Help to Buy Equity Loans

What they are & how to pay them off

Help to Buy Equity Loans

Thousands of people who took out Help to Buy equity loans to get on the property ladder when they launched in April 2013 could face a financial shock this year – when interest kicks in on their debt.

This is because you start racking up interest on the equity loan debt once you've had it for more than five years. In this guide we explain how the scheme – available on new-builds in England and Wales – works, how the interest on the equity loan will be added and what your options are if you're among those whose interest-free period is soon coming to an end.

The current Help to Buy equity loan scheme is ending in March 2021. It will be replaced by a new scheme, which will run from April 2021 until March 2023 - however, it will only be open to first-time buyers and have regional property price caps.

In this guide

How does the Help to Buy equity loan scheme work?

The Help to Buy equity loan scheme was launched on 1 April 2013 in a bid to help struggling first-time buyers or people finding it hard to move up the rungs of the property ladder.

First-time buyers AND people looking to move are eligible, but it's only available on new-builds in England and Wales. The scheme remains open – it ends in 2021 – so you can still take a loan out. In short it works like this...

  • You have to cough up a 5% deposit.
  • The Government then lends you up to 20% of the property price (or 40% if you're buying in London). This part is called the equity loan and it's interest-free for the first five years.
  • The remaining 75% is then covered by a standard mortgage.

Here's an example... Let's say you buy a home for £200,000 (outside London). Using this scheme, you put down a deposit of £10,000 (5%), and get a mortgage for £150,000 (75%). The Government will then plug the gap with an equity loan of £40,000 (20%).

In theory, this should give you access to competitive mortgage rates as mortgage providers will assess you based on a 25% deposit – instead of just 5%, where mortgage rates can be limited and expensive.

You don't pay a penny in interest on the loan for the first five years (although you have to pay a £12 management fee each year until the interest kicks in). This makes home ownership far more affordable for those who may struggle with monthly repayments.

You can use this money to buy a home worth up to £600,000 in England (or £300,000 in Wales).

How much can I borrow from the Government?

Equity loans can be worth as much as £240,000 in London (London Help to Buy equity loans launched in February 2016), £120,000 across the rest of England and £60,000 in Wales. That's considering the maximum qualifying property value.

Pros

You get a Government loan of up to 20% of the property's value, interest-free for the first five years.

You only need to borrow 75% of the value from the lender, reducing your loan-to-value ratio and giving you access to cheaper rates than on a 95% mortgage.

Cons

Interest kicks in after five years, and could amount to a chunky sum over time.

The Government will take the same percentage of the sale price as you opted for when you took out your equity loan (regardless of how much the loan was originally for) when the property is sold.

You can repay part or all of the loan early, but the Government will only accept this if it's a minimum of 10% of the property's current value.

Quick questions

When will I start paying interest?

You will have to start paying interest on the equity loan once you've had it for five years. Briefly, this is how it works:

  • You DON'T pay interest for the first five years.
  • From year six interest kicks in at 1.75%.
  • The rate increases every year after that at the RPI (Retail Prices Index) measure of inflation, plus 1% until the loan is paid off.

So if you bought a home for £200,000 with an equity loan of £40,000 (20%), this is how your repayments could look (including the £1 monthly management fee you'll have to pay from the start until the interest kicks in):

YEAR ESTIMATED RPI +1% (1) INTEREST FEE PERCENTAGE ANNUAL INTEREST FEE + MANAGEMENT FEE
1-5 n/a 0% £12/year
6 n/a 1.75% £700
7 6% 1.86% £744
8 6% 1.97% £788
9 6% 2.08% £832
10 6% 2.21% £840

You will only ever pay interest on the original loan amount. So let's say you borrow £40,000 on a £200,000 property...

If house prices rise and your home is now worth £250,000, you'll owe £50,000 as 20% of the property's value, BUT interest will still only be charged on the original £40,000.

How interest racks up

Over the years, repayments could become massively expensive – particularly as inflation rises. And if you've taken the maximum loan, you could face chunky interest charges.

For example, if you took the maximum £120,000 equity loan in 2013, you'd pay back £2,112 over the first year alone – that's £176 a month. And someone with a maximum equity loan in London would have to pay twice that amount – totalling £351 a month.

Bear in mind, this interest payment is ON TOP of your normal mortgage repayments for the 75% mortgage you first took out.

And remember you're only paying interest on the equity loan so the payments you're making aren't going towards wiping it out.

Alert. Who now has to start paying off the interest?

As you start paying interest on the equity loan after you've had it for five years, those who took out an equity loan when they launched on 1 April 2013 will now have to start paying interest. And with just over 6,000 loans taken out between April and September 2013, according to official figures, thousands of households should have either received their first bill or should expect it imminently.

However, that's just the first group of people affected. With 144,826 homes having been purchased using a Help to Buy equity loan between its launch on 1 April 2013 and 30 September 2017, according to the Ministry of Housing, Communities and Local Government, many more homeowners will have to figure out how they will deal with the added cost.

If you got a London Help to Buy equity loan, interest payments won't kick in until February 2021, as the London scheme didn't start until February 2016. But it's wise to be prepared for when they do.

