What is Help to Buy Equity Loan?
Help to Buy is a government-backed scheme which helps first time buyers onto the property ladder. It was introduced by the government in 2013 and has been a huge success in helpingpeople buy their first home ever since. The scheme provides eligible buyers with an equity loan (also known as shared equity) of up to 20% (40% in London) of the value of a new build home, so the buyer only needs to raise a 5% deposit, with a 75% mortgage making up the rest. Essentially, with Help to Buy allows buyers to purchase a property with just a 5% deposit, making it a more affordable option for many.
The loan is interest free for the first five years increasing to 1.75% after. After this, the interest rate will increase each year based on the Retail Price Index. It is also important to note that the interest you are charged does not go towards paying down the equity loan.
What are your options to pay off your Help to Buy loan?
There are a few different ways that you can repay your equity loan. It doesn’t need to be repaid until you sell the property or come to the end of your mortgage term. However, you can pay back the loan earlier. This can be at any point after the completion of the purchase, and you can either pay the loan in full or make a partial repayment with a minimum repayment of 10% of the property value. So, what are your options?
1) Pay the interest – After 5 years, you begin to pay interest on your equity loan, this will be a fee of 1.75% of the total value of the loan. This will also increase year on year in line with the rate of inflation. It’s important to know that you will only be paying interest and your loan will not be reducing. If you opt for this, you must remember that if the value of your home increases, then your equity loan will also increase, resulting in you paying more when it is paid off. Not sure how much interest you’ll be paying? You can easily find a Help to Buy interest calculator online, we have linked one below from Taylor Chartered Surveyors:
Help to Buy Interest Calculator | Taylor Chartered Surveyors (taylorsurveyors.co.uk)
2) Sell up and Move – Many people signing up for the scheme seemed to think they would live in the property for 5 years, then sell up when the interest kicked in. In some cases, this is an excellent idea, especially here in the south where property values have increased (although as discussed above, bear in mind that this would also mean the equity loan amount has increased). The problem comes in places where property has decreased in value and you may end up with low or negative equity. In some cases, the homeowners would not have enough money to form a decent deposit to move on, and so would have to stay and pay the interest, or sell at a loss.
3) Pay off the Loan – If you have savings then you may choose to use these to pay off your loan. You will need to pay for a surveyor to value the property as the equity loan is based on current property value. The unfortunate thing about this is that you cannot pay off the loan in increments – you can either pay half of it, or the whole of it. The valuation is another cost that needs to be accounted for.
4) Remortgage – Remortgaging will allow you to pay off your equity loan and be left with one
mortgage to cover all of your borrowing. If your property purchase rises in the future, then
you will have saved money by paying your loan of earlier. If this is your plan, the best thing you can do in the first 5 interest-free years is to overpay as much of the mortgage as you can. This will give you a better rate when it comes to remortgaging. Bear in mind there will be fees associated with remortgaging and possibly with overpaying.
Take home points to remember:
• The equity loan interest payments will only increase year on year, cutting into your ability to save to pay off the loan. Taking a long-term view and accounting for these costs rather than burying your head in the sand is the best course of action.
• Lower cost areas where property values have not increased can leave the buyer with negative equity or not enough of a deposit to sell up and move out.
• You can only pay off the equity loan either in halves, or the total amount (in Scotland, you can pay off in quarters).
• Remortgaging options are currently slim.
How can we help?
Remortgaging is one of the most popular ways to pay back the equity loan. If you are considering repaying your equity loan in this way, we can advise you on a suitable mortgage and whether this is an affordable option for you. We are here to save you time and money by comparing deals across the market to find you the most suitable mortgage product.
It is worth noting that the outstanding loan amount will depend on your property’s market value. In order to determine this, you will need to instruct a RICS certified property surveyor to determine the value of your property. There will be a cost for this which you will need to cover.
If you would like to speak to an expert to get advice on this, we would be happy to help and typically do not charge you any fees for our service. Give us a call on 01844 390910 to book an appointment with one of our expert advisors.
