Help to Buy Equity Loan Scheme – New Build Properties

Malcoln

Hi, it's Malcolm and I'm joined again by Wayne. Today I'm going to talk about the Help to Buy Equity Loan Scheme.

There are various different types of Help to Buy Mortgages, with some of the others being quite confusing.

Off the back of the Credit Crunch, the Government introduced many schemes, all seemingly called Help to Buy.

The one that stood the test of time and has probably made the most difference, is the Help to Buy Equity Loan Scheme, which only applies to new properties.

What are the basics that people need to be aware of?

Wayne

In very general terms, they need to have a 5% deposit equivalent to the price of the brand-new property that they're buying.

It has to be on an approved site with an approved builder that is registered under the Help to Buy Equity Loan Scheme.

So not every builder or every site necessarily is registered and a prospective applicant would need to check that out.

The Government would give a deposit equivalent to 20% of the price of the property, though this is where sometimes people sort of do struggle with the concept of it. It’s a loan, not a gift.

Malcolm

The property value might have gone up and it could have gone down, but in most instances, it will have gone up. So actually, you could end up paying back more than the original Government amount.

Wayne

If we use the previous example, let's imagine that you bought your property through the Help to Buy Equity Loan Scheme for a £100,000, the Government have given you the equity loan of £20,000.

Let's say you sell it in five years' time and you've sold it for £150,000, you're then going to have to pay the back the Government £30,000 because it's 20% of the price that you sell it at.

Malcolm

So, a lot of people think that you can take out a Help to Buy Equity Loan on any property, but it's not the case.

Wayne

No. It is brand new properties, newly built properties only, from designated builders on designated sites.

So not necessarily every builder will have applied to it to be registered under the Help to Buy Equity Loan Scheme.

Malcolm

If I remember rightly, some of these builders were getting a bit of a bad reputation for ‘land banking’, which is buying up land and then not actually building the properties thereafter.

This was a way back in 2013 when Help to Buy Equity Loan Scheme was launched, of encouraging builders to do with the land what they said they were going to do.

Wayne

Yes, because the Government wanted new properties built, they needed to satisfy some demand. So, it was a way to encourage building because obviously that opened up more of a market for them.

Malcolm

Okay. If a customer is interested in going for one of these properties, how would they go about applying for that Help to Buy Equity Loan Scheme?

Wayne

There's a page on the Government website, and if you Google Help to Buy Equity Loan Scheme, you'll be able to find it quite easily.

There's a really simple application form on the Help to Buy Equity Loan Scheme website through regional Help to Buy agencies that will coordinate that with you.

The application form is really quite straightforward.

Malcolm

I think they do a background affordability check, don't they?

Wayne

Yes, they will do some basic checks, so it's not a gimmick. They're certainly not going into as much information as you would get, for example, with a standard mortgage application.

Malcolm

So, if you're going to get the mortgage, you probably would get the equity loan.

Wayne

Exactly, yeah. If you're likely to get the mortgage, you're going to get the loan.

Malcolm

Then we need the code for the builder?

Wayne

Yes, each builder, each site, has a registration code that you need to complete on the actual application.

Malcolm

When it comes to taking out a Help to Buy Equity Loan mortgage then, what's the benefit for the customer of having this loan from the Government in terms of the deals that are on offer?

Wayne

Yes, the big benefit to the customer is the fact that they are now applying for their mortgage at a 75% loan to value because they're putting 5% in and the Government are putting 20% in.

So, the lender risk is only 75% loan to value, which does attract lower interest rates than if, for example, you were borrowing a high loan to value without the Government assistance.

Lenders do have specific products for Help to Buy. They will change from time to time, but the general principle is lower loan to value, lower rate available.

Malcolm

A lower risk as well, so probably a greater chance of getting through a credit score because you've got lower loan to value as well.

Wayne

Absolutely, yes, because lenders will credit score according to the risk that they are taking. If you're putting a bigger deposit down, that's less risk to the lender, so better chance of passing the credit score.

Malcolm

If it's going to be a lower monthly payment, possibly in a lot of cases cheaper than renting.

This should create some budget for a customer then to be saving possibly towards paying back some of that equity loan in five years’ time, rather than Remortgaging the full amount?

Wayne

I think that's the big thing. If I was to have had a criticism when this scheme first came out, it almost felt like it was free money.

Interest free, which it is, but only for five years and you will have to pay it back at some point. So, if you can build-up capital towards paying it off in the future, that's not a bad thing to do.

Malcolm

In terms of this lower risk then, would a customer that had some County Court Judgments or defaults, or some bad credit in the past.

Would they have a chance of getting a mortgage on the Help to Buy Equity Loan Scheme?

Wayne

The quick answer is yes.

I mean, because that lower loan to value reduces the risk to the lender, and lenders who specialize in people with poorer credit histories, typically want the applicant to put a bigger deposit down.

Not all the subspecialist lenders do it so that you maybe would be fishing from a smaller pond, but it does mean that you still have some options.

Malcolm

So, the Help to Buy Equity Loan Scheme is a way that customers can get onto the property ladder, with newly built properties only, by putting down a low deposit from the aid of a loan from the Government.