The Old Help to Buy Equity Loan
What they are & how to pay them off
Help to Buy equity loans have been a popular means of getting on to the housing ladder in England, with more than 230,000 properties purchased using the scheme since it launched in 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.
NEW Help to Buy Equity Loan Scheme now up and running
This guide focuses on the OLD Help to Buy Equity Loan scheme in England, which has now closed to reservations.
- First-time buyer and interested in an equity loan? See our NEW Help to Buy Equity Loan guide for full information on how the scheme works.
- Already got an equity loan? If you've already got an equity loan or you reserved a property by 15 December 2020 and you're planning on applying for an equity loan, then you'll be part of the old Help to Buy Equity Loan scheme which is tackled in THIS guide – so read on.
Help to Buy equity loan: need-to-knows
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.
Plus, you don't have to repay the equity loan itself until you come to sell your property, OR at the end of your mortgage term (max 25 years) – whichever of these comes sooner. Here are a few quick need-to-knows...
First-time buyers and previous homeowners can apply
Under this format of the equity loan scheme, both first-time buyers or previous homeowners could apply. If you wanted to apply, you needed to have reserved a home with a homebuilder by 15 December 2020.
Coronavirus & Equity Loans
For those who reserved a home by 15 December 2020, to qualify for the equity loan both your home must have been built and the sale legally completed by 31 May 2021– a two-month extension on the previous deadline. If you and your homebuilder can't meet this deadline, you'll be unable to qualify for the equity loan.
More information about coronavirus-related delays, and what happens if you can't meet the deadline, can be found on the Gov website.
You'll need to be buying a NEW-BUILD home
Help to Buy equity loans can only be used to purchase new-build homes. In other words, you can't use the equity loan to purchase a home that's already been lived in.
Under the current version of the equity loan scheme, the property you're buying can be worth up to £600,000, but no more.
To find which homes in your area can be purchased using an equity loan, you can browse your local Help to Buy agent website. Currently there is an Agent for the North, an Agent for the Midlands and London and an Agent for the South. On these websites you simply type in the area you're looking to buy, and you can see which properties can be bought in that area using the equity loan scheme. It'll also list which building developers are involved in the scheme.
A minimum deposit of 5% is required
You'll need to have at least a 5% deposit to be eligible for an equity loan.
An equity loan worth up to 20% of the property's value can then be taken out. In effect, the equity loan 'tops up' your deposit – the aim being to give you access to cheaper mortgage rates. In short, this is how the numbers work:
- You put up at least a 5% deposit.
- 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.
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) and take out an equity loan worth 20% (£40,000), so you'd only need to apply for a 75% mortgage (£150,000).
The equity loan rules only 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. On a £200,000 property, a 30% deposit equals £60,000, a 20% equity loan equals £40,000, and a 50% mortgage equals £100,000.
The equity loan doesn't need to equal 20% either. You can borrow less than that if you wish. You could have a 10% deposit, a 10% equity loan and an 80% mortgage, for example.
An equity loan can be worth up £120,000 (or up to £240,000 in London)
Under the current version of the equity loan scheme the property you plan to buy must not cost more than £600,000.
The loan itself can be worth up to 20% of the property's value, or 40% if you're buying in London, so it'll cover a maximum of between £120,000 and £240,000, depending on where you live.
Important: Under the 2021-23 version of the equity loan scheme, regional price caps will be introduced which – in all areas except for London – will be lower than £600,000. We'll add more details about these price caps when reservations for this version of the scheme open in mid-December.
Remember. Whatever you borrow with an equity loan is separate to your actual mortgage. In effect, you will be taking out TWO separate loan agreements.
Equity loans are INTEREST-FREE for the first five years
One of the biggest draws of the equity loan scheme is that equity loans are interest-free for the first five years. If you pay back your equity loan in full by the time these five years are up, you will not have paid a PENNY in interest for it.
If you don't repay your equity loan by that point then you'll start being charged interest on it (remember this is separate to interest charged on your mortgage). In brief, here's 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.
Let's imagine that the RPI rate plus 1% equals 6%. If the interest rate in year six was 1.75%, then based on the 6% increase your equity loan interest rate for year seven would be 1.86%. So that's 1.75% divided by 100 and multiplied by six, which equals 0.105 (let's say it's 0.11). Add 0.11 to 1.75 to get 1.86%.
