How to Pay Off a Help to Buy Loan
What is an Equity Loan?
The UK government’s Help to Buy equity loan scheme was designed to help those struggling to save for a deposit for a home to get on the housing ladder in England by providing a loan worth up to 20% of the property value (40% in London).
The scheme closed to new applications last year after giving out a whopping £22.5 billion in equity loans.
A major benefit of the loans was that they were interest-free for the first five years, after which borrowers started paying interest. The initial rate in year six is 1.75%, but it increases every April by the Consumer Prices Index (CPI) measure of inflation plus 2% until the loan is paid off. Given the recent rises in the inflation rate, this could mean a significant increase in interest payments for many.
How to Pay Back an Equity Loan
You can repay an equity loan at any time, although you must do so if you sell your property or come to the end of your mortgage term, whichever happens first. With so many variables involved – including inflation rates and the property’s value – there isn’t necessarily a best time to repay the loan, although aiming to do so before interest kicks in would always be a good idea. However, you need to be aware of a few things when planning to pay back the amount borrowed.
1. The 10% Rule
While you can pay back the loan at any time, and you don’t have to pay it all off in one go, you do have to repay at least 10% of the property’s current value. So, if you took out a 20% loan, you could make two payments of 10% each or one full payment of 20%. However, if you took out a 15% loan, you’d have to repay it in one go. Remember, the Help to Buy loan will be repayable at the market value of your property at the time of repayment, not the value when you bought it, so whether paying off the loan in part or in full, you’ll need to have the property valued by an RICS-accredited surveyor.
If you want to repay your loan but don’t have the funds to do so, it is possible to remortgage and borrow more to settle the loan. Obviously, this will depend on your financial situation as you’ll need to be sure you can meet the higher mortgage payments – and always check for any penalties if you’re remortgaging within your mortgage term. Remortgage options can be pretty limited, and most lenders will require you to have 10% equity in your home, not including your original deposit. So, if this could be an option for you making overpayments on your mortgage in preparation can be sensible.
3. Other Costs
Whenever and however you repay, be aware that there will be additional costs to factor into any budgeting. For example, you’ll be responsible for the valuation fee. You’ll also need to appoint a solicitor to manage the legal repayment processes and ensure all the necessary paperwork is completed. There is also a £200 admin fee whether paying off all or some of the loan.
4. The Valuation
Getting the right Help to Buy Valuation is a vital part of making sure the process of paying back your equity loan runs smoothly, whether you’re remortgaging, repaying your loan or selling the property. Target, which manages the scheme on behalf of the Homes and Communities Agency (HCA), has strict rules that must be followed, including that your valuer is RICS qualified, so it’s important to use a firm that understands Help to Buy valuations and is experienced in this area.