The Help to Buy scheme is a desirable option for first time buyers as the government lends you part of your deposit, giving you more choice of which mortgage or property you choose. But these deals can be confusing to begin with, let alone to pay off, so we’ve outlined the most important factors involved in Help to Buy equity loans to help you understand where you stand.
What is a Help to Buy equity loan?
The Help to Buy scheme is run by the government and offers first time buyers a funded equity loan to help them get the best mortgage deal they can. The loan is restricted to properties worth under £600,000, and the homebuyer must have at least a 5% deposit to contribute, which the government will then top up to a maximum of 25%.
How to repay a Help to Buy loan:
A Help to Buy loan usually lasts for 25 years, with the first five years being free from interest. During this time, you will only have to pay your mortgage payments. In five years’ time the interest will become 1.75% and will rise 1% plus inflation every year. It is also good to be aware that this is a percentage of the value of your home, and an equity loan means that the bank owns a percentage of the property, so when the value of your home goes up, so will your payments to the government.
How much should I pay off?
Many new homeowners might relax knowing that they have five years before they need to start paying back any interest, but actually now is the best time to get a large amount of the loan paid off because it is interest free. In addition, your property is only going to increase in value, so it makes sense to start paying off the loan before it rises.
What if I want to pay off a lump sum of my equity loan?
If you’ve saved a large amount of money or perhaps received an inheritance or gift, you might want to pay some of your debt, and you can easily pay off 10-20% of your Help to Buy equity loan without any charges or penalties.
What happens if I don’t repay the loan in time?
Well 25 years is quite a long time and hopefully you’re in a position to be able to pay off most of the debt by then, but if you can’t, the bank will take the money it’s owed when you sell your house. This may sound like the easiest option, but actually it works more in the bank’s favour as your property will probably have risen in price by then, giving the bank a much bigger sum in return for its 10-20% investment. Keep most of the profit for yourself and pay the loan off before then.
What about remortgaging for an equity loan?
Lots of people ask us about remortgaging in order to pay off their Help to Buy equity loan, and this is a good question. Ordinarily, a remortgage could help to get you a better interest rate, and release some equity tied up in your home, but with a Help to Buy, you are restricted to a few banks who will approve the remortgage and the interest rates may not be as good as a standard mortgage.
In addition, you’ll need to have paid off at least 10% of the equity already before the bank will let you switch. The money that you get from any remortgage will also go on legal fees and valuations, which will take a decent portion out of the payment before you even start.
What other options are there?
Depending on your particular situation, it might be a better idea to use any money to pay off some of your mortgage, particularly if you are still in the first five years of your Help to Buy loan.
For example, if your mortgage is on a 3% interest rate and your Help to Buy loan is 0% and will take about six or seven years from the purchase date to reach 3%, it would make more sense to spend that six or seven years paying off a chunk of your mortgage and saving money on unnecessary interest in the long run, but again, you will need to speak to an expert about your individual situation – but don’t worry, we can help!
Give us a call on 0800 038 6446 to discuss your Help to Buy equity loan and see if we can help you with remortgaging, paying it off, or just understanding your situation a little better.