Help to Buy: Equity Loans

The Government’s Help to Buy Scheme was introduced in twophases, the first in April 2013 and the second in January 2014 ( although applications for phase 2 were being accepted from October 2013).

The first phase, based on the provision of an equity loan, is only open to those people who were were purchasing a newly built house up to a maximum value of £600,000.00. The second phase, based on a mortgage guarantee, is open to any person wishing to buy a house whether newbuild or other.

In this article we provide an overview of the Help to Buy Equity Loan scheme. In part II we will cover the Help to Buy mortgage guarantee.

The equity loans are aimed at people wishing to buy a new house but who were unable to do so due to the fact that they were unable to raise an initial deposit of at least 10% of the value of the house they wished to buy. It is important to note, however that the applicant still has to show that they will be able to manage the repayments on the mortgage that they will be obtaining to purchase the house. The Help to Buy equity loans are only available those house builders who are registered with the Homes and Communities Agency (‘HCA’)..

Under the Home Buy equity loan scheme, the HCA provides up to 20% towards the cost of the new home (direct to the house builder). The buyer, must provide a minimum of 5% deposit towards the purchase of the house and must obtain a mortgage to finance the rest of the purchase price.

Example:

Market value of the house: £200,000.00

Deposit required from the applicant: £10,000.00

Minimun value of the mortgage to be obtained : £150,000.00

Maximum value of the equity loan provided by the Homes and Communities Agency: £40,000.00.

Conditions

The following conditions apply:

1.       The applicant must take out a first mortgage ( with a qualifiying lender these will be a bank or building society).

2.       The applicant must provide a 5% deposit towards the purchase of the house.

3.       The applicant must be able to demonstrate that they can afford the repayments on the first mortgage and the equity loan (monthly costs (mortgage, service charges and fees should not account for more than 45% of the applicants net disposable income).

4.       The first mortgage must be for a minimum of 80% of the Full purchase price.

5.       The first mortgage must be a repayment mortgage, it cannot be an interest only mortgage.

6.       The market value of the house must not exceed £600,000.

7.       The Help to Buy mortgage is limited to a maximum of 20% of the value of the house.

8.       The maximum term for the repayment of the equity loan is 25 years.

9.       The amount to be repaid on the equity loan is based on 20% of the market value of the house at the time the equity loan is repaid- it is important to note that it is not based on the actual amount of money originally loaned to the buyer.

10.   The HCAwill not agree to the house being sold at below the market value.

11.   The equity loan must be repaid in full, if the house is sold.

12.   The house must be the applicants main residence and cannot be let to tenants.

13.   The applicant must not own any other houses.

Repayment

The equity Loan must be repaid within 25 years or if the house is sold. The equity loan can be repayment earlier in increments each payment being a minimum of 10% of the market value of the house at the date of the repayment. This is known as staircasing.

If the applicant wishes to repay the whole of the equity loan or sell the house, they must repay an amount equal to 20% of the market value of the house.

Example:

House purchased for £200,000.00 – equity loan at the time of purchase is £40,000.00. Five years later the house is sold for £220,000.00 the amount repayable under the equity loan is £44,000.00.

If the market value of the house has fallen, the owner of the house does not have to make up the shortfall.

Example:

House purchased for £200,000.00 – equity loan at the time of purchase is £40,000.00. Five years later the house is sold for £180,000.00 the amount repayable under the equity loan is £36,000.00 – (£4,000.00 less than originally borrowed).

 

There are no repayments to be made on the equity loan for the first five years and no interest is added.

From the sixth year of the term of the equity loan, an annual fee of 1.75% of the value of the loan is payable and interest of RP1 + 1% per annum is added to the amount outstanding on the loan.

The house owner must obtain the consent of the HCA in order to sell the house or increase any borrowings secured against the title to the house.

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