How Does The Help To Buy Scheme Work?


Posted on: March 2nd, 2021

If you’re a first-time buyer, you may be asking: should I use the Help to Buy scheme? Or how does the Help to Buy scheme even work? It is a very common question among people looking to get onto the property ladder. Ultimately it is up to you, but we’re here to give you advice so you can make the best decision for yourself!

How Does Help To Buy Work?

So, how does the Help to Buy scheme actually work? If you are a first-time buyer in England, you can apply for something called a Help to Buy: Equity Loan. This would be a loan from the government that you put towards the cost of purchasing a newly built home. 

You can borrow a minimum of 5% and a maximum of 20% (40% in London) of the full purchase price of buying a newly built home. The home must be bought from a home builder registered for the Help to Buy: Equity Loan. The equity loan, the deposit you have saved, and your repayment mortgage cover the total cost of buying your newly built home.

First Time Buyers

Advantages of Help to Buy Schemes

So now we’ve established how the Help to Buy scheme works, but what are the advantages?

You don’t have to build up your deposit

Saving for a deposit can take years, but with an equity loan, the Help to Buy scheme allows you to purchase a home with a smaller mortgage, even if you only have a 5% deposit. 

Using the Help to Buy scheme can give you access to cheaper mortgage rates. With the support of the Help to Buy loan, you can gain access to a relatively low loan to value mortgage and some much more competitive deals than if you only had access to a 95% mortgage.

Your loan is interest-free for the first five years

As the loan is interest-free for five years, it can lessen the strain of paying back your loan at the same time as your mortgage. The first years of a mortgage are usually the hardest to pay back as you may still be developing your career or facing the new costs of raising your family.

Disadvantages of Help to Buy Schemes

The advantages may seem great, but the Help to Buy scheme comes with disadvantages too. So what are they?

The amount of money you owe isn’t fixed

Your loan is based on the value of your home, and as the housing marketing changes so can the value of your loan. So, if your home goes up in value, you are required to repay more than the government initially loaned you.

After the first five interest-free years, your loan will become more expensive. You will pay an additional 1.75% interest in your sixth year of having the loan. After this, your interest rates increase based on the Retail Price Index (RPI), plus an additional 1%. This means that if your rate increases, you may have to pay an unmanageable amount.

When does the help to buy scheme end?

Many experts fear that the Help to Buy Scheme could be inflating house prices and as such, you could get trapped in negative equity. There are fears that the property bubble could burst when the Help to Buy scheme ends – and it is scheduled to end on March 31st 2023.

At a Glance

ProsCons
  • You legally own all of the property
  • You’ll only need a 5% deposit 
  • Your Loan is interest-free for 5 years
  • You can own a home sooner than if you had to save for a greater deposit                   
  • Potential access to cheaper mortgage rates
  • Help to Buy only available on new build homes
  • The can only purchase properties up to a certain value 
  • Loan amount is not fixed
  • Loan interest rate increases after 5 years
  • You may end up in negative equity
  • Fewer mortgage providers offer competitive deals for Help to Buy applicants

 

Buying your first home is an exciting, but often difficult and complicated process. Here at Cygnet Law, we are happy to help. If you need a trustworthy and transparent solicitor to carry out conveyancing for your first step onto the property ladder, then contact us today to discuss your options.

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