Navigating the 5-Year Expiry of Your Help to Buy Equity Loan: A Guide for Homeowners
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
The Financial Conduct Authority do not regulate will writing, loans, credit cards or some forms of mortgage, tax advice, offshore investments and estate planning.
When the Help to Buy Equity Loan scheme was introduced in 2013, it provided an accessible pathway for first-time buyers to step onto the property ladder. It was later extended to become available for individuals purchasing a new-build property and hit peak popularity around 5 years ago. The scheme was particularly appealing because it offered an equity loan of up to 20% (40% in London) of the property's value, with the first five years being interest-free. However, as the 5-year mark approaches, many homeowners are now faced with an important decision on how to manage this loan moving forward, potentially higher mortgage rates have made this decision even more important. If you are in this situation, this guide will help you understand your options, using a real-life example to illustrate potential paths forward.
What is the Help to Buy Equity Loan?
The Help to Buy Equity Loan scheme was designed to assist first-time buyers in purchasing a home with a smaller deposit. It was later available against new-build properties meeting certain criteria. They are no longer available. Typically, a buyer would put down a 5% deposit, secure a mortgage for 75% (55% in London), and cover the remaining 20% (40% in London) with the Help to Buy equity loan. For the first five years, this loan was interest-free, making homeownership more affordable during that initial period.
However, after five years, the equity loan does not simply disappear. Instead, it begins to accrue interest at a rate of 1.75% of the loan value, increasing annually by the Consumer Price Index (CPI) plus 2.00%. This change can significantly impact your monthly outgoings, so it’s important to understand your options as the 5-year mark approaches.
Case Study: Sarah’s 5-Year Decision Point
Let’s consider a real-life example to illustrate the situation.
Sarah's Situation:
Property Purchased in 2019: £300,000
Help to Buy Equity Loan:20% (£60,000)
Mortgage: 75% (£225,000)
Deposit: 5% (£15,000)
Current Property Value (5 Years Later): £350,000
As Sarah's five-year interest-free period comes to an end, she needs to decide how to manage the equity loan. Here are her options:
Option 1: Continue with the Loan and Start Paying Interest
If Sarah decides to keep the equity loan, she will start paying interest at a rate of 1.75% of the loan amount, which will increase annually with inflation (CPI + 2%). This means her initial payment will be £1,050 per year, or £87.50 per month, which will rise over time.
Advantages:
Flexibility: She can continue to make interest payments and decide later to repay the loan when she has more financial stability
Lower interest rates: The prevailing interest rate on the Help to Buy equity loan is very likely to be lower than if she were to seek a mortgage from a lender in order to purchase the equity share
Disadvantages:
Rising Costs: The interest payments will increase annually, which could become burdensome if inflation rises.
Equity share: The government retains a 20% equity share in her home, meaning if the property’s value increases, so does the amount she owes. Conversely, if property prices fall however, her equity share falls in line with the government stake
Option 2: Remortgage to Repay the Equity Loan
Sarah could choose to remortgage her property to pay off the £60,000 equity loan. Given that her property has appreciated in value, she might be able to secure a mortgage for a higher amount to cover this repayment.
Advantages:
Full Ownership: By repaying the equity loan, Sarah would own 100% of the property, meaning she benefits fully from any future increases in property value.
No Interest Payments: She would avoid the risk of rising interest costs associated with the Help to Buy loan which have the potential to spiral upwards as the years go by
Disadvantages:
Higher Mortgage Payments: Remortgaging to cover the equity loan might result in higher monthly mortgage payments, depending on the interest rate and loan terms.
Lender Criteria: Sarah would need to meet her lender’s affordability criteria for the higher loan amount, which might be challenging if her financial circumstances have changed.
Option 3: Sell the Property
Sarah could decide to sell her property, repay the equity loan from the sale proceeds, and potentially use the remaining funds as a deposit for a new home.
Advantages:
Potential Profit: If her property has significantly appreciated, Sarah could walk away with a substantial profit after repaying the loan.
Fresh Start: Selling could allow Sarah to explore other living arrangements, perhaps in a more desirable location or a different type of property.
Disadvantages:
Market Conditions: If the housing market is suppressed, Sarah might not get a price that she’s happy with, limiting her options for buying a new home.
Moving Costs: Selling and buying a new property involves costs such as estate agent fees, legal fees, and moving expenses.
Option 4: Partial Repayment (Staircasing)
Another option for Sarah is to make a partial repayment of the equity loan, a process known as "staircasing." This would involve paying off a portion of the loan, reducing the government’s stake in her property. Under the current rules, she must pay of at least half of the equity loan.
Advantages:
Greater ownership: By reducing the government’s equity stake, Sarah would benefit more from any future property value increases.
Manageable Payments: She may be able to balance her new repayments by part-repayment/taking out a smaller mortgage to an amount that’s affordable, rather than committing to the full repayment.
Disadvantages:
- Ongoing Interest Payments: Sarah would still have interest payments on the remaining loan, although they would be lower.
- Multiple Transactions: If she staircases multiple times, she’ll incur additional valuation and legal fees each time.
Weighing Your Options
As Sarah’s example shows, each option has its own set of advantages and disadvantages. The right choice will depend on your personal circumstances, including your financial situation, future plans, and tolerance for risk.
Before making a decision, it’s important to consider:
- Your Financial Situation: Can you afford higher mortgage payments if you remortgage? Do you have savings that could cover a partial repayment?
- Market Conditions: Is now a good time to sell your property, or would it be better to wait?
-Future Plans: How long do you plan to stay in your current home? Are you looking to move in the near future?
Conclusion: Seek Professional Advice
The 5-year expiry of the Help to Buy equity loan is a crucial financial juncture that requires careful consideration. While this blog post provides a broad overview of your options, it’s important to seek tailored advice from a suitably qualified financial adviser who can assess your individual circumstances and guide you towards the best decision.
Remember, the decisions you make now will not only impact your current financial situation but also your long-term wealth and property ownership. By exploring your options and seeking professional advice, you can navigate this transition smoothly and make the most of your investment in your home.