The first Help to Buy deals are now coming to an end

The Help to Buy scheme was rolled out in April 2013 and recently made headlines (albeit not necessarily front-page ones) by being rolled out to March 2023.  While it may be a matter of debate whether the Help to Buy scheme is a useful scheme to help those struggling with house purchases or just a backdoor hand-out to home builders which simply works to keep house prices artificially high, it is a matter of fact that the interest-free loan only lasts for five years, after which the government charges interest of 1.75% on the original loan amount, increasing each year by RPI plus 1%.  This means that from now until (currently) 2028, a percentage of home owners who have bought their homes using the Help to Buy equity loan scheme will be seeing their payments increase.

A reminder about how equity loans actually work In short, the government provided a loan of up to 20% of the purchase price of a new-build home in return for an equivalent stake in the property.  Buyers provided a minimum deposit of 5% and standard mortgage providers made up the difference.  The equity loan is interest-free for the first 5 years, after which interest becomes payable at 1.75% and then each year it increases by the retail price index +1% until the loan is paid off.  In effect, the equity loan functions as an interest-only mortgage in that you are only paying interest on the debt rather than repaying the debt itself, which lowers your monthly payments but means you are not making inroads into the sum originally borrowed.

Paying back your equity loan There are basically two ways to repay your equity loan.  One is to sell your property and give the government the appropriate percentage of the sales price.  The other is to have your home valued (by a RICS surveyor) and buy the government out of its share as a percentage of current market value.  NB: this is only possible provided that you are repaying a minimum of 10% of your home’s value.

Selling your current home If you are in this situation, you could take it as a sign that now would be a good time to take a good look at your living arrangements and think long and hard about whether or not they are right for you.  Home owning does have its advantages, but so does renting and if you’re unsure about where the future is going to lead you, it may be best to opt for the flexibility of renting until you have a clearer idea of where you are headed professionally and financially.

Staying put If your equity loan is now coming due, it presumably means that you have been in your current home for the last five years, paying off your main mortgage, in which case, you will hopefully have some equity in your property, especially if house prices in your area have risen since you made your purchase.  If you are confident that your are happy to stay in one place and able to finance a mortgage over the foreseeable future, then you may wish to streamline your life and potentially reduce the overall cost of your home by paying off the equity loan.  Be aware, however, that doing so will not necessarily reduce the cost of your purchase, since you will change from paying interest to the government to paying interest to a mortgage lender.  Assuming, however, you opt for a repayment mortgage you will, at least, be making inroads into the outstanding balance of the loan and you will also get the full benefit of any house-price rises after you have bought the government out of its share of your property. Your property may be repossessed if you do not keep up repayments on your mortgage.