What you need to know about the Help To Buy Equity Loan

6 min Read Published: 04 Aug 2022

What you need to know about the Help to Buy Equity LoanWhat is the Help to Buy Equity Loan?

The Help to Buy Equity Loan is a loan from the UK government for first-time buyers to put towards the cost of buying a property.

It is aimed at those struggling to save up for a deposit by offering a loan worth 20% of the property's value (or 40% in London) which is interest-free for the first 5 years, allowing you to buy a property with as little as a 5% deposit.

The scheme is available across the UK, but different countries have different loan specifications. For more information on the Help to Buy Equity Loan scheme outside of England, check out the following links: Scotland, Wales, and Northern Ireland.

How does the Help to Buy Equity Loan work?

The Help to Buy Equity Loan allows you to take out a loan of up to 20% of a property's market value (or 40% in London) at the time of purchase.

The remaining cost of the property is covered by a deposit of at least 5% as well as a mortgage.

The scheme is completely interest-free - with only a £1 monthly management fee paid via Direct Debit - for the first 5 years, after which the terms of repayment change.

From the sixth year onwards you are required to pay:

  • a £1 monthly Direct Debit management fee.
  • a monthly interest fee of 1.75% of your equity loan.

The interest rate will rise each year in April by the Consumer Price Index (CPI), plus 2% and you must continue to pay interest until you clear your loan in full.

You must completely repay the equity loan after 25 years from the start date or when you sell your home.

Am I eligible for the Help to Buy Equity Loan?

The Help to Buy Equity Loan scheme is only available to first-time buyers, which means you must meet the following criteria in order to be eligible:

  • You must not own or have previously owned a property at any point, in the UK or abroad.
  • You must not have had any form of sharia mortgage finance before.
  • If you are buying with a partner, they also must not own or have owned a property before.

More details on how to check if you qualify for the loan are available at the Help to Buy website.

What value property can I buy with the Help to Buy Equity Loan?

There are regional price caps that dictate which property you can buy using the Help to Buy Equity Loan.

The maximum price of an eligible property in London is significantly higher than in the North East, for example, but this is designed to reflect the difference in average house prices across the country.

List of the regional Help to Buy price caps

Help to Buy property value cap
London £600,000
South East £437,600
East of England £407,400
South West £349,000
East Midlands £261,900
West Midlands £255,600
Yorkshire and The Humber £228,100
North West £224,400
North East £186,100

If you are unsure which region the property you are seeking is in, or if it is on the border between two areas, a Help to Buy agent can help you calculate costs.

What are the pros of the Help to Buy Equity Loan?

You can apply for the scheme with a minimum 5% cash deposit

The Help to Buy Equity Loan is ideal for those with minimal savings who do not mind having a larger mortgage to make up the difference. With the UK average deposit of 15% it would take a single person 10 years, on average, to save this size of deposit. The Help to Buy Equity Loan scheme offers a valuable shortcut for wannabe homeowners to get onto the property ladder.

You pay no interest for the first 5 years

The Help to Buy Equity Loan is completely interest-free for the first 5 years, making it an affordable option for those looking to minimise their additional costs. It would be worth trying to pay back the majority of the loan during this interest-free period while you can before the interest fees kick in from the sixth year onwards.

You can repay part or all of the loan at any time

The Help to Buy Equity Loan allows you to repay all or part of your loan at any time, giving you the flexibility to manage your debt at your own pace. However, it is worth keeping in mind that partial repayments have to be at least 10% of the market value of the property at the time of repayment.

What are the cons of the Help to Buy Equity Loan?

The scheme is only available for newly-built properties

New build properties tend to be more vulnerable to depreciation, meaning you could end up in negative equity, which would result in you making a loss if you choose to sell while the valuation is less than when you purchased it.

Part repayments must be at least 10% of the total value of the property

With partial repayments capped at a minimum of 10% of the price of the property at the time of repayment, the Help to Buy scheme may not be a sensible option for those unable to consistently earn or save enough to shell out large sums in one go.

The price of the loan rises or falls in line with the value of the property

The loan is pinned to the real-time value of the property, leaving you exposed to the volatility of the housing market and potentially having to pay back more than you had anticipated when you first signed up for the loan.

You cannot use the scheme for a property that you intend to rent out

The loan is only available for those who will actually live in their property, so anyone that wants to buy-to-let would not be eligible. It is worth noting that you must live in the property until you have completely repaid your loan, so if you are struggling to make ends meet, moving elsewhere and subletting it is not an option.

You will still be paying for your mortgage at the same time

Along with your loan repayments, you will still have to accommodate the cost of your mortgage. While the Help to Buy scheme can help you to make the initial step of buying a property, it does burden you with additional fees further down the line that may become unaffordable if your circumstances change.

What are the alternatives to the Help to Buy Equity Loan?

If the Help to Buy Equity Loan is not the right fit for you, there are other avenues you can explore to help you buy your first property, such as a shared ownership scheme.

For tips for first-time buyers purchasing their first home, take a look at our guide "How to buy a home – a guide for first-time buyers", or view our guidance on how to negotiate house prices to get the best deal.

Should I get a Help to Buy Equity Loan?

For people that meet the narrow set of credentials - for example, a young couple eager to buy a property together that they would not otherwise be able to afford the deposit for - the Help to Buy Equity Loan offers a rare opportunity for a leg-up onto the property ladder for those who are struggling to make that first expensive step.

However, there are a number of caveats which potentially make the scheme unsuitable under certain circumstances, such as for a single person with low income or poor job security who might struggle to afford the chunky repayments on top of regular mortgage payments as well.

It is important to consider that the most attractive feature of the Help to Buy scheme - the lower deposit - consequentially raises your mortgage loan, so you may find yourself tackling larger than average mortgage fees alongside your loan repayments.

Overall, the Help to Buy Equity Loan scheme could be a fantastic opportunity for a first-time buyer to purchase a property that they might not even be able to consider otherwise.

As with any major financial decision, however, it may be a good idea to check with an independent mortgage adviser if the scheme is suitable for your unique circumstances.

How do I apply for the Help to Buy Equity Loan?

Before you apply for the Help to Buy Equity Loan, make sure you have the funds to afford the following:

  • A fee to reserve your home (can be up to £500).
  • A 5% deposit on exchange of contracts (or, if you have a larger deposit, you can pay the rest on completion).
  • Other fees on completion (stamp duty, legal fees and mortgage fees).

It is always a good idea to consider seeking independent financial advice to help you understand and make the most of your position, particularly before making any life-changing financial decisions.

Once you are certain that the Help to Buy scheme is a fit for you, you can find a Help to Buy agent based in the area that you want to live in. The Help to Buy website offers a useful list of contact details for agents in their respective regions.

When does the Help to Buy Equity Loan scheme end?

The help to buy equity loan scheme ends on 31st March 2023 and closes to new applications on 31st October 2022. Buyers will need to legally complete by the 31st March 2023 to be eligible for the help to buy equity loan.