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Remortgage to clear a Help to Buy Equity Loan

June 4, 2021
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The Help To Buy Equity Loan scheme launched in April 2013. This Help to Buy scheme was intended to make it easier for those with a smaller deposit to get on the property ladder. For those people who took out this type of loan at the start of the scheme, you may have found that the interest-free period has now come to an end. So what should you do next?

You may find that your financial position is a lot different to when you first took out the loan. This leaves you with a few options to consider as you move forward. In this guide, we will explore the options available to you once your interest-free period comes to an end.

What is the Help to Buy Equity Loan Scheme?

This government-backed scheme was designed to help first-time buyers on the property ladder with a smaller deposit. It was only available on New Build properties in England and Wales worth up to £600,000 in England and £300,000 in Wales. The scheme was supposed to end in April 2021 but has been extended until March 2023.

The new Help to Buy Equity Loan scheme opened to applications in December 2020. Once this scheme took effect, the old scheme was no longer available.

The scheme works by offering borrowers an interest-free loan to help them buy a property. The full property value is secured in three parts:

  1. The borrower contributes a minimum 5% deposit.
  2. The government lends up to 20% of the property value, and 40% when buying a property in London. This loan is interest-free for the first 5 years.
  3. The remaining 75% of the property value is secured through a mortgage, usually on a 2 or 5 year fixed deal.

This is clearly an attractive prospect for borrowers who might struggle to secure a 25% deposit through savings alone. It allows borrowers to shop around for the best mortgage deal and save money on fees and interest rates.

What happens after 5 years?

Once your interest-free repayment period comes to an end, you will have to start paying interest on the remaining loan amount. This is on top of your mortgage repayments, so you could see your monthly repayments increase by quite a bit.

  • From year 6 onwards, you will pay 1.75% on the remaining loan
  • The interest rate will go up every year at the RPI (retail price index) plus 1% until you have repaid the full amount.

How Do You Pay Back Help To Buy Equity Loan?

Clearing the loan in the first five years is obviously the best way to avoid any additional charges, but this isn’t always that simple. Remember that the loan repayment is on top of your mortgage repayments, so you might struggle to clear the full loan amount in 5 years.

You have to pay back the loan in full either when you sell the property, or when your mortgage period comes to an end. If you sell your home, the government simply takes a percentage of the sale price. If your home has increased in value since you purchased it, you could end up paying back a lot more than you borrowed.

Can you remortgage out of an Equity Loan?

If you are in a stable financial position, you could consider remortgaging and clearing the equity loan. There are two options you can consider if you are nearing the end of your fixed term deal.

  1. You could remortgage and keep the equity loan. You will continue making repayments as usual.
  2. You could remortgage to pay off Help to Buy loan. This will incur an admin fee of £115.

The second option will leave you with a larger mortgage, so you need to consider if you can afford the bigger monthly payments. A mortgage broker can help you to determine if this is the right move. Make sure you stress test your finances to determine if you can afford the repayments and avoid defaulting.

Benefits of paying off the equity loan

If you want to keep the same property, you might want to consider raising the funds to pay off the Equity Loan. At the very least, start paying off the interest. Paying it off in full will help you to avoid interest charges, but this isn’t always an option unless you have the funds available.

If you cannot afford to pay off the loan, the government will continue to own a percentage of your property. This means that if you sell your home, the government will not simply repay what is owed, they take a percentage of the property sale. This could mean you lose out if house prices have increased.

Move house to pay off the loan

If you are thinking about moving house, another option would be to move house and pay off the loan in full. If the value of your property has increased, you could move to a less expensive area and have enough for a larger deposit. This would free you from interest charges and allow you to start fresh.

Is it worth paying off the Help to Buy Equity Loan?

This always depends on your personal circumstances and what you can afford. While the 5-year interest-free period might sound tempting, paying back what you can during this time is advisable. This will reduce the amount of interest you pay in the long term. There are a few key benefits to paying back your Equity Loan in full.

  1. If the property increases in value, you get to keep all of the profit. With an Equity Loan, the government owns a percentage of your property, so you might pay back more than you borrowed.
  2. You don’t have to worry about the interest charges piling up when the interest-free period comes to an end.
  3. When you come to remortgage your property, you will own a larger percentage of your home, giving you access to more lenders. This will allow you to shop around for the best possible deal.

If you do decide to remortgage, remember that this may come with additional charges. Lenders will typically have early repayment fees that are applied when you change mortgage products.

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