In this week's millennial money episode, Money to the Masses financial expert Damien Fahy and I speak about the pros and cons of the help to buy equity loan scheme.
Damien Says:
Help to Buy Equity Loan
The help to buy equity loan is available for first-time buyers but it's also a really good government-backed scheme for existing homeowners, with the aim of helping them to get further on the property ladder. The current scheme is running up until March 2021and after that the scheme comes to an end. However, there will be another scheme which is exactly the same but the help to buy equity loan will only be for first-time buyers from 2021 until March 2023.
How does the help to buy equity loan scheme work?
With the Help to Buy equity loan scheme you only need a 5% deposit to purchase a property. You are then entitled to get a 20% loan from the government (40% if you live in London), and so therefore only need to get a first charge mortgage agreed for the remaining 75% of the property (55% if you live in London).
There is, however, a maximum property purchase limit of £600,000 which means that the most you can borrow from the government (based on the 20% limit) is £120,000 or £240,000 if you live in London.
You have 25 years to pay off the government loan, but this is only if the property is not sold. If you sell the property or remortgage, the loan will be paid off and the government will claim its 20% or 40% share from the sale price. This is based on the property rules in England so they may vary in other areas of the UK. More information on these schemes can be found on the Money Advice Service or government website.
Pros of the Help to Buy equity loan scheme
- Only need a 5% deposit to get a property
- No interest on the loan for the first 5 years
- 20% (or 40% if living in London) loan from the government
- Helps all buyers move further up the property ladder
Cons of the Help to Buy equity loan scheme
- Can only purchase a new build property on a developers estate that offers the scheme
- Maximum property purchase price of £600,000
- There's a monthly fee of £1 that is applied throughout the term of the loan
- After the initial interest-free period of 5 years, you will be charged a monthly interest rate of 1.75% that then inflates annually in line with the RPI plus 1%
- It is the only property you can own
- Cannot be used for a buy to let property
- The scheme ends in 2021 for second-time buyers
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