The Government launched a Help-to-Buy Equity Loan Scheme to mortgage applicants back in 2013. The property market had been very slow to recover from the credit crunch and this was one of many schemes designed to give it a boost.
The interest-free period of the equity loan was for 5 years so many of these are now due for repayment in order to avoid interest accumulating.
If your 5 year period is ending soon or has already ended you should consider speaking to a mortgage broker who may be able to reduce your monthly payments or re-organise your finances.
The scheme works by the Government typically loaning the applicant up to 20% of the property’s value. There is no interest payable for 5 years. If the property increases in value then the amount you owe to the Government increases also, so in that instance the zero % could be quite misleading to some people.
The buyer is only required to put down a 5% deposit and that is what made the scheme so popular.
In my experience of Help to Buy Mortgages, many borrowers are unsure of what they signed up to when they bought the house. This could be because the scheme was not explained properly to them or they got a little carried away with the excitement of buying a home.
Either way, it comes as a nasty shock when the letter arrives asking what action you intend to take to repay the loan.
Because it’s a loan, not a gift, the Government owns a percentage share in the borrower’s home. The borrower has 25 years to repay the loan unless they sell the home beforehand.
At the end of the interest-free period, interest is charged at 1.75% in year 6 should the borrower not repay the loan at that time. The interest rate then goes up each year after that.
When the interest repayments kick in, some customers may struggle to keep up their payments. Most customers look into seeking remortgage advice at some point.
Not all lenders will accept remortgaging applications from Help to Buy customers. There are restrictions on the maximum loan to value when raising the capital to repay an equity loan. Some lenders can consider going up to 95% though.
The major advantage of repaying the equity loan in full is that any future increase in the value of the property will be 100% to the homeowner’s benefit and won’t be shared with the Government any longer.
If a lender cannot be found who will lend you the full amount to repay the Government loan when you come to remortgage then another option could be “staircase”.
This is when you gradually pay off the loan in instalments over a period of time, thus reducing the percentage of your home the Government owns. You can only staircase in multiples of 10%.