a deposit of at least 5%
• be looking to buy a home worth £600,000 or less
• be purchasing a property you intend to live in most of the time
• not let out the property or use it as a second home.

Go further: new-build homes – find out the advantages and disadvantages of buying a new-build property

Should I get a Help to Buy equity loan?

If you’re interested in buying a new-build property, a Help to Buy equity loan is certainly worth considering. To apply for one, you need to contact your local Help to Buy agent

However, there are plenty of other options you could look at, including ordinary mortgages and guarantor mortgages.

There is more information about equity loans schemes in Wales and Scotland on the Welsh and Scottish government websites. There is not an equity loans scheme in Northern Ireland at present.

  • Last updated: August 2016
  • Updated by: Marie Kemplay