Help to Buy Equity Loans
What they are & how to pay them off
Help to Buy equity loans are an increasingly popular means of getting on to the housing ladder, with more than 236,000 properties purchased using the scheme since 2013. For some, it's the only way, but equity loans add another layer of complexity to the home-buying process. It's important to know exactly how they work, and their potential additional cost.
Coronavirus and equity loans
The Help to Buy Equity Loan scheme is continuing in its current form, despite the coronavirus outbreak. Do bear in mind though that the property market is moving slower than normal.
The scheme will be restricted to first-time buyers from 2021, and will end completely in 2023. We've asked the Government whether these deadlines are likely to be reviewed, in light of coronavirus. We've spoken to a number of mortgage brokers, who think it's more likely that the scheme will be extended in some form, rather than scrapped.
In this guide
Help to Buy equity loan: the basics
Launched in 2013, the Help to Buy Equity Loan scheme is designed to help those who are struggling to save for a deposit for a home to get on to the housing ladder.
An equity loan, worth up to 20% of a property's value (or up to 40% in London), is used by a potential buyer to 'fatten up' their deposit. A bigger deposit gives you access to better mortgage rates, and you also don't have to worry about paying interest on the equity loan for the first five years.
Equity loans are only available to first-time buyers or previous homeowners who no longer own a property. From 2021, only first-time buyers will be able to apply.
You can only use an equity loan to purchase a new-build property in England, worth up to a maximum value of £600,000. You'll need to be able to put up at least a 5% deposit to be accepted on to the scheme.
How do equity loans help in practice?
In effect, the loan 'tops up' your deposit – the aim being to give you access to cheaper mortgage rates. It also means you could potentially afford to buy a more expensive property.
In short, this is how the numbers work:
- You put up a 5% deposit (this is the minimum).
- You borrow up to 20% of the value of the property you intend to buy (this is the equity loan).
- You apply for a mortgage to cover the remaining cost.
Here's an example... let's say you want to buy a new-build home worth £200,000. Using the equity loan scheme you could put down a 5% deposit (£10,000), apply for an equity loan worth up to 20% (£40,000), so you'd only need to get a £150,000 mortgage. Interest becomes payable on the equity loan after five years.
Technically, an equity loan doesn't have to be paid back until the end of your mortgage term (max 25-year term), or when you come to sell your property – whichever is sooner.
However, many people opt to pay back the loan sooner (for example, by adding the equity loan to their mortgage). A benefit of doing this is avoiding having to pay interest on the equity loan (you still always pay interest on the regular part of your mortgage), which kicks in after five years. More on how to repay the loan below.
The Help to Buy scheme is run by Government-appointed agents.
According to the official website, the agents can guide you through the purchase, from answering general questions to dealing with your application. To find out who your local agent is, you can search here.
Alternatively, if you're already viewing new-build properties, look out for the Help to Buy logo and ask the developer about the scheme.
In short, yes.
The rules state that you must provide at least a 5% cash deposit, and take out a mortgage for at least 25% of the value of the property. So in theory, you could put down a 30% deposit, get a 20% equity loan and take out a 50% mortgage.
A Help to Buy scheme also exists in Wales. Its structure is similar to the scheme in England, the main difference being that you can only purchase a property worth up to £300,000. The loan is also interest-free for the first five years. For more information, see the Welsh Government website.
Scotland also has a Help to Buy scheme (known as the Affordable New Build Scheme) available on new-build properties worth up to £200,000.
The Scottish Government provides a loan worth up to 15% of a property's value while you provide a 5% deposit, meaning that a mortgage for 80% of the property's value is required. The loan is interest-free for the ENTIRE duration of the term.
Unfortunately there's no Help to Buy scheme in Northern Ireland, but there are other options available for those struggling to get together a deposit.
For some people, using an equity loan is the only option to get on to the housing ladder.
There's no denying though that using an equity loan adds another layer of complexity to the process of home-buying. Plus, if you stick with an equity loan, the home-buying process could potentially end up costing you £1,000s or even £10,000s more than a standard mortgage.
Here are a few important things to bear in mind before you decide to go ahead:
Using an equity loan isn't your only option if you've got a small deposit. In recent years, the number of mortgages allowing you to borrow 95% of the property's value has increased. And by and large they have become cheaper. You can search for and compare the best mortgage deals using our Mortgage Best Buys tool.
It's also worth seeing if you can put together a bigger deposit than 5%. A deposit of 10% or more can really help you access cheaper mortgage deals, as rates become cheaper the smaller your loan to value is – loan to value being the percentage of the property's value that you borrow as a mortgage. The greatest drop is between 5% and 10% (see table below). See more in our How much can I borrow? guide.
Here's an example of how standard mortgages get cheaper.
|Deposit size||Best interest rate||Monthly cost||Yearly cost|
Including fees. Best rates as of February 2020. Mortgage term 25 years.
Using a Help to Buy equity loan will likely mean that your monthly mortgage payments are cheaper than if you take out a 95% loan-to-value mortgage – ie, if you borrowed 95% of the property's value.
There are two reasons for this. Firstly, it's because an equity loan will mean the size of your mortgage is smaller (therefore interest is applied to a smaller sum). And secondly, the rate of interest you pay is also lower because your loan to value (explained in the table above) is also smaller.
BUT... once five years have passed, your monthly and yearly costs will probably increase. That's because:
You start paying interest on your equity loan from year six.
