How London Help to Buy could help to buy your new home
The London Help to Buy Equity Loan could be a practical solution to help you buy your new home in the capital. It’s a government-backed scheme which lends you an extra sum of money in addition to your mortgage. Both first-time buyers and homeowners may benefit.
You can borrow up to 40% of the cost of a new home using an equity loan, which is interest-free for the first five years. You will need a minimum 5% deposit and a mortgage to make up the rest of the sale price. The scheme is open to new applicants until 2021 and is available on new build homes worth up to £600,000.
Could you be eligible for London Help to Buy?
You must meet the following five criteria if your application is to be successful.
- The maximum income multiple for a Help to Buy purchase is 4.5 x your household income. This can be joint (if you have a partner) or single (if you’re buying on your own).
- Your debt to household income ratio cannot be more than 45%. So if what you owe, including mortgages, loans and credit cards, is more than 45% of what your household earns, you won’t be able to apply for Help to Buy.
3. Most lenders require you to have a good credit history, although Precise offer schemes to accommodate borrowers with poorer credit history.
4. Help to Buy will also carry out a sustainability check on your application. They need to know — as far as possible — that you can continue to manage your finances in future and meet your obligations. This takes into account possible interest rate rises and the introduction of fees on your equity loan after five years.
5. Help to Buy is only available up to the age of 75. Also, if your mortgage extends beyond normal retirement data, you will need to satisfy your lender that you can still afford your mortgage repayments.
Your new home
The home you want to buy must be newly built, or being built, with a price tag of up to £600,000. It has to be advertised as Help to Buy and must be within Greater London. You can’t own any other residential property at the time you buy your new home, and you can’t enter a part exchange deal using your old home. You are not allowed to sub-let or rent out a new home bought with London Help to Buy – unless you are a member of the Armed Forces, under certain circumstances.
Key point: London Help to Buy can help you afford a home you might not be able to buy if you only had your deposit and a standard mortgage. Find out more information on the London Help to Buy website.
About the equity loan
What you borrow can cover up to 40% of the purchase price of your new home. To qualify, you must have:
- A deposit of at least 5% to put down.
- A mortgage in place for at least 55%.
- It has to be a London Help to Buy mortgage. Aldermore, Bank of Scotland, Barclays, Halifax, Leeds, Lloyds, Nationwide, NatWest, Royal Bank of Scotland, Santander, Teachers and TSB are some of the lenders currently offering London Help to Buyoptions.
- The mortgage must be on a repayment basis and not ‘interest-only’. Your monthly mortgage payments should go directly towards repaying the sum you owe.
- The mortgage is called the ‘first charge’ on your new home.
- The equity loan is called the ‘second charge’.
Paying back the equity loan
- No interest is charged on the equity loan for the first five years of owning your home. However, a monthly management fee of £1 is applied from the date of purchase.
- After six years, you must pay interest of 1.75% of the value of the loan to the Government annually. This is usually broken down into monthly payments, but can be a one-off payment. It does not go towards paying off your loan.
- From then on this interest rate rises annually by RPI (Retail Price Index) inflation, plus 1%.
- You can pay the equity loan off in segments or in full at any time after you complete on your purchase.
- It’s important to have plans in place to pay back the whole sum borrowed after 25 years. You will need to pay back the original equity loan plus up to 40% of any growth in the value of the property
Key point: If you hope to make major lifestyle changes in the next five to 10 years, such as having children, plan your long-term finances with guidance from a professional financial advisor.
If you want to move home
Your new home is yours and you own in it your name. However, because this is an ‘equity’ loan, the Government holds a stake worth up to 40%. Should you decided to move house and sell, you will be required to pay back the loan.
- The amount you have to pay is based on the market value of your home at the time you choose to sell, not when you bought it.
- You will need an independent valuation. Your home should be sold on the open market with the intention of achieving this value.
- If the value has gone up, you will pay back more than you borrowed because the value of the Government’s equity stake has risen.
- However, if the value of your home is now less than when you purchased, you will repay less than you originally borrowed.
Key point: The value of any home can go up or down, subject to property market conditions. This will affect the sum you have to repay.