How does Your First Home work? The equity loan explained

How does Your First Home work, in one paragraph?

Your First Home works by splitting the price of a new-build home three ways: you pay a 2.5% deposit, the government lends 20% as an equity loan, and a mortgage from a normal lender covers the remaining 77.5% (GOV.UK). The equity loan is interest-free for an initial period. Because it is an equity loan, we expect that when you sell the home, or pay the loan off, you give the government back 20% of what the home is worth at that time, as with Help to Buy; the repayment rules themselves have not been published. That is the whole mechanism; everything else is detail, and most of the detail arrives at the Budget on 28 October 2026.

Step 1: the three parts of the price

On the £230,000 starter home used as the example in reports of the announcement (Rightmove’s average first-time buyer price; the GOV.UK release gives no example):

You never receive the £46,000. It goes to the developer at completion as part of the purchase price, exactly as Help to Buy loans did (GOV.UK). In return the government takes a 20% stake in the home’s value and, under Help to Buy, a second legal charge behind your lender.

Step 2: the mortgage

The mortgage is the part you pay every month. A £178,250 repayment mortgage at 5% over 25 years costs about £1,042 a month. Because the loan-to-value (the mortgage as a share of the price) is 77.5% rather than 95%, you qualify for cheaper deals: on 26 September 2026 the best fixed rates from lenders operating across England were about 5% at 75% to 80% loan-to-value and about 5.55% at 95%, according to the HomeOwners Alliance rate table.

Lenders will probably have to sign up to the scheme, as they did for Help to Buy (the announcement does not mention lenders), and they will assess you on your income, outgoings and credit history in the usual way. Most lend up to about 4.5 times household income, so a £178,250 mortgage points to an income of roughly £39,600. The mortgage required calculator works this backwards from your income.

Step 3: the interest-free years

The government says there will be “an initial interest free period” on the equity loan (GOV.UK). It has not said how long. Help to Buy gave five years, then charged 1.75% of the amount borrowed in year six, rising every April by inflation plus 2% for its final 2021 to 2023 loans (earlier loans rose by RPI plus 1%) (GOV.UK). Those interest payments did not reduce the loan; they were a fee for keeping it.

Until the Budget, this site assumes the Help to Buy rules and labels every figure that depends on them “Assumed”. On a £46,000 loan that means about £67 a month from year six. The interest page has the full schedule.

Step 4: repaying the loan

This is the step people misunderstand, so here it is plainly, on the Help to Buy rule we expect the new scheme to follow. You do not repay £46,000. You repay 20% of the home’s value at the time you repay, whether that is more or less than £46,000.

Under Help to Buy you could repay when you sold, when the mortgage ended, at the end of the loan term (normally 25 years), or earlier in chunks of at least 10%, each time based on a surveyor’s valuation and with a £200 administration fee (GOV.UK). We assume similar rules; the repayment page goes through each route.

What the scheme is not

• It is not a grant. Every pound is repaid, as a share of value.
• It is not for everyone. First-time buyers only, England only, new builds only, and there will be an income cap and price caps (GOV.UK).
• It is not available yet. Nobody can apply until the rules are published and pre-registration opens.
• It is not the same as Shared Ownership, where you buy a share and pay rent on the rest. With Your First Home you own 100% of the home and owe the government a share of its value. The comparison page sets the two side by side.

A worked example from start to finish

Sam and Priya earn £42,000 between them and have saved £7,000. They reserve a £230,000 two-bedroom new build from a participating developer.

1. Deposit: £5,750 (2.5%). Their remaining £1,250 goes towards legal fees. As first-time buyers they pay no stamp duty on a £230,000 home.
2. Equity loan: £46,000, paid to the developer at completion.
3. Mortgage: £178,250 at 5% over 25 years, £1,042 a month. At 4.5 times income they could borrow up to £189,000, so the numbers work with a little room.
4. Years one to five: £1,042 a month plus insurance, council tax and any estate charge. No interest on the equity loan.
5. Year six onwards (assumed): about £67 a month interest on the loan, rising each year.
6. Year eight: they sell for £260,000. They repay 20% of that, £52,000, to the government (if the repayment works as it did under Help to Buy), clear the remaining mortgage of roughly £143,000, and keep about £65,000 before fees.

Run your own version in the calculator. Then read the pros and cons, because the same maths that helps Sam and Priya in year one costs them £6,000 more in year eight.