You will only ever pay interest on the original loan amount, despite the equity loan being equivalent to a percentage of your property's value. So if you borrowed £40,000 under the equity loan scheme, interest will only ever be charged on that £40,000.
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):
1-5 N/A 0% £12 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
Over the years, repayments could become very expensive – particularly as inflation rises. And if you've taken the maximum loan, you could face chunky interest charges.
Struggling with interest repayments?
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.
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'll still need to get a mortgage for the amount not covered by your deposit or the equity loan
If you're applying for an equity loan you'll still need to be accepted for a mortgage. The mortgage deal you apply for should be cheaper than normal though. That's because:
- The mortgage amount you're borrowing will be smaller (meaning interest being charged on a smaller sum).
- The interest rate you'll be charged will also be better, as rates generally get cheaper the smaller your mortgage.
Typically mortgages get cheaper at 90%, 80%, 75% and 60% loan-to-value (LTV). If you've got a 5% deposit and a 20% equity loan you'll only need to apply for a 75% mortgage, which'll have a cheaper rate than a 95% mortgage.
It's worth noting though that even if your LTV is smaller because you've taken out an equity loan you still might not get access to a mortgage lender's most competitive rates at that LTV band. That's because some lenders charge a small premium for mortgages where an equity loan is being used.
The difference is normally quite small, so it shouldn't feel too penalising. For instance, Barclays offers a two-year fix at 75% LTV for 1.70%, but if you're using an equity loan you'll pay 1.84%. On a £150,000 mortgage, 1.70% is equal to £614 a month (capital and interest repayment), while 1.84% is £10 more a month at £624.
Similar schemes are available in Scotland and Wales
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.
Taking out an equity loan? Key things to remember
For some people, using an equity loan is the only option to get on to the housing ladder.
However the use of an equity loan adds another layer of complexity to what is already a complicated process when it comes to home-buying.
Here are a few important things to bear in mind before you decide to take out an equity loan:
Equity loans can creep up in cost after five years
One of the draws of the equity loan – as discussed above – is that it can make homeowning more affordable for the first five years, as the loan is interest-free for that time.
It's important to remember though that interest on the equity loan kicks in after five years, with the rate increasing each year UNTIL you repay the equity loan in full. This interest can add £100s or even £1,000s onto your yearly costs.
Plus at some point you will need to repay the equity loan.
The Government owns a stake in your home, meaning you'll keep less of any price rise profit
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.
If your home has increased in value then by the time you repay the equity loan you'll have to pay back more than you borrowed. You'll still benefit from your property increasing in value, but what you owe the Government will also increase correspondingly.
Theoretically if your home depreciates in value then the cost of your loan will also decrease. However decreasing property prices can mean other issues, such as negative equity.
Equity loan versus normal mortgage – which wins?
Unfortunately there is no definitive answer to the question of whether using an equity loan is better than just going with a normal mortgage – there are just too many variables to say. Among these are house prices and interest rates, which will be two of the biggest factors that determine how much a mortgage or equity loan will cost you over its lifetime.
What we can show you though is roughly how much you'll need to pay in INTEREST over 25 years, depending on whether you're using an equity loan or not. This section has been written with those in mind who have a 5% or 10% deposit, who might be considering whether to use an equity loan to bolster their deposit.
Below we've compared these four scenarios in two tables:
- Table 1: Buying a £200,000 property with a 5% deposit of £10,000. Here we've compared a 95% repayment mortgage (£190,000) to a 75% repayment mortgage (£150,000) with a 20% equity loan (£40,000).
- Table 2: Buying a £200,000 property, but this time with a 10% deposit of £20,000. Here we've compared a 90% repayment mortgage (£180,000) to a 75% repayment mortgage with a 15% equity loan (£30,000).
The tables below outline the estimated total interest paid in each of these four situations after five, 10, 15 and 25 years.
We assume that in each scenario the standard mortgages are remortgaged every five years (so four times in all over the course of 25 years), and that house prices remain the same (very unlikely, we know). As we're using repayment mortgages, your loan-to-value (LTV) will drop with each remortgage, meaning access to better rates.
All of this informs the tables below, which outline the estimated total interest paid on each of these mortgages at five,10, 15 and 25 years. We assume that the equity loan is not repaid until 25 years, therefore where an equity loan is used, the interest shown is the total of both the mortgage interest and the interest due on your equity loan. Remember, interest becomes due on your equity loan after five years, and begins at 1.75%. It increases each year after that - in this instance we're estimating that interest will increase by 6% annually, so from 1.75% in year six to 1.86% in year seven, then to 1.97% and so on.
