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A Guide to Government Help to Buy Schemes in London

August 5, 2021

 

If you want to buy a property in Islington, Highbury or Camden, you’ll find it useful to know about the financial support on offer, particularly for first-time buyers. The government offers a variety of schemes for homebuyers in London, designed to help you get the house you want – and possibly a higher-priced home than you thought you could afford.

In this handy guide, you’ll find out about two key government schemes – the Help to Buy Equity Loan, and the 95% Mortgage Guarantee Scheme.

Help to Buy – a brief overview

Both the 95% Mortgage Guarantee Scheme and Equity Loan are great ways to fund a property purchase. If you’re thinking about buying a home in London, it’s worth finding out if you’re eligible for either of them.

The Equity Loan Scheme has proven popular among homebuyers. For example, according to recent figures, 278,639 properties have been bought with the Equity Loan since the scheme started in 2013, meaning a total of 16.46 billion pounds worth of equity loans have been granted. While many of the properties were valued at £200,000 or less, it’s important to note that the price cap in London is far higher – £600,000 in fact.

The 95% Mortgage Guarantee Scheme is a brand new government scheme which launched in April 2021. It bears similarity to the highly successful Help to Buy: Mortgage Guarantee scheme which ran from 2013 – 2017 and helped over 100,000 households to buy their own home in the UK. The new scheme is expected to reinvigorate the high LTV mortgage market, and aims to turn “generation rent” into “generation buy” by helping more people to get onto the housing ladder.

The Help to Buy Equity Loan

The Help to Buy Equity Loan is one of the best-known government homebuying schemes, but can only be used to fund the purchase of a new-build property.

How does it work?

With an Equity Loan, the government lends you money to finance your house purchase, which covers up to 40% of the new-build’s value (London only, the rest of the country is 20%). This loan is interest-free for five years.

You’ll then need to finance the rest of the purchase with a mortgage, plus a 5% deposit.

Financial breakdown

After the five interest-free years are up, you’ll be charged interest at a rate of 1.75%. Then, after the sixth year, the interest will go up again by the CPI (Consumer Price Index) plus 2%. You’ll need to repay the loan after 25 years, or when you sell the home.

Here’s an example of how it might work in practice.

Ms X wants to buy a property in North London for £400,000. She puts down a 5% deposit (£20,000), then takes out an equity loan of 40% – £160,000. She then funds the rest of the purchase with a mortgage – £220,000.

95% Mortgage Guarantee Scheme

The 95% Mortgage Guarantee Scheme is another option available to homebuyers.

How does it work?

Under this scheme, the government ‘guarantees’ to provide homebuyers with a 95% mortgage, providing they have a 5% deposit. The guarantee means that the government will compensate your mortgage lender (partially) if you default on your monthly repayments.

It’s available to first-time buyers and home-movers alike, and can be used against the purchase of any property costing under £600,000.

Financial breakdown

With the 95% Mortgage Guarantee Scheme, you’ll need to pay the 5%-9% deposit upfront. Then, you’ll pay off the remaining 95% in monthly mortgage repayments. Here’s an example of how it might work in practice.

Mr Y has found a property in North London that he loves, priced at £400,000. He pays the 5% deposit (£20,000), then funds the rest of the purchase with a mortgage (£380,000). As with any repayment mortgage, he’ll be paying off a portion of the cost of the home each month, plus interest. If the interest rate was 3%, this would mean a monthly repayment of £1,896.85.

Interest rates vary from lender to lender, so it’s important to shop around for the best deal.

Equity Loan vs 95% Mortgage Guarantee Scheme

If you’re not sure which option is right for you, here’s a list of the pros and cons for each.

Equity Loan: Pros

  • It’s interest-free for five years, which can save you a lot of money when compared to a mortgage.
  • It has a generous price-cap for London – you can use it to purchase a property valued at up to £600,000.
  • It enables buyers to purchase a house that otherwise would have been too costly for them.
  • It only requires a 5% deposit.

Equity Loan: Cons

  • It can only be used to purchase a new-build property, which might be limiting.
  • It’s only available for first-time buyers.
  • If you sell the property for more money in the future, you’ll also need to give a share of the profits to the government. For example, if you purchased for £400,000, then sold for £500,000, you’d need to pay back the original loan, plus 25% of the profit.

95% Mortgage Guarantee Scheme: Pros

  • The deposit is lower, which means you won’t need as much money up-front.
  • Unlike previous schemes, the offer isn’t limited to new-build properties.
  • The mortgage is a five-year fixed term scheme – which means you know how much you’ll be paying out each month, for the duration of the term.
  • It’s available for properties worth up to £600,000 in London
  • Most of the major banks are offering the 95% mortgage deal.

95% Mortgage Guarantee Scheme: Cons

  • Interest rates are usually higher for mortgages with low deposit requirements.
  • You won’t be able to select an interest-only mortgage – it must be a repayment mortgage.
  • In order to be eligible, your deposit mustn’t exceed 9% of the property’s value.

FAQs

  • When do I have to pay back the Equity Loan?

You’ll have to pay back the loan either at the end of the term, when you’ve paid off your mortgage, or when you sell your home.

 

  • How much will I have to repay with an Equity Loan?

The amount you have to repay is calculated as a percentage of the market value. That means, if the market value rises, so too does the amount you’ll need to pay back. This also applies if the market value falls – you’ll repay less.

 

  • When does the Help to Buy Equity Loan come to an end?

The scheme has been extended until 2023.

 

  • Does the government guarantee my payments with the 95% Mortgage Guarantee Scheme?

No – you’re responsible for your payments. Instead, the scheme is designed to protect the lender, and incentivise them to offer 5% deposit mortgages to their customers.

 

  • When does the 95% Mortgage Guarantee Scheme come to an end?

The scheme is scheduled to run until 31st December 2022.

 

Help to Buy For Properties in Islington, Highbury & Camden

If you’re keen to make the most of Help to Buy, get in touch with Hotblack Desiato. We’ve got a range of properties for sale in Islington, Camden, Highbury and the surrounding areas – some of which are compatible with the government schemes.

You can browse all our available homes to buy here.

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