Government Equity Release Scheme – How It Can Help You
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The UK Government has come up with many initiatives and schemes over the years to try and help first-time buyers finally get their foot on the property ladder. The most recent of which is a government equity release scheme which will only require aspiring first-time homeowners in England to have a 5% deposit at minimum.
Learn more about this Help to Buy equity loan scheme for first-time buyers in this guide!
What is the government 5% deposit scheme?
The UK Government 5% deposit scheme, officially known as the Help to Buy Equity Loan Scheme, is a new initiative to help first-time buyers access a mortgage with just a 5% deposit. The government will provide an equity loan to these buyers worth up to 20%, or up to 40% in London, with 0% interest for the first five years of the loan. The loan is used to add to your deposit and help access a better mortgage deal.
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Who qualifies for a Help to Buy Equity Loan Scheme?
To qualify for the Help to Buy Equity Loan you must be a first-time buyer. There are strict definitions on who is seen as a first-time buyer and who is not. To be eligible for an equity loan as a first-time buyer you must:
- Have never owned any property in the UK in the past
- Have never owned any property abroad in the past
- If you are buying a property with another person, you must be buying with another first-time buyer (see points 1 and 2).
Restrictions on the Help to Buy Scheme
If you do meet the definition of a first-time buyer or first-time buyers, there are restrictions on the type of property you can buy with the government’s equity loan.
Property price caps
The equity loan scheme is only available when the first-time buyer is purchasing property under a certain value. This is implemented to prevent the system from being abused by wealthy people who do not need help to get on the property ladder, as they are expected to buy more expensive property. How effective this will be remains to be seen.
The property price cap differs between different regions, and there is a substantial difference between those regions on the market value of property you can purchase. This is to reflect the difference in property prices based on geography.
For example, in the North East, the most expensive property you can buy using the government equity release scheme is £186,100, while in London the maximum property price is set at £600,000 – a £400,000+ difference!
There is a clear price cap difference between regions in the south and north of England. In the south, the price caps range from £349,000 to £437,000 (excl. London), while in the North it ranges from £186,100 to £261,900.
Sometimes a property may be situated on the border of two regions, in which case it is best to check with a local Help to Buy agent for information.
One restriction on the equity loan scheme that often gets overlooked is that it’s only available on new-build properties that have yet to be lived in. This naturally restricts the properties that qualify for the scheme.
And it is not even every new-build that qualifies for the loan. You must buy a property that has been built by registered Help to Buy builders, which can be reserved. A local Help to Buy agent will be able to point your property search in the right direction.
How do the deposit and loan work?
To get the equity loan you must be able to put down a 5% deposit on the (qualifying) property you want to buy. So if you wanted to buy a £150,000 in Newcastle Upon Tyne, you would need a £7,500 deposit. Or if you wanted to buy a £400,000 home in Canterbury, you would need to have a £20,000 deposit.
Up to a 20% equity loan is then available (or up to 40% in London) to “top-up” your mortgage deposit through the government equity release scheme. So if you are buying a £150,000 property in the North East with a £7,500 deposit, you could then access a further 20% of the property price as an equity loan. In this example that equals a £30,000 loan making your deposit £37,500.
As a result, you will only require a 70% LTV mortgage instead of a 95% LTV mortgage, which should grant you a better mortgage deal with somewhat cheaper repayments. But in any case, it will help you to get on the property ladder easier.
But keep in mind that your equity loan is separate from the mortgage you take out, which means you will have two different debts to repay.
Can I put down more than a 5% deposit?
Yes, you are allowed to put down a bigger deposit if preferred. You might decide to put down a 10% deposit and you can still access the equity loan offered through the scheme. This means you will require a smaller mortgage.
For example, you might put down 10% and receive a 20% loan, meaning you only need a mortgage with a 70% LTV. And if you ask for a smaller mortgage, there is a chance you could get access to a better mortgage interest rate.
However, interest rates don’t tend to get any better below a 60% LTV, so it may not be worth putting down more than a 20% deposit if you are also accessing a 20% equity loan through the government equity release scheme.
Getting a mortgage on the government equity release scheme
As mentioned, you will still need to apply and be approved for a mortgage on top of your equity loan as these are separate debts. The mortgage should be easier to be approved for and cheaper because of the equity loan. This is because:
- As you are borrowing less money, the interest rate that is applied to your mortgage should be lower than if you were borrowing a larger amount.
- You are borrowing less, so any interest charged on the mortgage will be applied to a smaller amount.
Mortgages typically have better interest rates when they have an LTV rate between 60%-80%. However, some lenders do not offer the very best rates to buyers who are using the equity loan initiative. Instead, they charge a premium because the mortgage is being reduced by the loan.
An example of this at the time of writing is Barclays Bank. They offer a two-year fixed rate at 1.7% but buyers using an equity loan will have to settle for 1.84%.
How do you repay the equity loan?
The equity loan is not subject to any interest for the first five years of the loan. This means that buyers who repay the loan within those five years will not pay any more than the amount they borrowed – almost!
There is a small monthly management fee applied to the loan, costing £1 per month or £12 per year. So even though the loan is not entirely free during those five years, it almost is. Any repayments you make are separate from your mortgage repayments.
What is the interest rate after five years?
If you do not repay the equity loan in full within those first five years, the government will start charging interest on the loan. The interest starts being charged when your loan is five years old to the day.
In the sixth year, the interest is set at 1.75% but increases by 2% + Consumer Price Index (CPI) inflation measurement every April thereafter. This continues until all of the equity loan has been paid off, so paying it off sooner will save you money.