For the standard mortgages which haven't used an equity loan, the calculated total interest only refers to interest charged on the standard mortgage.
Interest paid on a £200,000 property Interest after 5yrs £9,993 £4,564 Interest after 10yrs £15,240 £11,876 Interest after 15 years £18,260 £19,446 Interest after 25 years £21,180 £38,147 (1) Assumes 25yr mortgage term and uses mortgage rates found in August 2020. Interest paid on a £200,000 property Interest after 5yrs £9,022 £4,564 Interest after 10yrs £13,873 £10,933 Interest after 15 years £16,514 £17,186 Interest after 25 years £19,315 £31,770 (1) Assumes 25yr mortgage term and uses mortgage rates found in August 2020.
Here are some snapshot findings from the tables:
- For the first five years, an equity loan will be cheaper in interest. The difference in interest paid between an equity loan and high-LTV mortgage is biggest during the first five years – partly as no interest-is due on the equity loan (though you'll still be paying interest on your standard mortgage).
- Even up to year 10, the equity loan might be cheaper in interest. We can't say for certain, but – based on the scenarios we've used – even if you only repaid your equity loan after 10 years it might still cost you less in interest overall than a high LTV mortgage.
- Beyond 10 years, the cost in interest of an equity loan can spiral. An equity loan will likely start costing you more in interest than a standard mortgage if you keep the equity loan for more than a decade. The difference is cost becomes most pronounced if you don't pay back the equity loan until the end of your mortgage term, ie after 25 years.
As a very rough observation therefore, the equity loan will likely cost you less in interest than a high LTV mortgage for the first five years at least – possibly even if you keep the equity loan for 10 years. After that point though, the equity loan will likely become more expensive than a high LTV mortgage (according to the variables we've used), and will become increasingly so until you repay it.
I've got an equity loan – how can I pay it back?
The rules are clear: you don't have to repay the equity loan itself until you come to sell your property, OR at the end of your mortgage term (max 25 years) – whichever of these comes sooner.
However you don't have to wait until either of these points. You can pay back the equity loan at any point you want. So when should you repay the equity loan?
We'll be straight: there's no easy answer to this... Without a crystal ball there are just too many variables present for us to say exactly when the best time is to repay. We've already shown how an equity loan might compare to a normal mortgage in terms of total interest paid, but even this relies on a number of variables staying fairly constant.
So if you are thinking of repaying your equity loan, here are a few things to consider:
The minimum you can repay is 10% of your property's value
You don't have to pay off the whole equity loan in one go. But the rules state you have to repay at least 10% of the property's current value (roughly half of the equity loan's value) – or the whole equity 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 – which'll cost you a fee.
You'll also have to pay an admin fee of £200 to the administrators of the Help to Buy Equity Loan scheme to redeem the loan (regardless of whether you're partly or fully repaying). More information on this can be found on the MyFirstHome website.
Got savings? Consider using those to pay off the loan
If you've got savings then these can be used towards paying off the equity loan. Not got a huge amount of savings? Ask yourself the following:
If you've not got savings with which to pay off the equity loan, or you simply don't want to use them, then you can consider paying it off by remortgaging.
- Will I have enough savings left for an emergency?
- Can I earn more interest in a top savings account than the amount of interest I'm currently paying for my equity loan? See more in our Should I overpay my mortgage? guide.
You can pay off the equity loan by remortgaging
If you've not got the savings to hand to clear the equity loan, you could consider remortgaging. Effectively, this means borrowing more on your mortgage to pay off what remains of your equity loan.
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.
- Check if you're 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.
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.
Don't want to pay back the equity loan or sell up? You can stay put
Remember you don't have to repay the equity loan until either you sell up OR at the end of your mortgage term (max 25 years).
This means that if you don't have the means to repay the equity loan (or simply don't want to), and you're not intending on moving homes, then you can simply stay put and hold onto the equity loan.
You'll need to take into account though that you'll be charged interest on the equity loan from year six onwards, and the rate will increase each year until you repay the loan. And as we've shown above, holding onto the equity loan for roughly 10 or more years can really increase the overall cost of using one.
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