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Government Home Equity Loans – How it Works and FAQs

Home Equity Loan Government Scheme

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What is a government home equity loan? The answer lies in the Help to Buy equity loan scheme run by the UK Government. We explain everything you need to know about government home equity loans and how you might be able to benefit when looking for your first property. 

What is home equity?

Home equity is calculated by taking the amount left to pay on your mortgage away from the current market of the property. It’s somewhat like a financial sum of how much of your home you already own. 

For example, if you are buying a house worth £300,000 and have £200,000 left to pay on the mortgage, your equity is £100,000. It’s important to make this calculation based on the current value of the property rather than the original purchase price. Your home equity can increase or decrease irrespective of mortgage repayments if its value has changed. 

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What is a home equity loan?

A home equity loan is a loan offered to homeowners based on the amount of home equity they have. Lenders will typically offer loans up to the value of 85% of the amount for loan equity, although this will depend on the lender. If you have £100,000 of home equity you might be able to get a home equity loan up to £85,000. People do this for home renovations, debt consolidation, big purchases and to help family members out with finances.

Home equity loans provide a lump sum amount usually with fixed interest rates. On the other hand, home equity lines of credit (HELOC) provide revolving credit in instalments based on the homeowner’s needs, a bit like a credit card. And they usually have variable interest rates. 

What are government home equity loans?

A UK Government home equity loan is a loan that is part of the Help to Buy Scheme. These loans are used to help first-time homebuyers to boost their deposit amount and improve their loan to value ratio. In a nutshell, it helps these buyers to access more affordable mortgages that they otherwise would not have been able to access. 

Government home equity loans have favourable repayment terms compared to most other loans and mortgage products on the market. There is no interest to pay for the first five years. 

What is the Help to Buy equity loan scheme 2021?

The Help to Buy Scheme is a UK Government initiative to help first-time buyers get onto the property ladder. It was extended in April 2021 and plans to exist until at least the end of the 2022-2023 tax year. 

The main purpose of Help to Buy is to assist those who want to buy their first home but have been unable to access an affordable mortgage due to not having a big enough deposit. When you don’t have the required deposit, the mortgage applicant’s loan to value ratio is too high and the mortgages offered by lenders can be unaffordable. Ultimately, they get priced out of buying their first home. 

Help to Buy will aim to overcome this barrier through government home equity loans. 

How does the government Help to Buy Scheme work?

The UK Government is offering home equity loans to first-time homebuyers in the UK. You must have never owned a property anywhere in the world and plan to live in the property as your main residence. You can’t even have inherited property or be living with a de facto partner who owns a property in some instances. 

You can receive a home equity loan from the government up to the value of 20% of the property outside of London and 40% within London. This amount borrowed will remain interest-free for the next five years. 

Applicants will be required to have at least 5% of the purchasing price upfront as their own deposit, meaning with the government home equity loan, they could have 25% or 45% of the property value from the start, outside and inside London respectively. This will improve their loan to value ratio and give them access to more affordable mortgage deals. 

For example:

Home purchase price = £300,000

Buyer’s deposit = £15,000 (5% minimum)

Government home equity loan = £120,000 (40% of value – inside London)

Mortgage required = £165,000

The applicant would only need a mortgage of £165,000 instead of £285,000 in the above example. 

Note, there are caps on the value of the property you can purchase. The cap is determined by location. For example, in the North West, you can buy a first home up to the value of £224,400, while in London you can buy your first home up to a value of £600,000. 

How much interest do you pay on Help to Buy after five years?

After the interest-free period of five years ends, you will be charged a fixed 2% interest plus 1.75% which can increase based on the Consumer Price Index (CPI). if you received the government home equity loan before 2020 – this scheme existed then too – you’ll be charged 1% instead of the 2%, but also charged the variable rate based on CPI. There’s also a £1 monthly management fee. 

What happens if I sell my home?

If you sell your home after receiving a government home equity loan, you must repay the same percentage of the property price back to the government. This means it can cost you more if the valuation of your property increases, and cost you less if it decreases.

For example, if you bought a home for £250,000 outside of London and received a 20% home equity loan from the government, you’ll have received £50,000. If the home increased in value to £350,000, you’d still be responsible for paying back 20% rather than the fixed rate of £50,000.

Need more help with home equity loans and mortgages?

If you are considering buying your first home with a Help to Buy equity loan from the government, you should find out more by speaking with Money Helper or other free money advice services. 

You can also learn much more about home equity loans right here on MoneyNerd!