April 2018 marks the fifth anniversary of the launch of the Help to Buy equity loan scheme, with early adopters now facing charges if they wish to continue with their loan.
The government scheme was launched in April 2013 to help first-time buyers in England onto the ladder by providing them with an interest-free loan worth up to 20% of a property’s value.
However, the loan is only interest free for the first five years after it is taken out, meaning that the first people to use the scheme will soon be charged interest to keep their loan.
Data from the Ministry of Housing, Communities and Local Government (MHCLG) shows the popularity of the scheme, with 144,826 homes being purchased using a Help to Buy equity loan between its launch on 1 April 2013 and 30 September 2017.
Around 5,500 of these purchases were made in the first six months after the scheme launched, and these will be the first to switch from being interest free to repayment loans.
Note that this guide covers the Help to Buy equity loan scheme for properties in England only. Similar schemes run in Scotland and Wales, administered by the Scottish and Welsh governments respectively.
What are my options?
Homeowners with a Help to Buy equity loan have three options;
- Start paying interest on the loan
- Remortgage to free up equity and pay off the loan
- Or sell the property and move elsewhere
We explain these options in detail below.
Paying interest on the loan
If you choose to keep the loan and start paying interest, you’ll be charged 1.75% in the sixth year after taking out the loan. This will increase in line with the retail prices index (RPI) + 1% each year until the loan is repaid.
MHCLG says interest will be added to the mortgage statement issued by your lender and can be paid bundled up with your mortgage payments.
The government says that a typical homeowner with a £40,000 equity loan will be charged £700 in the sixth year of their loan, plus the £12 annual management fee that they have paid since they joined the scheme.
| Start of year | Estimated RPI +1% | Interest fee percentage | Annual interest fee and management fee due |
| 1 | N/A | 0% | £12 |
| 2 | N/A | 0% | £12 |
| 3 | N/A | 0% | £12 |
| 4 | N/A | 0% | £12 |
| 5 | N/A | 0% | £12 |
| 6 | N/A | 1.75% | £712 |
| 7 | 6% | 1.86% | £756 |
| 8 | 6% | 1.97% | £800 |
| 9 | 6% | 2.08% | £844 |
| 10 | 6% | 2.21% | £896 |
Source: Ministry of Housing, Communities and Local Government, February 2018
While the interest rate on this loan is low compared to many high street loans, remember that this will increase your monthly mortgage payments.
Remortgage and pay off the loan
If your property has increased in value over the last five years you may choose to remortgage and release equity from your property to pay off the government loan.
You can choose to pay off either half of the loan - 10% of the property’s value - or pay off the full 20%.
When you pay off the loan, you must pay the government either 10% or 20% of your property’s current value – rather than 10% or 20% of the original purchase price.
This means if your house has increased in value since you purchased it, you will have to pay back the government extra cash.
You must also check whether your current lender will let you remortgage to another product.
Research conducted by mortgage advice firm Which? Mortgage Advisers shows that major lenders Nationwide and Santander do not allow their Help to Buy customers to remortgage. These customers will have to switch to another lender if they wish to remortgage.
Barclays, Halifax, HSBC and NatWest are among the lenders to offer Help to Buy remortgages, while Skipton Building Society told Moneywise it has launched a range of products specifically for Help to Buy equity loan customers who are looking to remortgage.
Sell the property
This may seem like a drastic option, but after five years in a property many people will be looking to make their next step up the ladder.
When you sell your current home, you’ll be required to pay back the government loan, and this will be worth 20% of the sale price rather than 20% of the original purchase price.
This is a good option if your house has increased in value and you wish to move up the ladder. It also means you avoid having to pay interest on the equity loan in future.
You must, however, repay the loan in full if you sell – you can’t transfer the loan to a mortgage on a new property.
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