Securing an affordable mortgage on your ideal first home

If you are a first-time buyer looking to make your first step on to the property ladder and are struggling to save enough money to successfully secure an affordable mortgage on your ideal first home, then you are not alone. Thousands of people are currently in the same situation, which has prompted the Government to launch a variety of schemes to ensure that property ownership is not beyond the means of those who are ready to commit to one of the largest financial investments they will make in their lifetimes.

What is Help to Buy?

Help to Buy is a government-backed scheme that was initially introduced in the 2013 Budget and has been designed to help first time buyers to purchase a property with as little as a 5% deposit. The Government has recently confirmed that Help to Buy schemes have been extended to run until at least 2023, however from 2021 regional price caps will apply, which is likely to reduce the number of properties that will be eligible to be purchased through the Help to Buy scheme.

The primary scheme is known as Help to Buy scheme is available to all buyers who are looking to purchase a newly built property. If you were to go ahead and use this scheme, the Government will lend you money to help you to obtain a new build mortgage on a property under £600,000 in England, £300,000 in Wales and £200,000 in Scotland. You will be permitted to borrow 20% of the purchase price of your property on an interest-free basis for the first five years, provided that you also have at least a 5% deposit to put in. If you are looking to buy in London, the percentage of the purchase price you can borrow on these terms rises to 40%.

Who cannot apply for Help to Buy schemes?

Help to Buy cannot be used to purchase a property over £600,000 (£300,000 in Wales or £200,000 in Scotland), a second home, or a property that you intend to rent out at any time.

During the application process, you will be required to sign a legal document which confirms that you will not let out your property, either now or in the future. It is also important to note that if you intend to obtain anything other than a repayment mortgage, you will not be eligible for the Help to Buy scheme.

How Help to Buy Equity Loans Work

You must be able to put in 5% of the purchase price of your new-build house or flat as a deposit. You can then obtain up to 20% (or 40% if your property is located in London) of the purchase price of your property from the Government.

The rest of the money (up to 75% of the purchase price of your property) will need to be borrowed on a repayment only basis from a mortgage lender. You will, of course, need to prove to lenders that your circumstances mean that you will be able to comfortably afford your monthly mortgage payments.

If you would like to get an idea as to the amount that you could borrow from a mortgage lender and what your monthly repayments might be, check out our easy to use mortgage calculator.

The equity loan obtained from the Government will need to be repaid after 25 years or whenever you sell your home, whichever occurs sooner.

You will be required to repay the same percentage you borrowed as an equity loan from the proceeds of the sale of your property. So, if you received a 20% equity loan, when you sell your property in the future you must repay 20% of the proceeds of that sale.

If the cost of your new-build property is £200,000 the breakdown of your borrowings using Help to Buy might look something like this:

  • Your deposit - 5% - £10,000
  • Help to Buy Equity Loan - 20% - £40,000
  • New build mortgage on a repayment basis - 75% - £150,000

Help to Buy Equity Loan Interest Rates

For the first five years, you will not pay any fees or interest at all on the equity loan you have received from the Government. In the sixth year, your interest rate will be 1.75% and this will rise each year in line with inflation set out by the Retail Prices Index (RPI) plus an additional 1%.

  • Years 1-5: No fees or interest
  • Year 6: 1.75% of your total equity loan
  • Year 7 onwards: 1.75% plus RPI plus an additional 1%
It is important to note that these fees are additional and therefore will not be put towards the repayment of your government equity loan.

When your mortgage is paid off or when you sell your home in the future, you will be required to repay the total equity loan you received plus a share of any value increase. Let’s run through a quick example of what this could look like here.

Say you purchased your property for £200,000 and you sell it for £250,000:

  • Increase in value - 25%
  • Equity loan repayment - £50,000 (£40,000 plus 25% increase in value)
  • Repayment Mortgage - £150,000 (less capital repayments)
  • Your Share - at least £50,000 
The exact amount you will receive as your share will depend on how much you have paid towards your mortgage, but this can then be used as a deposit to secure your next home. You can repay part or all of your equity loan at any time, but the minimum percentage you can repay is 10% of the total market value of your property.

The Benefits of the Help to Buy Equity Loan Scheme

The competitively priced, interest-free equity loan will substantially reduce your total monthly property-related outgoings for the first five years. Additionally, as you will only need to obtain a 75% mortgage, you should also gain access to a range of more affordable mortgage products.

Increasing numbers of lenders are now offering Help to Buy mortgages and with so much choice available, your chances of securing a good deal are significantly improved.

What should you do next?

Help to Buy schemes are not necessarily the most appropriate option for every buyer, so speaking to a mortgage advisor to discuss your needs in greater detail will equip you with the knowledge you need to ensure that you are making the correct purchasing decisions. For example, if it looks as though you will be able to put in a 10% deposit and secure an affordable 90% mortgage, a Help to Buy equity loan might not be the best option for you. Your mortgage advisor will run through a variety of different mortgage scenarios with you, which will include factors such as interest costs and the potential financial impact of a rise in the price of your property on the amount of money you will be required to pay back in relation to your equity loan.

Importantly, however, Help to Buy schemes have helped thousands of people to get their foot on the property ladder in a landscape that has been increasingly difficult for buyers to navigate successfully.

If you have any questions about the Help to Buy scheme and how it could help you to obtain a new build mortgage on your ideal property, why not call The Mortgage Hut today on 02380 980304 or enquire online here to speak to a qualified expert who will be able to tailor their advice to your unique circumstances.

Looking for a Mortgage?

Find out if you're eligible in a couple of clicks, with no hidden credit checks.

With interest rates rising, speak to an advisor today to lock you in with the best deal. Check your eligibility now.