With the new version of the Government’s Help to Buy: Equity Loan having recently been launched, Adam Crawford, Partner and Head of New Build Homes at Prince Evans Solicitors, looks at what has changed and the conveyancing process for buying with Help to Buy
BACKGROUND
The Government’s existing Help to Buy product officially came to an end on 31 March 2021 (with a small extension for Covid-related delays) and has been closed to new applicants since mid-December 2020. The new Help to Buy product is initially due to run from 1 April 2021 to 31 March 2023 (we will call this “HTB2” in this article).
The previous version of Help to Buy allowed buyers to purchase a new build property with a maximum value of £600,000 with up to a 20% equity loan outside of London or up to a 40% equity loan inside London. The loan, which was available to first time buyers as well as home movers, was interest free for the first five years after which an interest rate of 1.75% was charged, increasing by the Retail Price Index (“RPI”) plus 1% annually. The loan was repaid on the sale of the property at the same percentage as the buyer borrowed.
HELP TO BUY 2 - WHAT HAS CHANGED?
The new HTB2, while being a similar product, does have some key changes as follows:
HTB2 is only available to first time buyers – this means you will not be eligible if you have ever owned another property or been named on the deeds to a property anywhere in the world
The product is still only available for a new build property
You can still obtain up to a 20% equity loan outside of London or up to a 40% equity loan inside London
The maximum purchase price has changed and is now subject to regional price caps. The new build property you are buying cannot exceed the price shown in the table (left)
Nothing is repayable for the first five years but interest is then charged at 1.75% of the loan and increases by the Consumer Price Index (“CPI”) plus 2% (a minimum 2% will also apply even if CPI is negative). Note this is a change as the increase used to be RPI plus 1%.
If the property being purchased is a house then it must be freehold and not leasehold (apart from in exceptional circumstances with Homes England’s prior approval)
If the property is a flat/apartment and is therefore leasehold, the developer is not permitted to charge any ground rent
The Help to Buy Agent now wants to see certified ID and evidence of source of funds (evidence of how the buyer has acquired their deposit) which is to be provided by the buyer’s conveyancer
Before proceeding with a Help to Buy purchase you should check whether you are eligible. More details and a buyer’s guide can be found on the Government’s website at the following link.
HOW DOES HELP TO BUY WORK?
Using a 40% equity loan as an example and a purchase price of £500,000:
The buyer has a 5% deposit of £25,000 and secures a mortgage for £275,000 being a 55% loan to value
HTB provides an equity loan for 40% of the value of the property being £200,000 and this is secured against the property as a second legal charge (the mortgage will be the first legal charge)
The buyer does not repay anything for the first five years of the loan (other than a token £1 direct debit per month) but from year six the buyer is required to pay (monthly) interest of 1.75% of
the equity loan. The interest rate then increases every year by the Consumer Price Index (“CPI”) plus 2% (a minimum of 2% will always apply even if CPI is negative)
When the buyer sells the property, they must repay the 40% equity loan at the value of the property at that time. For example, if the property has increased in value to £550,000 then the 40% amount repayable will be £220,000; if the value had decreased to £450,000 then the 40% repayable will be £180,000.
WHAT IS THE PROCESS FOR A BUYER?
Once you have reserved a suitable home with a developer or housing association and paid a maximum reservation fee of £500, you should follow the below steps to apply for a Help to Buy: Equity Loan:
Complete a Property Information Form (“PIF”) with your personal and financial information, the property details and proposed mortgage details. Often your mortgage broker or the developer’s or housing association’s sales staff will help you with this process. It is crucial that the information completed is accurate and correct or the process may need to be repeated, which can cause delays
The signed PIF and a copy of the reservation form must be sent to the HTB Agent
The HTB Agent will then assess your eligibility and, if approved, an Authority to Proceed (“ATP”) will be issued
You will need to apply for a repayment mortgage and are advised to seek independent financial advice
Once the ATP has been issued, the HTB is then progressed by your conveyancer.
WHAT IS THE LEGAL PROCESS MY CONVEYANCER (PROPERTY LAWYER) WILL HAVE TO COMPLETE?
Your conveyancer will receive the ATP from HTB directly, and upon receipt will check the details are correct. If not, an amended PIF will need to be submitted by you to HTB
Your conveyancer will report to you on the legal aspects of the HTB loan and will send you the HTB Charge and, as a new requirement, a declaration that you are a first time buyer for signing. Your conveyancer will only provide you with advice on the legalities of the HTB loan but cannot provide any financial advice
Once your mortgage offer has been received, your conveyancer can submit aForm1 to HTB to apply for the Authority to Exchange
The Form 1 must be signed by a Partner
PROCESS CHART
Key: HTB = Help to Buy ATP = Authority to Proceed PIF = Property Information Form ATE = Authority to Exchange COE = Confirmation of Exchange CTD = Confirmation to Developer of the law firm and accompanied by a copy of the mortgage offer, the mortgage valuation (if available) and the Disclosure of Incentives Form and as a new requirement HTB is also now asking for certified copies of ID and evidence of the buyer’s source of funds. Again, it is crucial all information is completed correctly, as any inaccuracies can lead to the Form 1 being rejected and you having to return to the back of the queue
Once HTB has checked and approved the Form 1 it will issue an Authority to Exchange (“ATE”). The ATE confirms that HTB is happy for your conveyancer to exchange contracts, provided that this takes place by the date it has specified. If this date expires, then an extension must be obtained (causing further delays)
Your conveyancer will check the ATE and ensure it is correct and that the ATP is less than three months old. Provided they are correct then exchange of contracts can take place – completion must take place within six months of exchange of contracts
Once exchange takes place your conveyancer must submit a Confirmation of Exchange to HTB (“COE”) and if a fixed completion date is agreed they must also submit a Form 2
A Form 2 and Certificate of Title (“COT”), together with your completed Direct Debit form, is submitted by your conveyancer to HTB once a completion date is known (either on exchange of contracts or once notice to complete
is served)
Once HTB has checked the Form 2 it will issue a Confirmation to Developer (“CTD”) to confirm the funds will be released and completion can take place.
PROCESS CHART
For ease, summarised above in a flow chart are the steps which must be undertaken for a HTB application to reach completion. This process will run alongside your conveyancing transaction.
AFTER COMPLETION
You should be aware of the following points after completion:
You must occupy and continue to occupy the property as your only main residence
You can add or remove a party from the Equity Loan with consent from HTB 9 The loan can be repaid at any time – you do not have to wait for a sale of
the property. If you wish to repay the loan then you should contact HTB’s loan administrator who will explain
the process (which in short is to obtain a RICS valuation of the property and repay, via a conveyancer, the percentage you borrowed)
You can remortgage your main mortgage but can you only borrow more money in certain circumstances.
You must seek permission from HTB to make any structural alterations to the property
You cannot sub-let the property without obtaining consent.
As you can see, there is much work to be undertaken by your conveyancer if you
are purchasing with assistance from a Help to Buy: Equity Loan and there are several factors that can cause delays to your conveyancing transaction.
For this reason, it is very important that you instruct a conveyancer who is very experienced and well versed in Help to Buy and new build properties.
Prince Evans is one of Chameleon Group’s recommended solicitors who specialise in all aspects of conveyancing. You can contact Prince Evans direct for all your conveyancing needs and for a friendly no obligation quote on 020 8567 3477 or nbh@prince-evans.co.uk