Help to Buy loans are a great way for people to get on to the property ladder who would otherwise struggle to afford a house deposit, but it can become expensive if you’re not careful about when you pay it back.
What is a Help to Buy loan?
Buyers who are looking to purchase a new build home may be eligible for a government loan of up to 20% of the property’s value. You must put down a deposit of at least 5% yourself, and secure a mortgage from a participating lender for the rest.
Learn more about Help to Buy here.
How does a shared equity mortgage work?
If you take out a Help to Buy loan, you’ll have what’s known as a shared equity mortgage. This means the government owns a share of the property’s value until the loan is paid off.
The loan and its repayments, therefore, relate to the property’s current value and not its purchase price. For this reason, you’ll be required to repay more money if house prices rise, or you could pay less than the initial loan amount if the property drops in value.
The loan must be paid off either when you sell the house or at the end of your mortgage term, whichever comes first.
How do you make the most of the interest-free period?
Help to Buy loans are interest-free for the first five years. You may be tempted to delay paying off the loan during this period, instead focusing on your mortgage repayments.
However, once the interest-free period is up, you’ll be charged an interest rate of 1.75% of the original loan amount. After this, the fee will increase annually at the Retail Prices Index (RPI) rate of inflation, plus a 1% management fee. This means the interest rate quickly ramps up, which can make the loan more expensive than a traditional mortgage.
It’s therefore wise to pay off the Help to Buy loan within the interest-free period to avoid these higher rates. Bear in mind what you must pay back is a percentage of the property’s current value, not what you paid for it. If house prices are likely to go up over that five-year period, it’s best to pay off the loan quickly.
Can you remortgage to pay off a Help to Buy loan?
If you’ve yet to pay off your Help to Buy loan when the interest-free period comes to an end, it might be worth remortgaging.
One way to do this is to keep your equity loan and reassess your mortgage. Remortgaging to allow for cheaper monthly repayments might give you extra cash to tackle the loan.
Another option is remortgaging to pay back some, or all, of the equity loan. This might result in bigger monthly repayments but avoids the high-interest rates that you’ll see after the first five years.
You may have to pay an early repayment charge to your existing lender if you remortgage.
