The help to buy scheme explained

If you want to find a low loan-to-value mortgage with preferable mortgage rates, you may be saving for a deposit for years, especially considering how high property prices are right now.

To help first-time buyers get their foot in the door, the government created the Help to Buy scheme in 2013, allowing homebuyers to find mortgages with as little as a 5% deposit.

Government data shows that over 355,000 homes have been bought using the scheme since its inception, which is considered a huge success. However, with only a month left before its end date, time is running out for young homebuyers to take advantage.

To help you decide whether this is the scheme for you, we’ve created this article to explain all things Help to Buy related, such as what it is, how it works, how to apply, and much more.

What is the Help to Buy scheme?

The government’s Help to Buy equity loan scheme is designed to help first-time buyers get on to the property ladder. Under the scheme, you can obtain a mortgage with as little as a 5% deposit, provided the property is a new build.

The government will then give you a loan of up to 20% (40% for homes in London), which reduces the amount you have to borrow from a mortgage lender. Homebuyers have until 31 October 2022 to apply for an equity loan and reserve a new-build property, after which they have until 31 March 2023 to finalise the purchase.

How does the Help to Buy scheme work?

To qualify for a Help to Buy Equity Loan, you must be able to put up a 5% deposit based on the new build property value.

The government then tops this up with an equity loan. If the property you want to buy is in London, the equity loan can be as high as 40% of the home’s value. For homes in the rest of the country, the government will provide equity loans of up to 20% of the property’s market value.

You must cover the remaining funds for the purchase with a typical repayment mortgage you’d find with a mortgage lender. But, with the government’s equity loan and your 5% deposit, you will already have up to 45% of the funds for the purchase. As such, the mortgage will be considerably smaller, particularly when your cost is only 5% of the total purchase price.

The equity loan is an interest-free loan for the first five years. It’s only in the sixth year that you will start paying interest on your loan. However, you will have to pay a management fee of £1 per month from the start of your loan term.

An example of how the Help to Buy Equity Loan works – outside London

Suppose you are looking to buy a home in the West Midlands and found a property on sale for £200,000. You will be eligible for an equity loan of 20% since the property is located outside London. As such, you can expect the following figures:

Percentage of the total valueValue (£)
Your deposit5%£10,000
Help to Buy Equity loan20%£40,000
Standard Repayment Mortgage75%£150,000

An example of how the Help to Buy Equity Loan works – in London

Suppose you are looking to buy a home in London and you’ve found a property on sale for £500,000. You will be eligible for an equity loan of 40% since the property is located inside London. As such, you can expect the following figures:

Percentage of the total valueValue (£)
Your deposit5%£25,000
Help to Buy Equity loan40%£200,000
Standard Repayment Mortgage55%£275,000

Can I put down more than a 5% deposit?

Absolutely, you can put down as big of a deposit as you’d like. For instance, you could put down a 35% deposit and still be eligible for a 20% equity loan. This means that instead of a 75% loan to value mortgage, you would only need 45%.

The benefit of putting down a larger deposit is that your monthly mortgage repayments will be considerably lower due to you borrowing less money. Additionally, you will get better mortgage rates compared to if you only put down 5%

However, it should be noted that mortgage rates tend to be capped after a 40% deposit – regardless of whether that 40% comes directly from you or 20% from you and 20% from the equity loan.

This means that increasing your deposit to more than 40% will only benefit you by lowering your monthly repayments. Therefore, before deciding how high you want your deposit to be, weigh the pros and cons of parting with more money upfront or paying a little extra per month.

How much interest do you pay on a Help to Buy Equity Loan?

With a Help to Buy equity loan, you won’t be charged interest for the first five years. Once the sixth year has begun, you will start to pay interest, with your monthly interest payments calculated as 1.75% of the equity loan. Each subsequent year that passes, your interest rate will increase in April according to the Consumer Price Index (CPI), plus 2%.

The CPI measures the total change in consumer prices based on a basket of goods and services; in other words, it measures inflation. So in years where inflation is high, like 2022, you will see much higher interest payments than in other years.

In addition to the interest payments, you will need to eventually pay down the equity loan amount. Therefore, it’s best to take advantage of the interest-free period and pay down as much of the outstanding loan as possible to ensure you’re not left with expensive interest payments down the line.

YearInterest rate
1Interest-free period: no payments
2Interest-free period: no payments
3Interest-free period: no payments
4Interest-free period: no payments
5Interest-free period: no payments
61.75% of the equity loan amount
7(1.75% + CPI + 2%)
8+(1.75% + CPI + 2%)

Who is considered a first-time buyer?

