Shared equity schemes are a way to help people purchase a new-build home if they are struggling to get together the deposit necessary.
It can be incredibly difficult for first-time buyers to get on the property ladder, with rising house prices and a tough housing market, and the help to buy scheme is also open to home movers. We look at shared equity schemes, the pros and cons, how shared equity works and whether it could be an affordable way for you to purchase your new home.
Part of the Help to Buy Initiative, Shared Equity schemes allow people purchasing a new-build home to borrow up to 20% of the deposit on that property. The scheme is designed to help fill the 'deposit gap' with many people being unable to afford the large deposits needed to purchase a home.
This loan is a government equity loan of between 10% and 20% of the deposit of a new build property, provided the buyer can already put down 5% of the deposit. The loan can be repaid in two payments of 10% or the whole 20% at any time. If you don't pay the loan back before you move, you will still have to repay 20% of the value of your home.
You will still need 5% of the total deposit, and with a home worth £599,000, that figure would be £29,950, not an insignificant sum. You will also need to qualify for a mortgage and have a good credit rating. You don't have to be a first-time buyer to qualify for the scheme and there is no income cap on the loan. You have to be a UK citizen or have the right to remain in the UK indefinitely to access the shared equity loan.
The main benefit of a shared equity mortgage agreement is that it allows home buyers to pay a much smaller deposit on a house they could not afford the whole deposit for. The threshold for Help to Buy shared equity loans is significantly higher than other schemes and can be used on houses worth up to £600,000. The first five years of the loan are interest-free, however, after the first five years, you will need to pay a fee of 1.75% of the value of the loan, which will increase with inflation, plus 1%. With a 25% deposit, you may be able to access better mortgage deals, which will reduce your overall costs.
Because the value of the loan is a percentage of the house, it can rise or fall along with the house price. This means that if the value of your home rises considerably, the amount you will have to pay back will rise too. The loan is interest-free for the first five years but after that, you will need to pay interest of 1.75% which rises at a rate of 1% plus inflation.
No, shared equity is a different scheme to the shared ownership scheme. A shared ownership agreement is with a housing association and there are different restrictions on shared ownership and shared equity agreements. With a shared ownership property you only own a certain percentage of your home and pay rent as well as a mortgage. With shared equity mortgages, you own all of your home but owe a percentage of your deposit.
The scheme is designed to help people purchase new, good quality housing with a loan to reduce the amount you need to save before you buy a house. This can make a huge difference if you can't afford a deposit, and the interest-free five year period should enable you to save and pay back the loan. Like any loan, you need to make sure you can afford to pay it back, and that it is the best option for you as you look to purchase a new home. The help to buy equity loan will only be available for first-time buyers after 2021, with regional price caps and the scheme forecast to end in 2023. It is important to make sure you understand the scheme and how shared equity mortgages work, but if you are struggling to save for a deposit, it is definitely worth considering the help to buy scheme.
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