While interest begins at only 1.75%, this increases each year by the Retail Prices Index measure of inflation, plus 1%, until the loan is paid off (full info on how this work is below). This will likely cost you £100s more in payments each year, and will be charged until you repay the equity loan. And remember, the paying of interest doesn't go towards the actual repayment of the equity loan itself.
When you take out an equity loan, the Government then owns a stake in your home. If your equity loan is equivalent to 20% of the value of your property, the Government essentially owns 20% of your home until you repay the loan.
And whatever percentage the Government lends you through the equity loan scheme, it will be owed that same percentage when the equity loan is repaid – EVEN if your property has increased in value. For example...
Let's say the Government lent you £40,000 (20%) to buy a £200,000 property in 2019. You pay back the loan in 2029, but your home is now worth £250,000. You would now owe the Government £50,000, as that is 20% of £250,000 – a £10,000 jump in what you initially borrowed.
This is a big issue, as by the time you repay the equity loan, if your home has increased in value then you'll likely be paying back way more than you borrowed in the first place. Of course, you'll still benefit from your property increasing in value, but just not as much as you would have done if you'd bought using a standard mortgage in the first place.
On the other hand, if your home depreciates in value then the cost of your loan will also decrease, which is a positive. However, decreasing property prices can mean other issues, such as negative equity.
Many people decide to wipe the equity loan by adding its cost to their mortgage. Typically they do this five years after taking out the equity loan, because of the interest kicking in from year six. While you may have swerved interest payments, your mortgage payments will likely increase (something which might possibly put you in a higher LTV band, meaning the rate you get might not be as good).
How much is added to your mortgage will depend on what your property is now worth. If its price has increased since purchase, the cost of your equity loan will also have grown (remember, the equity loan covers a percentage of the value of your home, ie, if you borrow 20% of its original value, you'll repay 20% of its current value). In other words, the more your property increases in price, the more that'll be added to your mortgage.
If you decide to sell up and move home, you'll need to repay the equity loan (this is one point at which you must repay it).
For those who sell up and buy another property, the fact that you have to repay your equity loan means that you'll have £1,000s or £10,000s less for the new purchase. On the other hand, somebody who has a standard repayment mortgage will receive all the proceeds from the sale of their property.
How much less cash you'll have left over will depend on what your property is now worth. As above, if its price has increased since purchase, the cost of your equity loan will also have grown (remember, the equity loan covers a percentage of the value of your home, ie, if you borrow 20% of its original value, you'll repay 20% of its current value). In other words, the more your property increases in price, the more repaying the equity loan will eat into the funds generated from you selling up.
The latest point at which you can repay the equity loan is at the end of your mortgage term (the longest this is allowed to be is 25 years). For those who don't pay back the equity loan until this point, the cost of the equity loan will likely be greatest.
Over that time, a property could easily have increased in value twofold. For example, your home bought originally for £200,000 may well now be valued at £400,000, meaning your £40,000 equity loan will now cost you £80,000.
If paying this back coincides with retirement, illness or a reduced income, for example, this could spell difficulties financially.
When do I start paying interest on my equity loan?
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...
- Interest kicks in on the fifth anniversary of your equity loan (ie, from year six).
- The initial rate starts at 1.75%.
- This increases each year by the Retail Prices Index (RPI) 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, this is how your interest repayments could look (including the £1 monthly management fee you'll have to pay from the start until the interest kicks in):
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 property 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.
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.
Interest payments could become even more expensive depending on which day of the year your home is purchased.
MSE research has shown that the cheapest months to use Help to Buy are between January and March, with December being the most expensive. This bizarre quirk could end up costing some homeowners thousands over the life of a mortgage. You can read more about this in our MSE News story.
If paying these 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 it 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.
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I've already got an equity loan. How can I best pay it back?
As mentioned above, while interest becomes payable on the equity loan after five years, the loan itself doesn't have to be repaid until you sell up OR you reach the end of your mortgage term (specified as after 25 years).
If you want to pay off the loan sooner, this can be done in one lump sum or in parts, something known as 'staircasing'. The minimum payment must be equivalent to 10% of your home's value.
So if you're reaching the end of your interest-free period, here are three possible options:
You could remortgage your current mortgage (the traditional mortgage you took out alongside the equity loan) – this is one of the most popular options. This could be done in two different ways...
- Remortgage your standard mortgage and keep the equity loan separate.
- 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 remortgaging is the best option for you will depend on factors such as these:
- Payments will need to be manageable: Don't stretch yourself with a massive mortgage unless it's affordable.
- Are you currently within your mortgage term? If you leave a fixed or 'tracker' mortgage period early, you could face big penalties. Read our Should you remortgage? guide for more info.
If you decide to go ahead and remortgage, you'll have to pay an admin fee of £115 or £200 (depending on whether you're partially repaying or fully repaying) to the administrators of the Help to Buy Equity Loan scheme. More information on this can be found on the MyFirstHome website.
As you can see, this is complex, so it's worth speaking to a mortgage broker to discuss the options available to you. Our Cheap Mortgage Finding guide lists some of the top brokers around.
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 separate, 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 its 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.
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. 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.
You don't have to pay off the whole lot in one go. But rules mean you have to repay at least 10% of the property's current value – or the whole loan amount.
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 an 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 (£115 if staircasing). That's on top of any other fees you face. A list of charges is available via MyFirstHome.
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 the 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.
Remember, when you sell you'll have to pay back the Government loan in full, worth up to 20% of the sale price (whether your home's value has risen or fallen).
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