To qualify for the Help to Buy scheme, the government has outlined strict guidelines to who they consider a first-time buyer and who they don’t. The home buyer must meet the following criteria:

  • Must not own a home or residential land in the UK or another country
  • Must not have owned a home or residential land in the past in the UK or another country
  • Must not have had any form of sharia mortgage finance

Using this criterion, the government will verify your application into the Help to Buy scheme. Also, information on your monthly income and expenses, household bills, and estimated mortgage repayments will determine your eligibility for an equity loan.

Those married, in a civil partnership, or in a cohabiting relationship will have to make a joint application with their partner. As such, the criteria must apply to both of you. If one of you fails to satisfy the scheme requirements, you will be deemed not eligible for the scheme.

What are the Help to Buy scheme regional price caps?

The initial equity loan scheme was open to both first-time buyers and existing homeowners, where both were able to apply for an equity loan for any property. With the new iteration of the scheme introduced in 2021, some changes were made.

The current Help to Buy scheme is only open to first-time buyers. Perhaps more importantly, price caps were introduced. This means that house prices above the price cap will not be eligible for the Help to Buy equity loan.

Since the average house price in England differs depending on the property’s region, the government outlined regional price caps. For instance, London, which has the highest average house price in the country, also has the highest price cap under the equity loan scheme.

RegionProperty house price cap
North East£186,100
North West£224,400
Yorkshire & the Humber£228,100
East Midlands£261,900
West Midlands£255,600
East of England£407,400
South East£437,600
South West£349,000

Does Scotland, Wales, or Northern Ireland have a Help to Buy scheme?

Scotland had its own version of the Help to Buy scheme called the Affordable New Build Scheme, but it has now been closed. There are other government-backed alternatives that Scottish residents can sign up for.

Northern Ireland never had such a scheme available for its residents. Still, like in Scotland, the government offers other options to help buyers get on the property ladder.

Wales has a Help to Buy scheme also called ‘Help to Buy’. It’s structured almost identically to the scheme in England, with the main difference being that the property price cap is set at £250,000 throughout the country. In addition to first-time buyers, the Welsh scheme is also open to existing homeowners.

How can I repay my Help to Buy equity loan?

When it comes to paying off your equity loan, you can repay it when you sell or remortgage the property, in which case you will have to pay it off in full. The other option is to pay in instalments, also known as ‘staircasing’.

If you plan on staircasing, there are a few things to be aware of:

  • You can make payments at any point in time
  • You must pay at least 10% of the property’s current market value
  • You will have to pay for an independent valuer to appraise your home each time you make a repayment, which will cost £200.

It’s a good idea to take advantage of the five-year interest-free period and pay off as much of the loan as possible during that time frame. This will allow you to keep a higher percentage of the property’s value when you eventually sell it.

Can I remortgage a Help to Buy home?

Once the interest-free period has passed, you can decide to remortgage the property. You can choose between keeping the equity loan as is or using the new mortgage to repay the outstanding loan amount.

However, there are some things to be aware of. When remortgaging a Help to Buy property, you’ll have to pay Homes England an administration fee of £115. Also, suppose you decide to pay the equity loan back. In that case, the sum you owe will be calculated using the most recent home valuation. This could mean you pay back more than you initially borrowed.

Can I sell my Help to Buy home?

Absolutely, you can sell your home at any time. It should be noted that if you have an outstanding loan amount that needs to be paid, the exact amount will be calculated using the most recent valuation of the property.

For instance, suppose you bought a property for £200,000 and had a £40,000 (20%) equity loan using the Help to Buy scheme. Two years later, you sold the property for £250,000. You have not yet paid back the 20% equity loan, meaning the 20% loan repayment would be calculated using the home’s latest valuation.

Since the property sold for £250,000, your equity loan repayment would be £50,000 (20% of £250,000).

How can I apply for the Help to Buy scheme?

Applying for the Help to Buy scheme is a fairly straightforward process.

  • Step 1: Find and reserve a new-build home through a Help to Buy agent in your area. The reservation fee costs at least £500 but will be refunded if you aren’t accepted for the equity loan.
  • Step 2: Complete the Property Information Form provided by your agent
  • Step 3: Provide all necessary personal and financial information to your agent, who will then review your application
  • Step 4: If your application is accepted, you must then apply for a standard repayment mortgage for the remaining funds to complete the purchase of the home

When does the Help to Buy scheme end?

To purchase a property under the scheme, homebuyers must reserve a property and apply for an equity loan by 31 October 2022. The home purchase must be legally completed by 31 March 2023, as that is the end date of the scheme.