The Help to Buy Equity Loan Scheme was introduced to help people with lower deposits to enter the property market for the first time, by providing a 20% equity loan that was interest-free for the first five years of property ownership.
Since it was launched in April 2013, the scheme has resulted in the Government advancing loans in excess of £16 billion towards homebuyers, with 58% of first time buyers purchasing using the minimum 5% deposit. In the 12 months leading up to March 2021, a record 45,965 Help-to-Buy loans were issued to first time buyers (Source: Dataloft), proving that the scheme continues to prove popular among buyers.
Whilst the previous scheme ran until March 2021 (replaced by a new scheme only eligible for First Time Buyers) one key question remains:
What should you do when the initial five year interest-free period comes to an end?
The Help-to-Buy Equity Scheme enables people to buy a new-build property with a small deposit as low as 5%. The Government then lend up to 20% of the cost of a newly built home, and up to 40% in London. When combined with the deposit saved and the repayment mortgage, the equity loan covers the total cost of buying your newly built home.
Recipients of the equity loan do not pay interest on the equity loan for the first 5 years, with interest payments starting in year 6 on the amount borrowed on the equity loan. The equity loan payments are interest only, so payments do not reduce the amount owed.
With this in mind, there are a few different approaches you can take at the end of the five years:
Pay the Interest
Once the initial 5 year interest-free period is over, you can choose to only pay the interest for the equity loan. However, as the interest rate increases every year and the amount owed does not reduce, this should only be seen as a short term solution.
The monthly interest fee is 1.75% of the equity loan. The interest rate will rise each year in April by the Consumer Price Index (CPI), plus 2%. You will continue to pay interest until you repay your loan in full.
2. Pay off the Equity Loan
If you have been able to save during this 5 year period, you may be in a position to pay off the loan. This cannot be repaid in instalments, it must be repaid either in half or in full. The equity loan can be repaid either:
- at the end of the equity loan term
- when you pay off your repayment mortgage
- when you sell your home
- if you do not follow the terms and conditions set out in the equity loan contract, you may be asked to repay the loan in full
Whilst it isn't a straightforward process and not every lender currently deals with remortgaging on the scheme, it is possible to remortgage your home in order to cover the equity loan. The lenders require you to have at least 10% equity in the home, not including the original deposit.
For a quick insight into remortgaging, use our Mortgage Calculator below. However, given the complexities of this route, we highly recommend speaking to our Mortgage partners About Mortgages for specialist, impartial advice on the topic.
4. Sell Your Home
If property prices have increased, it can be a great idea to move home once the interest free 5 year period has come to an end. You will be required to pay back the equity loan from the sale. If property prices haven't risen, you may end up with low or negative equity, and struggle to form a decent deposit to move.
What is best for you?
Whilst every situation is different, it is always best to act early, especially as interest payments rise year on year. Choosing the right plan of action depends on a range of factors such as location, changes in property prices, whether you want to move again, and what you can afford to do.
To help you with this complicated decision, we are always here to help. Please contact us for free and impartial advice, we would love to help!