Many people struggle to buy a house because they can’t afford a big deposit. That’s where the UK government’s Help to Buy scheme comes in. But how does the scheme work, and how do you save up for a deposit? Here’s what you should know.
Help to Buy explained
Help to Buy is essentially an equity loan from the UK government. You put the loan towards the price of your new home, which means you don’t need such a big deposit to buy the house.
But before we break it down, here’s some key information about Help to Buy:
- It only applies to new-build properties. It doesn’t cover second homes or rental properties.
- You can apply as a first-time buyer or an existing homeowner if you complete the sale by March 2021.
- From 1 April 2021, the scheme is only open to first-time buyers.
- Help to Buy ends completely on March 31 2023.
With that in mind, let’s break down how it works:
- The scheme covers properties worth up to £600,000 (in London – there are caps elsewhere). So if you want to buy a house that costs more than £600,000, you can’t use Help to Buy.
- You need at least a 5% deposit. But this is still less than the 10-15% you’re normally expected to put down on a house.
- The loan usually covers 20% of the purchase price, but in London this increases to 40%.
An example makes it easier to understand:
- You buy a house worth £100,000.
- You need a 5% deposit (£5,000).
- Help to Buy gives you a 20% loan of £20,000.
- To complete the sale, you take out a mortgage on the remaining 75% of the property price (£75,000).
The Help to Buy loan
Help to Buy is an equity loan.
- You get five years interest-free. So if you repay the loan in five years, it doesn’t cost you any anything in interest.
- Interest is 1.75% in year six.
- From year seven, you pay 1.75% + an extra 1% per year + the standard rate of inflation. In other words, the interest rate gets a little steeper each year.
- You need to repay the loan within 25 years.
Equity loans are obviously appealing because there’s no interest for a few years. But remember, you will start paying interest if you don’t repay the loan within the interest-free period.
You can contact your local Help to Buy agent to apply for the scheme when you’re ready. But remember you also need a mortgage for the remaining 75%, which means you need to find a mortgage lender.
How to build your deposit
The first thing you’ll need to get in place is your 5% deposit. So, how do you get this? There are a few ways.
- Start a savings account and put money away each month.
- Cut back on spending.
- Take on a side hustle for some extra cash.
- Sell things you don’t use online.
If things don’t go to plan
Okay, so that’s Help to Buy explained. But what if things don’t go to plan, or your financial circumstances change? Well, Help to Buy is a legal agreement, so there are some procedures you need to follow.
Let’s take a look at the most common problems you could face.
Your house sale falls through
Don’t worry – even if your sale falls through and you miss out on your new home, you can still get Help to Buy for another property. Your solicitor can talk you through what happens.
You lose your job
If you can’t afford your monthly repayments, you’re still responsible for your mortgage and any outstanding loan fees. Contact your lender as soon as possible to discuss repayment options, and reach out for debt advice if you need it.
And remember, if you want to sell your property, you’ll need to pay back any outstanding payments and fees.
You buy your house with a partner and they move out
In this case, you need to contact two people: your Help to Buy agent, and your lender. They’ll send you a written notice releasing your partner from the agreement.
You’ll still need to keep up the remaining payments.
You want to add someone new to the mortgage
Before you add someone to your Help to Buy mortgage, you need permission from your lender and Help to Buy agent. They’ll formally add the other person to the Help to Buy agreement.
Other Help to Buy schemes in the UK
Although we’re talking about the English Help to Buy scheme, it’s not the only scheme of its kind in the UK.
- Wales: the Welsh Help to Buy scheme covers properties up to £300,000.
- Scotland: you can buy a new build worth up to £200,000 with the Affordable New Build scheme.
- Northern Ireland: there’s no NI equivalent yet, but you could look at other initiatives.
Help to Buy isn’t right for everyone, even if you’re a first-time buyer. Always get financial advice if you’re unsure.
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