The Welsh Government has set up a shared equity loan scheme which provides loans of up to 20% of the purchase price of a new build property. Here is a useful guide to help you understand whether you qualify and how much loan you could obtain to assist with the purchase of a new property.
Are you eligible?
The Help to Buy Scheme is open to all buyers seeking to purchase a new build property.
The Scheme offers a loan of up to 20% of the purchase price up to a maximum purchase price of £300,000.
You must have a minimum of 5% deposit and the Help to Buy Scheme will then provide up to 20% of the purchase price. This can make a huge difference particularly for first time buyers who are seeking to get on the property ladder. With today’s modern housing shortage the Help to Buy Scheme gives buyers the opportunity where it is difficult to raise the usual 10% deposit to purchase a property with the aid of a mortgage.
To be eligible you have to take out a first charge repayment mortgage with one of the qualifying lenders approved by Help to Buy Wales (HTBW) (most mainstream lenders are on the approved list).
HTBW carry out their own assessment of the Application to make sure that you are in a position to afford not only the 5% deposit but also the mortgage.
You do not need to be a first time buyer to qualify for HTBW. There are, however, certain restrictions, namely: –
1. The property you buy must be your only residence. If you are a buy to let investor or you own any other property then you will not qualify.
2. You cannot rent out your existing home or buy a second home through HTBW.
3. Any fraudulent claims will be subject to criminal prosecution.
4. Fraudulent claims will also require immediate repayment to HTBW of the loan assistance.
The Application process has four stages.
Stage 1 – Application
You complete a Help to Buy Wales Property Information form which is available on their website www.helptobuywales.co.uk. You must also reserve the home so this might involve paying a reservation fee to the house builder. You then submit the Property Information form along with the builder’s signed reservation form and a copy of your Pay Slip to show your last three months’ earnings to HTBW.
Stage 2 – Authority to Proceed
HTBW will check to make sure that you can afford the main mortgage. You must also sign a Declaration that the house will be your only residence. After HTBW has assessed the paperwork if you qualify you will then receive an Authority to Proceed form within 4 working days of HTBW receiving your completed Property Information form, Reservation form and copies of your Pay Slips.
You then instruct a Solicitor to act for you and tell your Financial Advisor of the Help to Buy funding so that they can inform the Mortgage Lender. HTBW will also issue instructions to your Solicitors after they send the Authority to Proceed to you.
Stage 3 – Mortgage Offer and Exchange of Contracts
Your Solicitor will undertake the normal conveyancing process and will also explain to you the implications of the shared equity loan provided by HTBW as well as the consequences of making a fraudulent application. When all of your investigations have been undertaken by your Solicitor the Solicitor then requests permission to exchange Contracts from HTBW. When they approve Contracts can then be exchanged and you pay the deposit.
Stage 4 – Completion
On completion your Mortgage Lender will send you the mortgage funds and HTBW will send your Solicitor the shared equity loan. Your Solicitor will then proceed to register your mortgage and the Help to Buy loan against the property with the Land Registry.
You must repay a percentage contribution of the loan when you sell your home or within 25 years whichever is sooner.
How does Help to Buy Work?
When HTBW provide you with the loan for the first 5 years after you have purchased the property you pay no interest on the amount borrowed. However, a management fee of £1 per month will be collected from the start of the loan which will be the date that you complete your purchase.
After 5 years the shared equity HTBW loan will then be subject to interest of 1.75% per annum on the outstanding amount of the loan. This will increase by an annual percentage increase in the retail price index plus 1% from the 1st April following the 5th anniversary of the date that you receive the funds.
If you sell your home you must repay the loan to HTBW.
For example, if HTBW give you a 20% contribution towards the total purchase price then your repayment will be 20% of the total market value when the property is sold. This figure might be more than the actual amount borrowed.
You purchase a house for £200,000. You obtain a mortgage with a bank for 75% of the value being £150,000 and you pay a 5% deposit from your own money being £10,000. You obtain a 20% loan from HTBW of £40,000.
In 4 years’ time you sell the property for £240,000. You must repay the loan to HTBW on the completion of the sale so the proceeds will be divided as follows: –
You are entitled to 80% of the sale proceeds which would be £192,000.
HTBW are entitled to 20% of the sale proceeds which would be £48,000.
From your £192,000 you will then have to pay the Estate Agent’s fees, Solicitor’s fees and any other costs involved in the sale. You will have obtained a shared equity loan of £40,000 and you are repaying £48,000 on the sale of the property. This is a shared equity loan so HTBW are entitled to a share of the equity. Please note that the amount that they receive is based on the market value. Normally the sale proceeds would be the market value i.e. you sell for what the property is worth as we have done in the example above. However, if you were to sell at an undervalue i.e. less than the market value you would still be obliged to pay HTBW a percentage of the market value depending on what you borrowed.
This also works in reverse so if you were to buy a property for £200,000 with a £40,000 20% shared equity loan from HTBW and then you later sell for £150,000 then HTBW would only be entitled to a £30,000 repayment against the £40,000 that you initially borrowed. As long as you have complied with all of your obligations under the HTBW shared equity loan you will not be required to pay any shortfall.
Can you repay the shared equity loan in part?
The HTBW Scheme allows you to repay all or part of the shared equity loan at any time. This is sometimes known as staircasing.
Staircasing payments can be made at any time after you take out the loan but it must be a minimum of 10% of the property’s market value at the time that you make the payment. So, for example, if you purchased a property for £210,000 and you put forward 80% of the market value of the property yourself through a 5% deposit and 75% mortgage (£168,000) then if you wanted to pay a lump sum off the shared equity loan the minimum amount that you could pay would be £21,000.
Repayments and Interest
As we stated you do not pay any interest for the first 5 years of the shared equity loan.
You will, however, pay a sum of £1 every month to HTBW by way of a management fee.
On year 6 of the loan you will then pay interest at a rate of 1.75% of the market value of the property at the time that you purchased it. This will then go up with the retail price index so, for example, if you purchased a property for £200,000 and you have a 20% shared equity loan with HTBW of £40,000 then when you start making repayments on year 6 you would pay £58.33 per month based on an interest rate of 1.75%.
Please note that because the interest rate starts at 1.75% but is linked to the retail price index it is likely to vary as the loan term carries on.
You should also note that when obtaining a mortgage for a shared equity loan HTBW assisted purchase you can only obtain a capital repayment mortgage. Interest only mortgages do not qualify.
If you have any queries about HTBW or shared equity loans then please do not hesitate to contact our offices on 01654 711499 or email email@example.com.