You’ve likely heard of Help to Buy, probably from a minister heralding it as a success or from your smug friends who used it to purchase their shiny new build home. But what exactly is the government scheme and who can it “help to buy”?
Help to Buy is the umbrella term for a sequence of government schemes launched in April 2013 to assist people, particularly first-time buyers, purchase residential property. It’s designed to partly counteract the forces—including stagnant wages and soaring house prices—that have more than halved rates of home ownership among young people.
There are two active parts of the scheme: Help to Buy Equity loans, which can help you top up your deposit when you’re ready to purchase a home, and Help to Buy Isas, which can help you save for a deposit until you reach that point.
As of 2018, more than 420,000 people have purchased homes through using one or more of the Help to Buy schemes, including more than 365,400 first-time buyers, according to government figures. That includes the nearly 160,000 people who had used the equity loans and completed a home purchase by the end of 2017.
Additionally, 1.2 million people have opened Help to Buy Isa accounts, which will enable them to purchase homes in the future.
Below we take a closer look at each component of the scheme, including who’s eligible, what properties they can buy, and with how much assistance.
Help to Buy Equity Loans
This equity loan scheme is generally what politicians, journalists, and your now property-owning friends mean when they refer to “Help to Buy.”
With this scheme, the buyer contributes a deposit of at least 5% of the value of a home, which the government then tops up with an equity loan of up to 20% of the value, or 15% in Scotland. In London, where the average property value is double the average in the rest of England, the equity loan can be extended to 40% of a home’s value.
The buyer then takes out a mortgage on the remaining value of the property: either 75%, 80% in Scotland, or 55% in London. Because the borrower has a larger deposit with the equity loan and thus a lower mortgage principal, he or she is eligible for more mortgage deals with better interest rates.
The Help to Buy equity loan is interest-free for five years, after which the government levies an annual fee, which starts at 1.75% of the loan’s value in the sixth year. The repayments then increase each year in line with inflation, as measured by the Retail Price Index (check the latest RPI on the Office for National Statistics site; as of December 2018, it was 2.7%), plus 1%. You’ll need to be paying back this loan while also making mortgage payments, so it’s important to do the maths for the sixth year and beyond when buying a home via Help to Buy.
Help to Buy equity loans can be used on new build homes up to a maximum value of £600,000 in England, £300,000 in Wales, and £230,000 in Scotland.
You don’t have to be a first-time buyer to obtain a Help to Buy equity loan, but most people (80%) are, simply because second-time buyers should have accumulated enough equity in their previous properties to have a large enough deposit to purchase without government assistance. The home does have to be your intended primary residence, however. Help to Buy schemes cannot be used to purchase second homes or buy to let properties.
Help to Buy Isas
If you haven’t yet accumulated even the minimum 5% deposit required to purchase, the other component of the Help to Buy scheme can help.
The Help to Buy Isa is a tax-free savings account for people saving to purchase their first home. For every £200 a potential house-buyer puts into the Isa, the government will contribute another £50, up to a maximum of £3,000. You can contribute £1,000 the first month you open the account, and then can add a maximum of £200 each subsequent month.
if you max out all contributions, you can save up £12,000 in less than five years with a Help to Buy Isa, with a government top up to £3,000. A deposit of £15,000 will then, with the Help to Buy equity loan scheme, enable you to buy a home worth up to £250,000 in England or Wales, or up to £450,000 in London.
Couples taking out joint mortgages can open separate Help to Buy Isas, to receive a maximum government top up of £6,000.
Anyone can open a Help to Buy Isa, but only first-time buyers will receive the government top up.
The government bonus is paid out when you actually purchase the home. But unlike with the equity loan, the Isa can be used to purchase any home, not just a new build.