Your Help to Buy Equity Loan is up and running – what happens after 5 years?

The following is based on our current understanding of ‘Help to Buy’ criteria which may change prior to publication of this article on 21.04.2020

Hands up those of you who remember when HM Government showed up with a much-needed shot in the arm for the housing market then?

Help to Buy Equity Loans from HM Government had arrived in 2013 and this enabled house buyers with modest deposits to get financial assistance when looking at buying a property. For the purpose of speed (and to make it easier for me) I am shortening the name of these loans to HTB throughout this blog.

To remind you, the scheme helped buyers with a 5% deposit and, providing they were buying a new build property worth less than £600,000 (in England different levels applied for Wales) they could apply to the government for an interest free loan of a further 20% (40% if you were buying in London) which meant that the you the buyer then had a deposit of 25%.

This made the banks and building societies happy as they only had to lend 75% of the value of the property being purchased.

To make this easier to understand, say you were buying a new build house from a developer for £100,000 (hypothetical of course… we both know that’s highly unlikely! Haha) but £100,000 is a nice round number for the mathematics behind this analogy.

So, £100,000 for a new build house.

You have saved up £5,000 and the government lend you £20,000 for 5 years interest free.

Happy days.

You have £25,000 deposit and Mr. Mortgage Lender will lend you the remaining £75,000 to buy your new house.

You’ve sorted your mortgage out, the solicitor does what they do and, in a few weeks, you are in your new home and filling it with all sorts of lovely stuff and a huge flat screen ultra HD telly, of course!

You pay your mortgage each month and an annual HTB admin fee of about £12.00.

All is well.

Then you crack on with life.

You pay your bills and time ticks away and before you know it 5 years is looming up on you and you start to wonder what happens next?

You probably got a 5 year fixed rate mortgage deal to run along side the HTB loan so you could budget effectively so the mortgage will need reviewing AND you will have to start paying back your equity loan as well.

Blimey it's all happening in 5 years’ time eh?

If you do nothing you have to start repaying the loan back to the Government at 1.75% interest rate from year 6 and then it moves to 1% above whatever the Retail Price Index is until the loan is paid off.

Either way your bills go up from year 6 until the loan is paid back.

The idea is that you pay a fair market rate of interest on this loan that the government has granted to you after the initial interest free period of 5 years ends.

What are the options then?

Well you can continue and pay the loan repayments as demanded by the HTB people or pay some or all of off if you can.

Now remember our earlier example - you borrowed £20,000 from HM Government on a house worth £100,000.

5 years down the road your house is now worth say £150,000, good eh?

So you say to yourself  ‘I know I will remortgage and pay off that £20,000 so I don’t have to pay it back’ however, as the loan was an EQUITY loan it means the Government want 20% of what your house is now worth and not just the £20,000 you borrowed from them.

So, your £20,000 has now turned into £30,000.

AND also…YOU have to pay for the Government approved surveyor to value your property so they can establish the value of your home and that will be separate to any remortgage process you are putting into place.

Or if you sell and move on, the HTB loan will still have to be repaid as you can’t transfer it to another property either.

What a head scratcher.

You only wanted your own place and a big flat screen telly!

Don’t Panic.

That’s what we are here for to work with you to go through your options and see how we can get you HTB debt free if we can, no promises but by looking at a re-mortgage for you with a different lender and raising additional money so you can pay the HTB loan off thins might begin to look a wee bit better for you.

Of course, all of this is subject to your ability to take on additional borrowing and maintain an increased mortgage but let’s have a chat and see if its something we can help with – we don’t charge for a chat!

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