Help-To-Buy Scheme: How does it work?

The help-to-buy scheme is a government initiative to help first time home buyers purchase a property with just a 5% deposit.  

How does the help-to-buy scheme work?  

The scheme offers an equity loan where the government lends first-time buyers and existing homeowners’ money to buy a newly built home. 

  • The purchase price must be under £600,000 
  • You can borrow 20% of the purchase price interest-free for the first five years if you have a 5% deposit.  
  • If you live in London, you can borrow up to 40% of the purchase price.  
  • You will need a mortgage of up to 75% for the rest (up to 55% in London).  

The government has recently updated this scheme and have confirmed that it will be extended from 2021 to 2023 however this will be restricted to first-time buyers purchasing newly built homes.  

You can’t apply for the scheme to buy a second home or property to rent out and if you use the help-to-buy scheme you can only take out a repayment mortgage. You must also purchase your home from a registered Help-to-Buy builder.  

Equity loan fees  

If you use the equity loan option for Help-to-Buy then you will have fees to pay but not for the first five years. In the sixth year, you will be charged a fee of 1.75% of the loan’s value. The fee then increases every year, according to the retail prices index plus 1%. The fees do not count towards paying back the loan.  

You must pay your loan back after 25 years or when you sell your home, whichever comes first, and the amount depends on how much your home is worth (the market value).  

Help-to-Buy ISA 

Unfortunately, you can no longer open a Help-to-buy ISA. If you already have a Help-to-Buy ISA, you can continue to pay in up to £200 each month. The government will top up your savings by 25% (up to £3,000) when you buy your first home. If you are buying with someone else who also has a Help-to-Buy ISA, both of you will get a 25% bonus.  

When you purchase your property the home must:  

  • Have a purchase price of up to £250,000 (or up to £450,000 in London)  
  • Be the only home you own  
  • Be where you intend to reside  

Your solicitor or conveyancer will apply for the extra 25% from the government and you will not have to pay this back. You can also use this scheme with an equity loan.  

Lifetime ISA  

You can use a Lifetime ISA (Individual Savings Account) to buy your first home. A Lifetime ISA allows you to put in up to £4,000 each year, until you’re 50 and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.  

You can use your savings in your Lifetime ISA to help you buy your first home if:  

  • The property costs £450,000 or less  
  • You buy the property at least 12 months after you open the Lifetime ISA 
  • You use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them. Your mortgage broker cannot act for you in this instance.  
  • You’re buying with a mortgage.  

If you are buying with another person and they have a Lifetime ISA then they can use their savings and government bonus too.  They will pay a withdrawal charge to use their Lifetime ISA savings if they own or have a legal interest in another property.  

If you withdraw funds from your Lifetime or Help to Buy ISA for any other reason, there is a 25% charge (20% until 05 April 2021).

If you have a Lifetime ISA and a Help-to-buy ISA, you can only use the government bonus from one of them to buy your first home.  

Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Your home may be repossessed if you do not keep up repayment on your mortgage.

If you require additional information about the Help-to-Buy scheme, then please get in touch.   

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