How to apply for new Help to Buy equity loan and buy a home with 5% deposit

FIRST-time buyers can get on the property ladder with just a 5% deposit when they use the Help to Buy equity loan.

The new government-backed loan scheme opens for applicants from next month, and will run until 2023.

The government will lend new homeowners up to 20% of the property value, interest-free,to lower the mortgage and increase affordability.

The loans will be available to those who are due to complete on a new built house from April 1, 2021, once the current Help to Buy loan scheme ends.

It means first-time buyers who want to secure an off-plan property not due to be built until after April next year can still access the government help.

But there are some key changes to the loans that you should know about before applying. Here's what they mean for you:

What is the new Help to Buy equity loan and how is it different?

Like before, the government will lend you up to 20% – or 40% in London – of the cost of a new build home.

You'll still need to fork out at least 5% of the total property value for a deposit but this time you have to get a mortgage for at least 25% or more to make up the rest.

Under the old scheme, the property value must be worth less than £600,000 to be able to qualify for a loan.

Loans under the new scheme will be capped at 1.5 times the average first-time buyer property price by region in England.

This is to stop already wealthy first-time buyers using the scheme to purchase bigger homes.

For example, buyers in the North East will only be eligible for the help on homes worth less than £186,100, while those in the South East are limited to property worth less than £3437,600.

The loan is interest-free for the first five years, after then fees start at 1.75% and rise each year in April by the Consumer Prices Index (CPI) level of inflation, plus 2%.

There's also a £1 monthly management fee for the full term of the equity loan.

The loan repayments are on top of your mortgage repayments.

You can pay it off in the same way as the old one, either when you sell your home, add it to your mortgage when it's time to remortgage, or pay it off in one go at the end of the term.

The loan is secured against your home, like a mortgage, which means if you fail to make the payments the property could be repossessed.

In the same way as the previous loan, you won't be able to use it to buy a home that isn't new build.

The new loan is only available for first-time buyers. Second-steppers will no longer be able to use a Help to Buy equity loan to buy a property.

How can I apply for a Help to Buy loan?

Buyers can still apply for the old Help to Buy equity loan but only on new homes built by February 28, 2021.

The construction deadline was originally set for December 31, 2020 but was extended by two months to make up time caused by coronavirus lockdown delays.

But the deadline for completing on the sale remains at March 31, 2021, unless the construction of your home has been severely delayed.

In this instance, Homes England may give you until May 31, 2021 to legally complete, but this will be dealt with on a case by case basis.

What is stamp duty?

STAMP duty land tax (SDLT) is a lump sum payment anyone buying a property or piece of land over a certain price has to pay.

Up until July 8, most house-buyers in England and Northern Ireland had to pay stamp duty on properties over £125,000.

This was temporarily increased to £500,000 until March 31, 2021 in the government's mini-Budget in July 2020.

The rate a buyer has to fork out varies depending on the price and type of property.

Rates are different depending on whether it is residential, a second home or buy-to-let, or whether you're a first-time buyer.

The usual system in England for residential properties means:

  • First-time buyers pay nothing on properties below £300,000 (and relief available on properties of up to £500,000)
  • You pay nothing if the property costs below £125,000
  • You pay 2% if it is worth between £125,001 and £250,000
  • You pay 5% if between £250,001 and up to £925,000
  • You pay 10% if it is between £925,001 and £1.5million
  • You pay 12% on anything over £1.5million

For second homes or buy to let properties:

  • 3% on purchases up to 125,000
  • 5% on purchases between £125,001 and £250,000
  • 8% on purchases above £250,001 and £925,000
  • 13% on purchases above £925,001 and £1.5 million
  • 15% on purchases above £1.5 million

Stamp duty rates are different in Scotland and Wales.

If you don't meet any of these criteria, you'll need to apply for the new scheme, which opens on Wednesday December 16, 2020.

Once you've had an offer accepted on a new build home that is eligible for the scheme, you'll need to go through a Help to Buy agent.

You can find one near you on the Homes England website.

The new scheme can be used to buy a home from April 1, 2021 until it ends in March 2023.

What other options are there for first-time buyers?

There are a whole host of other schemes designed to help first-time buyers onto the property ladder.

For example, you may be able to get help through the shared ownership scheme.

Shared ownership lets buyers purchase a portion of the equity if they can't afford to take out a mortgage for the total value of the property.

They will still need to put down a deposit and can take out a mortgage for the part that they own, while they pay rent to the housing association that owns the remaining portion.

Currently, buyers need a to purchase a minimum 25% to be eligible but the government is looking at ways to drop this to 10%.

Savers aged between 18 and 39 can also get up to £32,000 towards their first home from the government if they save into a Lifetime Isa.

If you've already opened a Help to Buy Isa, you will still be able to get the government bonus of up to £3,000 until 2029. These accounts closed to newcomers last year.

In October, Boris Johnson vowed to "turn Generation Rent into Generation Buy" and help get millions of Brits on the property ladder with a new 5% deposit mortgage scheme.

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