Launched in April 2013, the Help to Buy Equity Loan scheme is something customers often want to hear more about. For those of you who took the scheme out in the year it launched, the free interest period has now come to an end, and you may find your finances are looking a whole lot different now.
In this article, we’ll talk about what an Equity Loan is, how and when the interest will be added, and what the options are for those whose free interest period is coming to an end.
Read on if you want to know more.
Firstly, let’s look at how a Help to Buy Equity Loan works
The Equity Loan is only applicable on new build properties in England and Wales (up to the value of £600,000 in England and £300,000 in Wales). It was due to end in April 2021 but has now been extended to March 2023. The aim of the scheme is to help first time buyers finding it difficult to get on the property ladder, or homeowners struggling to move up the property ladder.
The scheme can be broken down into three simple parts as follows:
- You contribute a 5% deposit.
- The Government will lend you up to 20% of the property price (40% if you’re buying a property in London). This is interest-free for the first five years, but you do have to pay a £12 management fee per year, until you start paying back the interest.
- The outstanding 75% is taken out as a regular mortgage (e.g. a two- or five-year fixed deal).
Paying back the interest
Seems pretty good on first view? Well yes, in theory, but don’t forget that once the loan reaches its five-year anniversary from the day you took it out, you will have to start paying back the interest. From year six onwards, the interest rate you will have to repay is 1.75%. The interest rate will increase every year at the Retail Price Index (RPI), plus 1%, until you have paid back the loan you initially borrowed. Remember, the interest you have to pay back is on top of your monthly mortgage repayments, so it’s important you have the funds in place for this when the time comes as your repayments could substantially increase.
Paying back the loan
You will have to pay back the equity loan, either when you sell the property or when your mortgage term comes to an end e.g. 25 years. If you sell your house, the Government will simply take the percentage amount that you owe off the sale price of your house, regardless of whether it’s higher or lower than the amount you borrowed. This means that if house prices in your area have increased, you may find you’re paying back a lot more than you borrowed. This can be a bit of a shock to those people who don’t plan ahead.
Remortgaging out of Help to Buy Equity Loan
Some people may be coming to the end of their current mortgage deal and are therefore looking to remortgage. If that’s the case, then there are two different options on how to approach this:
- You can do a normal remortgage and keep the Equity Loan alongside it, as you have been doing already.
- You can remortgage and get rid of the Equity Loan, or at least some of it (you will have to pay an admin fee of £115). This, however, does mean you’re likely to end up with a larger mortgage, but you can be assured you won’t be tied into the loan any longer.
Before you make this decision, we strongly recommend you speak to a mortgage adviser as you need to make sure you’re in a good financial position to be able to take on the extra mortgage payment without running the risk of defaulting.
Staying put and paying off the Equity Loan
You may also wish to simply stay put in your current home and either pay off the loan in full or at least start paying off the interest. Paying it off in full will save you having to pay for interest charges, but this depends on you having the funds in place to do this. If you can’t afford to buy yourself out of the Equity Loan, the Government will still own a share of your house and will take their cut when you do eventually come to sell up and move on.
If you want to pay back the loan, you can either pay it back in installments or the whole amount in one lump sum or in smaller instalments. However, it’s important to remember that you can only repay back a minimum of 10% of the property’s value. You will also need to have the remainder of the loan assessed which could cost around £200 for a valuation, as well as an additional admin fee of £200.
Paying off the Equity Loan when you move house
You may also wish to consider moving to a new house and paying off the loan, especially if you’re ready for a change anyway, or property prices have increased in your area. The Equity Loan will be repaid to the Government from the sale proceeds, so you won’t have to pay any further interest and you can benefit from the rest of the profits you make from the sale.
So, should you pay off the Help to Buy Equity Loan?
Well, this is all going to come down to your own personal circumstances and your financial situation. We would always contend that paying back any debts, if you can afford it is going to be the best option, especially as it saves you money in the long run.
Certainly, there are benefits of paying back the Government loan if the property increases in value. You can then take full advantage of this as you won’t have to hand any of it over to the Government. Secondly, you won’t have to worry about paying the interest after the five-year anniversary of taking out the loan. In addition, when the time comes to remortgage, you will have access to a wider range of lenders with more mortgage deals, so you’re likely to find the right one for you.