Help To Buy: How Does It Work?

Help To Buy is a government initiative which aims to help first-time buyers get on the property ladder with as little as a 5% deposit. It was recently announced that the scheme will be extended through to 2023. How exactly does Help to Buy work?

First-time buyers who want to buy a newly-built home and are able to afford a 5% deposit can then receive an equity loan from the government for 20% of the purchase price (or 40% in London). This loan is interest-free for the first 5 years. The rest of the purchase price will need to be covered by a traditional repayment mortgage from a commercial lender. 

The scheme only covers homes up to £600,000 and you cannot use Help To Buy if you’re not a first-time buyer, nor for a property which you intend to rent out.

Repayment

The government equity loan of 20% must be repaid after 25 years or at the moment you sell the home. And because the loan is for 20% of the purchase price, you will have to repay 20% of the resale price.  So, if the value goes up between the time you buy and sell the home, you will be repaying more cash than you borrowed.

The remaining 75% that you borrowed from a commercial mortgage provider must be paid back in the traditional way.

It’s important to remember that, while the government’s 20% equity loan is interest-free for the first 5 years, in year six you will be charged 1.75% interest and another 1% every year after that, plus any inflation based on the Retail Prices Index.

A breakdown

For a £200,000 home (not in London), you will be required to provide a 5% deposit of £10,000.  This is all you will need to have available up front.

The government equity loan of 20% equals £40,000 and you’ll have 5 years to pay it back without interest.

The remaining 75%, £150,000, comes from your commercial mortgage provider. 

If you have any questions about Help To Buy, our property expert, Russell Quirk, is here to help. Drop your question in the comments section below and we’ll get right back to you.