The Help to Buy Equity loan comes with a 5 year interest-free period. When you reach the 5 year mark, what choices are available to you?.
Remember that exciting moment when you used the Help to Buy scheme to step onto the property ladder? Well, congrats, you’ve now reached a significant milestone: the end of your interest-free period. But don’t fret, this isn’t the end of the road, just a new chapter in your homeownership journey
Let’s dive into what happens after 5 years of Help to Buy and explore the various repayment options available to you.
The 5-Year Mark: What to Expect
You relished the sweet relief of living interest-free on your Help to Buy loan for the first five years. However, after this grace period, things change. Here’s what you can expect:
- Interest kicks in: Starting from year six, you’ll be charged an annual interest rate of 1.75% on the outstanding loan amount. This rate increases each year in line with the Retail Price Index (RPI) plus 1%.
- Monthly payments: You’ll start making monthly payments to cover the accrued interest on your loan. Remember, you’re only paying the interest, not the actual loan amount.
- Rising costs: As the interest rate increases annually, your monthly payments will gradually climb, potentially impacting your budget.
Navigating Your Repayment Options:
Knowing the post-5-year scenario, let’s look at the various approaches you can take to your Help to Buy repayment:
Option 1: Pay the Interest
This option involves diligently making your monthly interest payments as they become due. This is a simple method, but it’s important to make sure your budget can handle the growing expenses and account for the rising interest rates.
Option 2: Pay Off the Equity Loan
You might think about paying off some or all of the equity loan if you were able to save money during the interest-free period. This eliminates future interest payments and gives you greater control over your finances. But keep in mind that you have to pay back the loan in full at once, or in half. You cannot pay it back in installments. To ascertain the present loan amount, you will also require a property valuation.
Option 3: Sell the House
It may be a good idea to sell your property, particularly if its value has substantially increased. This enables you to use the proceeds from the sale to pay back the loan and possibly turn a profit. But be aware of possible negative equity scenarios in which the value of the property has decreased and you no longer have enough money to pay back the loan and proceed.
Option 4: Remortgage
Remortgaging your property can be a strategic move, allowing you to consolidate your mortgage and equity loan into a single loan with potentially lower interest rates. However, this option requires careful consideration as remortgage options for Help to Buy schemes are limited, and you’ll need to have at least 10% equity in your home.
Making the Right Choice:
The ideal repayment plan for you will rely on your unique situation, your financial objectives, and the state of the real estate market. Here are some factors to consider:
- Your financial situation: Assess your current savings and ability to make additional payments.
- Property value: Consider the current market value of your property and its potential for future growth.
- Your long-term plans: Do you intend to stay in the property for the long haul or plan to move in the near future?
- Interest rate trends: Analyze historical and projected interest rate trends to understand the potential impact on your repayments.
Seeking Expert Advice:
Consulting a financial advisor or mortgage expert can be invaluable in navigating your Help to Buy repayment options. They can provide personalized guidance based on your unique situation and help you make informed decisions for your financial future.
Remember, the Help to Buy scheme was designed to assist first-time buyers in achieving homeownership. By understanding your repayment options and making strategic choices, you can continue to enjoy the benefits of owning your own home.
So, take a deep breath, analyze your options, and make the decision that aligns best with your financial goals and aspirations.
Applications for the Help to Buy Equity Loan Scheme are currently only available in Wales. This article is for people who already own a Help to Buy property in England and Wales.
If you purchased a home through the Help to Buy Equity Loan Scheme, you are aware that for the first five years that the government provides the loan amount, you are not required to pay interest. At the end of the 5 years, interest is set at 1. 75% and will rise in line with Retail Price Index plus 1% year on year. For many, paying this interest on top of their mortgage, especially as it increases, can be problematic. So what can you do?.
- Pay the interest: The first option is to save up the money necessary to pay off the interest if you have planned for the interest to start accruing after five years and you plan to remain in your house for a considerable amount of time. But since the interest rates go up the longer you own the property, this is really just a temporary fix and might not be the wisest use of your money.
- Pay off the equity loan. You might have saved money for the loan’s principal during those five years. This might or might not be achievable depending on the amount of the loan you took out. The bad news is that you can’t pay back the loan in installments; you can only pay back half of it or the entire amount. You will need to obtain a property valuation in order to pay off the loan, as the amount you owe will be based on the current value of your property rather than the value when you purchased it. An additional expense that must be considered is the valuation.
- Sell the house: Several participants in the program appeared to have anticipated living in the home for five years before selling when interest began to accrue. This makes sense in some situations, particularly in the South where property values have risen (though keep in mind that this would also mean the amount of the equity loan has increased). The issue arises in areas where property values have dropped, potentially leaving you with little or no equity. There are situations where owners would have to stay and pay the interest or sell at a loss because they would not have enough money to make a sufficient deposit to move.
- Remortgage: Although there are many Help to Buy mortgage lenders available, not many of them handle remortgaging under the program. The four banks that presently provide a refinance require you to have 2010% equity in your house, which does not include your original deposit. The best course of action during the first five years of interest-free mortgage repayment, if you intend to remortgage to pay for the equity loan, is to overpay as much of the mortgage as you can. This will result in a more favorable rate for you when remortgaging. Remember that remortgaging and potentially overpaying will come with fees.
What are the main problems?
- Your ability to save money to pay off the loan will be hampered by the annual interest payments on your equity loan. The best course of action is to account for these costs and take a long-term perspective rather than to put your head in the sand.
- The buyer may have negative equity in lower-cost areas where property values have not increased, or they may not have enough of a deposit to sell and move out.
- Only the full amount (or, in the case of Scotland, in quarters) may be repaid on an equity loan.
- Remortgaging options are currently slim.
The secret to repaying your Help to Buy loan
FAQ
How do I pay back my equity loan?
How long has help to buy been around?
How can I pay off my home equity loan faster?
What is the interest rate for equity release?
How long does it take to buy a home with help to buy?
Because Help to Buy homes are generally on new developments (and may still be under construction), in common with most new home sales, you will normally be expected to arrange a mortgage and exchange contracts within one month of paying your reservation fee.
How long should I repay my help to buy loan?
You should aim to repay your Help to Buy loan within ten years, as costs can begin to spiral after that. If you are repaying by selling the property, you’ll need to meet Target’s requirements to get Authority to Complete. The Help to Buy administrator has now changed; please liaise with Homes England for customer services on your Help to Buy loan.
What happens at the end of a help to buy loan?
At the end of the Help to Buy term (usually 25 years) you will still have this capital to repay. If you do repay back some of your equity loan, your interest repayments will reduce. The smallest repayment you can make is 10% of the current market value of your home. When is Help to Buy ending for new applications?
When is the cheapest time to use help to buy?
MSE research has shown that the cheapest months to use Help to Buy are between January and March, with December being the most expensive. This bizarre quirk could end up costing some homeowners £1,000s more over the life of an equity loan. When you take out an equity loan, the Government owns a stake in your home.