Your options if you've got a Help to Buy equity loan

There are three options available for homeowners reaching the end of the interest-free period on their equity loan. You can try to remortgage, stay put and pay off the loan (or just the interest), or sell up and move somewhere else.

1. Remortgage

You could remortgage your current mortgage (the traditional mortgage you took out alongside the equity loan) – this is likely to be one of the most popular options. This could be done in two different ways...

- Remortgage your standard mortgage and keep the equity loan.
- Remortgage to wipe out some or all of the equity loan, meaning you'll likely end up with a bigger standard mortgage.

Whether or not the remortgaging options above are doable or the best options for you will depend on a number of factors:

  • Don't stretch yourself with a massive mortgage, unless you can afford it.

  • If you are, you could face big penalties if you try to change the deal too early.

  • This all depends on what remortgaging option you're going for. If you're remortgaging your standard mortgage to include the equity loan, you'll have a good choice of lenders to choose from. 

    But if you're just remortgaging your standard mortgage and keeping the equity loan, some lenders won't lend to you (the ones more likely to offer a mortgage here include Halifax, Barclays, Newcastle Building Society, Skipton Building Society and Leeds Building Society).

    Even if you can get a mortgage from a lender, you'll have to meet their affordability tests before being approved.

  • The interest rate you'll pay for the equity loan will be 1.75% in the first year you'll have to pay it back, meaning only the best mortgage deals will beat that.

    On the flipside, clearing the equity loan sooner rather than later could be worth it if you think property prices are likely to go up a lot in future. This is because if your home is worth less, you'll pay less to the Government, as it'll take the same percentage of the sale price as you opted for when you took out your equity loan. If the price of your home goes up later, that percentage will also rise.

    Whatever you decide, always make sure you do your sums before taking the plunge.

If you decide to go ahead and remortgage, you'll have to pay an admin fee of £115 to the administrators of the Help to Buy equity loan scheme. That's on top of any other fees you may face (such as mortgage fees). Find a list of charges here.

The best thing to do is to check your sums and work out how much remortgaging may cost you and save you – our Mortgage Best Buys list the current rates available.

As you can see, this is complex so it could be worth speaking to a mortgage broker to help navigate the mortgage maze. It'll search the market to find your options, and cover a huge range of lenders. Our Cheap Mortgage Finding
guide lists some of the top brokers around.

2. Stay put and pay off the interest or the loan

Another option is simply to stay put and start paying the interest or to see if you can get enough money together to pay off the equity loan (you're allowed to repay the loan early without selling your home).

The latter is worth doing if you can afford it, as you'll avoid interest charges – and get full ownership of your property. Otherwise, the Government takes a slice on sale. It's particularly worth considering if you think house prices are likely to go up a lot as it means you'll pay less to the Government as they'll take the same percentage of the sale price as you opted for when you took out your equity loan.

You don't have to pay off the whole lot in one go. But rules mean you can only repay a minimum of 10% of the property's current value – or the whole loan amount.

For example, let's say you bought a property for £200,000 and its value has risen to £260,000 over the past five years. You took an equity loan for £40,000 – but if you want to repay the full amount, this has now risen to £52,000.

Whether paying off the loan in part or in full, you'll need to have the outstanding loan amount assessed. This must be done by a RICS surveyor – find one here (RICS stands for Royal Institution of Chartered Surveyors). It'll cost about £200 for a valuation, but charges vary.

You'll also pay an admin fee of £200 to pay off the loan. That's on top of any other fees you face. Find a list of charges here.

3. Sell and move somewhere else

A final option is to sell up, particularly if the property's price has soared – and bank any profits after the loan is repaid from sale proceeds. This way you'll avoid paying any interest on the equity loan and you might want to take the next step on the housing ladder, or you might be ready for a change. When you sell, you'll have to pay back the Government loan in full, worth up to 20% of the sale price (whether its value has risen or fallen).

What if I can't afford the interest payments?

If you've no plans to sell up, you'll need to find a way to pay the loan interest.

If paying this is going to be a struggle, you can contact scheme administrators Target on 0345 848 0235 (or at MyFirstHome). It's vital you speak to them if you're falling behind with payments. This is because an equity loan is just like any other mortgage debt – a financial charge on your home – meaning if you fail to keep up with repayments you could end up seeing your home repossessed.

If you have any worries about paying the interest, or repaying the loan, you can find masses of info at MyFirstHome and at Help to Buy equity loan.

When do I repay the actual equity loan (NOT the interest)?

While you have to start paying interest on the equity loan after five years, you don't actually have to repay it until you sell up, or at the end of your mortgage term (which is after 25 years or whenever your 'traditional' mortgage term finishes) – whichever comes first.

The Government takes the percentage amount you still owe off the sale price. That's regardless of whether that sum is higher or lower than you originally borrowed – which could come as a shock to those in areas where house prices have soared.

For example, let's say you bought your property for £200,000, and sell for £210,000. If you originally took out a 20% equity loan, at £40,000, you'd now pay back £42,000 (20% of the sale value) to the Government. However, if house prices drop and your home is only worth £180,000 when you come to sell, you'd only have to pay £36,000 back.

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