Mortgage Equity Loans

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Government ‘help to buy’ equity loans 

What You Need To Know

Many people wanting to own their home are, often through no fault of their own, caught in a catch 22 situation when it comes to actually taking the plunge. That situation is one where they can afford the monthly payments for a mortgage, but don’t have a large enough deposit to be able to actually take out that mortgage and as property prices rise, this problem becomes more and more acute.

Now, if this describes your situation, you could be forgiven for giving up on your home-ownership dreams completely, however, before you do, you should take a look at the government’s equity loan scheme, which is specially designed to provide a leg up that can make all the difference to your home ownership ambitions.

A Small Deposit

Since the credit crunch happened in 2009, mortgage companies have required much larger deposits than the 95% loan to value mortgages that were commonplace beforehand. In the modern day, deposits of around 15-20% are the norm, meaning that for a £250k property, a down payment of anywhere between £37k and £50k is typically required. A considerable sum in anyone’s book.

The equity loan scheme circumvents this issue for first-time buyers by allowing them to put down a just 5% of the property’s value to secure a mortgage. Under the terms of the equity loan proposition, the government contributes 20% for a deposit total of 25%, with the remainder of the purchase price being made up by the mortgage lender. In London, due to the significantly higher property values there, the equity contribution is 40% – for a deposit total of 45%.

The Terms of the Loan

As you would expect, there are some terms and conditions involved with the equity loan scheme. These terms are fairly broad, but for anyone looking to take advantage of the scheme, they need to be taken into account when making your affordability calculations and drawing up your plans.

The equity loan scheme states that:

It can only be used on a new-build property.
There is a £600k maximum property price
For the first 5 years, the loan is interest-free, after which interest is charged at 1.75% increasing thereafter at 1% above the RPI (Retail Price Index)
The equity can be repaid early, but only in large lump sums at least equivalent to 10% of the market value of the property

Another important thing to consider is the amount of equity provided by the government is not a flat amount, so it shouldn’t be treated as such. If your home’s value goes up, the amount repayable remains at 20% or 40% of the total purchase price and it’s done in this way to encourage people to pay it off as quick as they can.

If your property loses value and you sell it, then this will reduce the amount owed, as it will be worked out on the property’s value at that time. It’s a fair system that protects the home buyer, as well as ensuring that no one makes a financial killing at the government’s expense.

Eligibility Criteria

As well as needing to be a first-time buyer, there are a number of factors that will rule you in or out of being able to participate in the equity scheme. Firstly, this particular scheme is only available in England, however, there are equivalent systems in place in Wales, Scotland and Northern Ireland. If you live in the UK, but not in England, you need to check out the websites of each one.

Secondly, whilst the home is yours, you’re not allowed to sublet it out or own another property at the same time and the usual rules relating to having a good credit history apply. The scheme is also not open to overseas residents who have no prior history of owning a home in the UK and if you’re already taking advantage of other government schemes like NewBuy, you will, unfortunately, not be eligible for an equity loan.

How to Apply?

If after reading everything we’ve covered so far, you’re thinking of applying, then you’re going to want to know how to do it. In order to do so, you need to get in touch with an official Help to Buy agent and you can find the one nearest to you by checking out the page that deals with it. These guys are appointed by the government and will be able to provide answers to any questions you might have about the finer details of the scheme.

The unmistakable Help to Buy logo, which can be found on the same link as we just provided, is something you should be looking out for on any of the numerous new housing developments. If you see the logo, you’ll know that a) they participate in the scheme and b) they’re a good source of information on the topic.

Obviously, there are certain aspects of your prospective house purchase that you’ll have to sort out yourself, but that shouldn’t be too much of a problem, as Help to Buy agents are there to assist and guide you through the process from filling out your application, right through to getting your hands on the keys to your new home.

Suffice to say, you’re in good hands.

In Summary

Whilst some might see the Help to Buy scheme’s terms and conditions as a bit restrictive, it’s something that is enormously useful to many who otherwise have no chance of enjoying the benefits of homeownership. Compared to renting, owning your own home is cheaper, more stable and allows the owner to benefit from the capital growth of their property – rather than simply helping to pay off someone else’s mortgage.

It also offers the prospect of long-term property ownership, as once your foot is on the first rung of the ladder, it’s that much easier to climb higher and end up owning your own home outright.

For these reasons, it’s something that anyone struggling to afford a mortgage on their own should pay serious consideration to.

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