It is difficult to understand how the interest rate increases, but it is made easier with an example. If we imagine that the CPI inflation calculation is 1% each year, then the interest rate will increase by 3%. This does not mean that 1.75% becomes 4.75%, but rather, it means that 1.75% will be increased by 3% for the following year. So in the second year the interest rate would become 1.8025%. After a further ten years you could expect the interest rate to be close to 2%.
But this all depends on how the rate of inflation increases, which has been significant post the pandemic.
Further rules on repaying your equity loan
You’re never made to repay your equity loan until you either pay off all of your mortgage or sell the property, whichever happens first. But you can choose to make a repayment sooner if you prefer. It may be a good idea to do so if you think property prices are going to rise soon (we explain why later in this guide!).
There are some additional rules you must follow when making a repayment. These are:
- You must repay at least 10% of the loan in a single payment and any payment must be a multiple of 10%, i.e. a payment of 10%, 20%, 30% etc. So if you have a 20% equity loan then you must pay 10% or 20% – nothing in between. And if you have a 15% equity loan, you will only be able to repay the loan in full because paying 10% now would leave a 5% payment for the future, which is not allowed.
- You are allowed to remortgage your existing mortgage and borrow more to pay off the equity loan. This could save you money if the mortgage lender is offering a lower interest rate than what you are paying on the equity loan.
Of course, you will never be forced to pay back the equity loan if you stay put and don’t sell. But it will become payable once you clear your mortgage, which may take 25 years. After this time the interest being applied to your loan could be expensive and create a big bill.
Avoid using the help to Buy Equity Loan Scheme on the WRONG day!
Believe it or not, but buying a home and using a government equity release scheme in certain months could make repaying the loan more expensive. Sometimes buying at the wrong time will end up costing you thousands of additional pounds in interest. Research has found that using the scheme is most effective when you complete your property purchase between the months of January and March.
How the value of your property affect loan repayments
There is one thing about the scheme that not a lot of people realise when they first start looking into it. When you take out a government equity loan to buy a first home, the government owns the equivalent stake in your property. So if you get a 20% equity loan, the government owns 20% of your home.
If you buy a property worth £150,000 and use a 20% equity loan, the government therefore owns £30,000 of your property. But this figure can increase or decrease over time based on how your property market value changes. In most cases, the value of your home will increase. So, one of three things can happen to the amount you owe on your loan regardless of any interest applied:
- The property price will remain the same and you’ll owe the same amount as the original loan (plus interest if applied)
- The property price will decrease and you’ll owe less than the original loan (plus interest if applied)
- The property price will increase and you’ll owe more than the original loan (plus interest if applied)
This is why it can be a good idea to pay off your loan if your property price decreases and you have the means to do so.
A drawback of the Help to Buy Scheme
One negative of the Help to Buy Scheme is that it can be harder to “trade up” from your first home after using the government equity release scheme if your property’s market value has increased significantly.
Most people move up the property ladder by buying a more expensive house, and often a larger home as the patter of tiny feet can be heard. When this happens, they sell their current home and use the money to pay off their outstanding mortgage. And then use the rest as a deposit on their next home’s mortgage. The rest of this money is known as their home equity. Thus, they use their home equity to get a more expensive property in the future.
You can work out your home equity by subtracting your mortgage balance from your property’s current value (not what you paid for it!). If you have a government equity loan, you’ll also need to subtract the amount owed to the government.
But because the government owns a percentage of your home rather than the loan amount, you’ll need to subtract the percentage of the property they own – and its newly increased value – rather than the loan amount. This means you may have less home equity than you think, and have less equity to move up the property ladder.
Having a property increase in value is certainly not all bad news, but it can make it more difficult to trade up your property because the government owns a fixed share in it rather than a set amount of money.
Is the Help to Buy Scheme worth it?
If you cannot get on the property ladder in your current financial situation, it may be worthwhile using the government equity release scheme to finally get on the ladder. However, if you have a large enough deposit to get a mortgage in any case, the decision to use the scheme is more complicated.
There is no way to say for certain that the scheme is the right or wrong thing to do for everybody, simply because so many variables are in play to make a blanket statement. You may want to seek mortgage advice for personalised support and guidance.
Data analysts at Money Saving Expert have been crunching the average numbers, and they believe that on average, the scheme can save you interest in the short term but is the more expensive option over the long term. If you plan on taking the loan and paying it off within five years, you are almost certain to make a saving.
How can I apply for a Help to Buy equity loan?
To apply for the Help to Buy Scheme equity loan, you must complete a two-step process, namely:
Step #1: You must reserve a home to buy through a registered builder. To reserve your home you may need to pay a fee of up to £500. This fee should be refunded to you in the event that you are denied the equity loan.
Step #2: You can then apply for the loan using a registered Help to Buy agent in your region. If approved for the loan, you must then continue to apply for the required mortgage.
Is the scheme available across the UK?
The Help to Buy scheme discussed in this guide is exclusively available in England. However, there is a namesake scheme available in Wales that is almost identical to the one in England. It provides an equity loan to help buy property valued up to £250,000 with 0% interest for the first five years. Scotland did have a similar scheme but this has closed for applications, and other funding options are available in Northern Ireland.
Want to know more about home equity and mortgages?
For lots of information on home equity, loans and mortgages, check out the MoneyNerd site. We have published lots of free explanation guides on all of these topics, and they’re all available to read free of charge.