If you own a Help to Buy home in England or Wales, you’ll need to pay interest on your equity loan after five years of ownership.
With this in mind, many homeowners seek to settle their loans when remortgaging, potentially saving hundreds of pounds a year in interest payments.
Here, Which? explains the remortgaging options available to people using Help to Buy, and provides a step-by-step guide to repaying your loan.
Help to Buy mortgages: the basics
You’ll need to put forward a 5% deposit, and the remainder must be covered by a mortgage.
Help to Buy has been very popular, especially with first-time buyers.
Official statistics show that more than 236,000 homes have been bought with an equity loan in England alone, with 192,000 of these going to first-timers.
Why do you need to pay off your equity loan?
When you take out a Help to Buy equity loan in England or Wales, you don’t need to repay it until you come to sell the property – but you will have to pay interest after the first five years. Equity loans are interest-free for life in Scotland.
Interest is charged at 1.75% in year six, a figure that increases every year by the level of the Retail Prices Index (RPI) plus 1%. RPI changes from month to month, and it is currently set at 2.2%.
The government uses a much higher representative RPI of 5% in its Help to Buy guidance.
Based on that figure, you’d theoretically pay the following interest on a £200,000 home bought with an equity loan of £40,000.
|Year||Estimated RPI (5%)+1%||Interest fee percentage||Interest and management fee (annual)||Interest and management fee (monthly)|
Source: Homes England
- Find out more: check out our full guide to Help to Buy remortgaging
Remortgaging at a higher loan-to-value
In an ideal world, the value of your home will have increased enough in the first five years to easily pay off the equity loan when remortgaging without increasing your monthly repayments.
But in a market where values are stagnating, that won’t be the case for some homeowners.
The good news is that some lenders will allow you to remortgage as high as 95% loan-to-value (LTV), meaning you can borrow more and settle the equity loan as part of the process.
The upside of doing this is that you won’t need to pay the interest and you’ll benefit from any future uplift in the property’s value. The downside, however, is that remortgaging at a higher LTV will increase your monthly repayments.
The criteria used by lenders for Help to Buy remortgaging vary, so you may find it helpful to speak to a whole-of-market mortgage adviser, who will be able to pinpoint the right deal for your circumstances.
The effect of mortgage repayments on your LTV
Assuming you’re remortgaging after five years, the repayments you’ve already made might have a greater effect than you realise.
Based on a £200,000 property, our calculations show that even if the value of your home has remained the same over five years, you could theoretically remortgage and pay off the equity loan while only increasing your LTV from 75% to 84%.
|Price increase after five years||Property value||Equity loan to repay (20% of value)||Remaining mortgage and equity loan after five years||New loan-to-value required|
Note: Our calculations are based on a £200,000 home bought with a £10,000 deposit and £40,000 equity loan with a 25-year mortgage at a rate of 3%.
If your home has increased in value by significantly more than this in the first five years of ownership, you might find that you can pay off the equity loan when remortgaging and reduce your LTV level at the same time.
One word of caution – it’s important to bear in mind that these figures are just estimates and will vary depending on the specifics of your property and your mortgage deal.
Using savings to pay off your equity loan
If you’ve got significant savings or have come into some money, you can settle your Help to Buy equity loan whenever you wish.
If you’re crunching the numbers, remember that how much you’ll need to pay off is based on the property’s current market value, rather than the amount you originally borrowed.
So, to use the example of a £200,000 property with a 20% equity loan, if the home is now worth £220,000, you’ll need to pay back £44,000, rather than the £40,000 you borrowed.
There are some additional costs, too. These include valuation fees, conveyancing fees and an administration charge of £200.
Paying off your Help to Buy equity loan: step-by-step
Whichever way you decide to pay off your loan, you’ll need to follow these steps:
- Obtain a valuation: have a valuation conducted by a Rics Certified Surveyor. This will only be valid for three months.
- Instruct a solicitor: appoint a solicitor to undertake the conveyancing elements of paying off the loan.
- Pay the administration fee: complete the Loan Redemption Form and pay the administration fee of £200.
- Receive your redemption letter: you’ll now be sent a redemption letter including your estimated repayment figure.
- Authority to complete: your solicitor will arrange a completion date for the repayment, and the Homes and Communities Agency (HCA) will provide ‘authority to complete’.
- Money transfer: your solicitor will transfer the cash to the HCA and your equity loan will be settled.