Help to buy – Coming to the end of your interest-free equity loan period

Introduction – Help to Buy equity loan

Since it was launched in 2013, the popular Help to Buy scheme has enabled almost 170,000 households to buy homes; in almost all cases they would not otherwise have had the ability to buy. An extension to the successful scheme was announced in the Autumn 2018 budget, now making it available until 2023 for first
time buyers only ‘to ensure future support is targeted at those who need most help’.

This could benefit tens of thousands of extra buyers who are purchasing a new-build property, who under the scheme can get an extra 20% (40% in London) government loan, which is interest free for five years. If they also secure a mortgage from a bank or building society for 75% (55% in London), this means buyers themselves need to only find a 5% deposit.

As part of the changes, the government has also introduced new caps on house prices for qualifying
properties in different regions, to reflect the huge variations in prices across the country. London will continue with a £600,000 cap, whereas the caps in other regions have been changed to 1.5 times the average forecast first time buyer price in an area.

 

But what are the options for those coming to the end of the Interest Free period on their equity loan

Continue paying

If you haven’t paid your equity loan off by the end of the five-years, you’ll be charged 1.75% interest on the outstanding loan amount and this will increase by the Retail Prices Index (RPI) plus 1% each year. So if you haven’t already, you should start making provisions to repay the equity loan, as interest will start to add up considerably.

Sell the property

You can choose to sell your home, you’ll need to repay the equity loan in full. If the value of your property has stayed the same and your loan was 20% then your repayment will be 20% of the value of your home.

If the value of your home has increased or decreased the amount you pay will change by the same percentage. So, if your home is now worth 5% more than when you originally bought it you’ll owe an extra 5% of the original loan value.

Remortgage and pay the loan

You can choose to repay the equity loan by releasing equity from your property by Remortgaging. You’ll need to be aware of any changes in the size of your equity loan, from property price fluctuations for example, just as if you were selling.

For example, if the value of the original equity loan was £20,000 – below is indicative values of the amount owing when you come to sell.

Remortgage and keep the loan

You could remortgage and keep your
equity loan, the new mortgage must not
exceed the current mortgage and cannot
be longer than the entire term of the existing
mortgage. For example, if you remortgage five
years after taking a 25-year Help to Buy equity
loan, your current mortgage must not be
longer than 20 years. You will of course have
to start paying interest on your equity loan.

House value

Decreased by 5%
£19,000

House value

the same
£20,000

House value

Increased by 10%
£22,000

There are a number of options
when it comes to the end of your
five-year equity loan period.
Contact us and we can discuss
the right option for you.

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