A Beginner’s Guide to Help to Buy

With property prices rising all the time, it may be frustrating to you to think that you may never get on to the property ladder. Well, don’t despair: help is at hand in the government’s new help to buy scheme that could see you owning your own home sooner than you might think.

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What is Help to Buy?

This is a government scheme that will offer a first-time buyer a help to buy loan to buy a new-build property. They will lend up to 20% of the purchase price (40% if you are buying in London) interest-free for up to five years.

Where Does the Rest of the Money Come From?

You will need to put at least a 5% deposit down on the property yourself, and the rest can be made up from a traditional mortgage. For example, if you have seen a new-build property for £150,000, you will need to find £7,500 to use as a deposit. If you are buying outside London, the government will then loan you up to £30,000, and the remaining £112,500 would be taken out as a mortgage from a regular bank or mortgage lender.

Is There a Downside?

The help to buy loan will be dependant on your being able to put down a deposit and borrow the rest with a mortgage. This may be a problem if you are a low earner, as most lenders would only consider lending around four times your annual salary. The type of mortgage you will be offered will also be dependant on your credit score, so if you have a history of CCJs and late payments you may not be eligible for the scheme.

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What Happens When the Interest-Free Period Ends?

The interest rates charged on your loan will then go up each year in April by the Consumer Price Index (CPI) plus 2%. These charges do not go towards paying off the government loan but are simply used to pay the interest.

What Happens if You Want to Sell the Property?

You can sell the property, but you would have to pay back the equity loan as well as a share of any increase in property value.

For example, the property you brought for £150,000 in the previous example is now worth £200,000 and you were given a government loan of £30,000 which represented 20% of the property price. On selling, you will now have to pay back that £30,000 as well as a 20 per cent share in the property increase of £50,000, which is £10,000. In total, you will owe £40,000. However, if you are selling for £200,000, you have still made money.