Entering the property market can be an exciting, albeit daunting venture for many prospective homeowners. Where do you start? How do you find a property that suits your needs but also falls within your budget? And, most importantly, how do you secure the required financing to buy the property? One of the options available is the Help to Buy equity loan scheme, a government initiative designed to assist first-time buyers and existing homeowners to buy a new-build property. Another is shared ownership, a scheme where you buy a share of a property and pay rent on the rest. This article will delve into the details of these two schemes and discuss the possibility of combining them.
Understanding the Help to Buy Equity Loan
Introduced in 2013, the Help to Buy equity loan scheme was designed to give a leg-up to those struggling to afford the deposit needed to buy a home. Under this initiative, the government offers a loan of up to 20% (or 40% in London) of the cost of a new-build home. As a buyer, you need to cough up a minimum of 5% as a deposit, with the remainder funded by a mortgage.
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The real appeal of this scheme is that the equity loan is interest-free for the first five years, making it an attractive option for those who want to own a home but are wary of high-interest rates. After the interest-free period, a fee of 1.75% is charged, which will increase annually by the increase (if any) in the Retail Price Index (RPI) plus 1%.
What is Shared Ownership?
A step up from renting but a step down from full homeownership, shared ownership offers a middle ground. This scheme allows you to buy a share in a property, usually between 25% and 75%, and pay rent on the remaining share to a housing association.
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The key advantage of shared ownership is that it reduces the deposit you need to secure a property. Because you’re only buying a share of a home, the deposit required is also a fraction of the property’s value. This can make homeownership accessible for people who may have struggled to save for a deposit on the full value of a home.
Over time, you can buy more shares in your home, a process known as staircasing, until you own 100% of the property. The cost of the additional shares will depend on the current market value of your home.
Can You Combine the Help to Buy Equity Loan with Shared Ownership?
The primary question here is, can you combine the Help to Buy equity loan with shared ownership to make buying a property more affordable? The short answer is no. As of April 2021, Help to Buy and Shared Ownership are two separate schemes and cannot be used together.
The reason for this is that the Help to Buy scheme is designed for buyers who can afford to take on a mortgage for the remaining cost of the property after the deposit and the equity loan. On the other hand, shared ownership is intended for people who can’t afford the mortgage on 100% of a home.
How to Decide Between Help to Buy and Shared Ownership
Now that we’ve clarified that these two schemes can’t be used together, you might wonder which is the most suitable for you.
Help to Buy can be a good choice if you can afford a larger mortgage but need help with the deposit. It offers an interest-free loan for the first five years, which can ease the financial burden in the early years of homeownership.
Shared ownership, on the other hand, can be a more viable route to homeownership if you are unable to afford a large mortgage. It allows you to buy a share of a home and pay rent on the remainder, making it a more budget-friendly option.
When considering these schemes, you should take into account your financial situation, your long-term plans, and the local housing market. Consulting with a financial advisor or mortgage broker can also be beneficial as they can provide expert guidance tailored to your circumstances.
Remember: owning a home is a substantial financial commitment. Take your time to understand these schemes fully and decide which one is right for you.
The Pros and Cons of the Help to Buy Equity Loan Scheme
The Help to Buy equity loan is a government initiative that offers a significant boost to first-time buyers and existing homeowners who are struggling to save for a deposit. The scheme provides an equity loan of up to 20%, or 40% in London, towards the purchase of a new-build home. This loan is interest-free for the first five years, making it a particularly attractive option for those wishing to step onto the property ladder.
However, after the interest-free period, a fee of 1.75% is charged, which will increase annually by the increase, if any, in the Retail Price Index (RPI) plus 1%. This could make the loan more expensive than initially anticipated.
Also, the scheme is only available for new-build homes, which may restrict your choice of property and location. Furthermore, the equity loan scheme is based on the assumption that the buyer can afford a mortgage to cover the remaining cost of the property. This implies that the scheme might not be suitable for those with lower incomes or facing high mortgage rates.
The Pros and Cons of Shared Ownership
Shared ownership, on the other hand, is a scheme that provides a middle ground between renting and full homeownership. With shared ownership, you buy a share of a property (between 25% and 75%) and pay rent on the remaining part to a housing association. This scheme significantly reduces the deposit required to secure a property, making homeownership more accessible to people who struggle to save for a substantial deposit.
Over time, you can buy more shares in your property, a process known as ‘staircasing’, until you own 100% of your home. The cost of these additional shares will depend on the current market value of your property.
However, shared ownership properties are usually leasehold, meaning you’ll have to pay ground rent and service charges, which can be quite high. Also, you can only sell your property to someone who meets the shared ownership criteria, which could limit the pool of potential buyers.
Conclusion: Which Scheme is Right for You?
Deciding between the Help to Buy equity loan and shared ownership depends on several factors including your financial circumstances, your long-term plans, and the local housing market.
If you can afford a larger mortgage but need help with a deposit, the Help to Buy scheme could be an excellent option. It provides an interest-free loan for the first five years, easing the financial burden during the early years of homeownership.
Shared ownership, on the other hand, could be a more viable route to homeownership if you are unable to afford a large mortgage. It allows you to buy a share of a home and pay rent, making it a more budget-friendly option.
The key is to thoroughly understand these schemes and consider your personal circumstances. Consulting with a financial advisor or mortgage broker can provide expert guidance tailored to your situation, helping you make an informed decision. Remember, owning a home is a significant financial commitment. Take your time, do your research, and choose the right path for you.
