The Help to Buy equity loan scheme has been around now since 2013, and with many people coming to the end of their five-year interest-free period on their Help to Buy equity loans, many are asking the same question – what are my repayment options? The good news is that there are a few different routes that you can take when paying back the equity loan – and we at Mortgage Light have experts that can help you decide which is best for you.
Firstly, let’s explain a little more about the Help to Buy equity loan
The Help to Buy equity loan is a government scheme designed to make the property ladder more accessible for those who are struggling to save for a house deposit. When it initially launched it was available solely to first-time buyers however, it is currently open to anyone looking to move into a new build property in England. There are similar schemes available in Wales and Scotland however, they are subject to slightly different rules.
With the Help to Buy equity loan, you can purchase any new build in England that costs below £600,000. You will need to put down a minimum of a 5% cash deposit. Then you will be provided with an equity loan from Homes England which can be up to 20% of the value of the property (40% in London). This makes up the rest of your deposit. The remaining 75% of the value of the property (55% in London) is funded by a Help to Buy mortgage.
Your equity loan is provided interest-free for the first five years. After five years, you’ll start to incur a fee of 1.75% of the loan value, and this fee increases each year by a further 1%, plus any increase in the Retail Price Index. This fee does not contribute towards the repayment of the loan amount. Your equity loan must be fully repaid upon sale of the property from the sale proceeds, or after a maximum of 25 years.
How do you repay the Help to Buy equity loan?
There are a few different ways that you can repay your Help to Buy equity loan. It doesn’t need to be repaid until you sell up, or until you reach the end of your mortgage term (specified as after 25 years), but if you wanted to pay off your loan sooner, you can do so at any time in one lump sum or parts (known as ‘staircasing’). The minimum payment that you can make must be equivalent to 10% of your home’s value.
The interest-free period of your equity loan is designed to give you some breathing space in the particularly strenuous time of purchasing and furnishing a house. However, if you’re reaching the end of this interest-free period and are thinking about beginning to pay off your Help to Buy equity loan before those 1.75% payments hit, here are your possible options:
- Sell up and move
You might decide to sell up and move. This way you’ll avoid paying the annual fee to Homes England on the equity loan, which kicks in after five years. You can then take your next step on the property ladder. You must repay your equity loan from the house sale proceeds and the amount to be repaid will be determined by the valuation/selling price of the property. If the value of your property has increased since you purchased it, say from £200,000 to £250,000, then your original equity loan of £40,000 (20%) will have increased to £50,000 (20% of £250,000).
- Stay put and pay the fee on the loan whilst you save up
You may be willing to simply start paying the annual equity loan fee, whilst you try and gather enough money together to pay off your equity loan – either in one lump sum or by staircasing with those 10% minimum repayments.
Perhaps you have managed to build up a significant amount of savings or have come into some money that can help you to pay off your loan. Remember, however, that house prices are rising as fast as you are saving. It may take a long time to get enough together to pay off the ever-increasing equity loan (as above, what started as a £40,000 loan on a £200,000 property would be a £50,000 loan if the property value increased to £250,000 whilst you were saving). In the meantime, that fee also increases each year by 1%, plus any increase in the Retail Price Index, so that will eat into your savings.
- Remortgaging to fully (or partially) repay the equity loan
One of the most popular ways of paying back the equity loan is by remortgaging. It’s always important to regularly check to see that you have the best mortgage deal for your circumstances – but especially when you have a Help to Buy mortgage. Although your mortgage options are generally more restricted, remortgaging with Help to Buy could allow you the opportunity to consider borrowing additional funds to repay some or all of your equity loan.
Whilst borrowing a larger amount will generally increase your monthly repayments, this will be offset, at least in part, by saving on the annual equity loan fee. Once you have fully repaid your loan and built up a little equity, you should also be able to access better mortgage deals.
Before you repay any amount of your loan, remember that your outstanding loan amount will depend on your property’s current market value. To determine this, you will need to have your home valued by a suitable RICS valuer. If your home has increased in value, you may have to pay back a higher amount than you originally borrowed. You will also need to factor in a few extra costs such as valuation fees, conveyancing fees, and admin charges.
Whether you simply remortgage your existing mortgage deal and keep the equity loan as it is, or remortgage at a higher level to wipe out some or all of the equity loan, be sure not to overstretch yourself with repayments that you struggle to meet each month. You should also be careful of leaving your existing mortgage term early, as you may be faced with early repayment charges, especially if you are currently in a fixed-term deal.
Unsure of which option is right for you? Don’t worry – we’re here to help and advise. At Mortgage Light, we are specialists in Help to Buy mortgages and remortgaging with Help to Buy. If you have any questions about your Help to Buy mortgage or repaying your Help to Buy equity loan, simply contact us. One of our friendly experts will be on hand to help.