The government has announced a new Help to Buy equity loan scheme, which will effectively replace the current one from 16 December.
Just like the existing scheme, Help to Buy: Equity Loan (2021-2023) means the government will lend buyers up to 20% (or 40% in London) of the cost of a new build home.
You will have to provide at least 5% of the deposit, with a mortgage of 25% or more making up the rest.
The equity loan is interest free for the first five years, which means if you manage to pay it off in that time, you would only have to pay the management fee of £1 a month during the entire period – or £60.
After the five years, the payments can get very expensive very quickly – the interest rate starts from 1.75% and increases by Consumer Prices Index including owner occupiers’ housing costs (CPIH) rate plus 2% every April – so it’s worth paying it off as quickly as you can. Not forgetting of course that you’d still have to make your usual mortgage payments.
But there are some crucial differences with the new scheme.
First, it’s open to first time buyers only. This means that if you already own a home or have previously owned a home, you won’t be eligible for the scheme.
Second, the government has put caps on the value of the homes you’re allowed to buy and this varies from region to region, as below.
- North East £186,100
- North West 224,400
- Yorkshire and the Humber £228,100
- East Midlands £261,900
- West Midlands £255,600
- East of England £407,400
- London £600,000
- South East £437,600
- South West £349,000
And finally, while you can reserve your new build home from 16 December, you won’t legally be able to complete the sale until 1 April 2021, which means there’s no chance of taking advantage of the stamp duty freeze. That said, first time buyers have some concessions in this area anyway.
What it means for you…
If you’re an existing homeowner or have previously owned a home, and you’re planning on using the scheme as part of a new purchase, you’ll have to reserve your home before 15 December to get on the old scheme. Otherwise you’ll miss out as you won’t be eligible for the new scheme.
If you’re a first time buyer, you have a bit more flexibility and it may well be worth waiting, especially if it would be a struggle to get your finances together.
It’s worth knowing that under the new scheme, the government has placed greater restrictions on the minimum quality of the new build, which potentially also means you can get a better quality home.
But the cap on value under the new scheme may trigger two situations.
First, you may find that you have fewer choices of homes because of the upper limit. And second, depending on how the housing market plays out, you might be able to buy a higher specification home because of it.
You’ll have to balance all the pros and cons, of course.
Either way, because you’re buying a new build home, be prepared to negotiate. It’s worth bearing in mind that according to Rightmove’s November House Price Index, the asking price of homes coming onto the market is already beginning to dip.
If there isn’t flexibility on asking price, developers may still be happy to throw in extras, such as free legal fees or stamp duty.