Help to Buy Equity Loan Repayment: A Comprehensive Guide

Introduction
The Help to Buy Equity Loan scheme has been an instrumental government initiative in the UK, helping first-time buyers and existing homeowners alike secure their dream homes. However, the time inevitably comes when borrowers must start repaying the equity loan. This process is often misunderstood and can be daunting for those unfamiliar with the terms and repayment structures. This article aims to break down the complexities of the Help to Buy equity loan repayment process, providing clear guidance and actionable steps for homeowners preparing for this financial responsibility.

Understanding the Help to Buy Equity Loan

The Help to Buy scheme was introduced in 2013 to assist individuals struggling to purchase homes due to the high deposit requirements of traditional mortgages. The government offered equity loans of up to 20% of the property value (or 40% in London), allowing buyers to put down just a 5% deposit and secure a mortgage for the remainder. This structure enabled more people to access the housing market, especially in areas with rapidly increasing property prices.
The equity loan itself is interest-free for the first five years. From the sixth year onwards, borrowers must begin paying interest at a rate of 1.75%, which increases annually by the Retail Price Index (RPI) plus 1%. The interest payments do not reduce the capital balance of the loan, so the full amount remains outstanding until repayment.

When to Repay the Equity Loan

Repayment of the Help to Buy equity loan can occur in one of the following situations:

1. Sale of the Property: If you decide to sell your home, the equity loan must be repaid as a percentage of the sale price. This means that if your property has increased in value, you will owe more than you initially borrowed.
2. End of the Mortgage Term: At the end of your mortgage term, you must repay the loan in full.
3. Voluntary Repayment: You can choose to repay the loan early in full or in part. This is known as “staircasing,” where partial payments reduce the loan amount gradually.

Calculating Your Repayment

The amount you repay depends on the current market value of your property. The repayment is based on the same percentage of the property’s value that you originally borrowed. For example, if you received a 20% equity loan and your property has since increased in value, you will need to repay 20% of the current market value.
Example:

• Original property price: £200,000
• Help to Buy loan: £40,000 (20% of property value)
• Current property value: £250,000
• Repayment amount: £50,000 (20% of current value)

This example highlights the potential financial impact of property value increases on the repayment amount. Conversely, if your property decreases in value, the repayment amount will be lower, but you will still repay the same percentage of the property's current value.

Repaying with Remortgaging

One common method for repaying the Help to Buy equity loan is through remortgaging. This involves replacing your existing mortgage with a new one that includes enough additional funds to cover the equity loan repayment. Remortgaging is a popular choice because it allows borrowers to remain in their homes without the need to sell the property.
However, before proceeding with this option, it’s important to ensure that you can secure a mortgage large enough to cover both your existing mortgage and the equity loan repayment. Lenders will assess your income, expenses, credit score, and the current loan-to-value (LTV) ratio of your home before offering a new mortgage. If your property has increased significantly in value, remortgaging may be more feasible, as the LTV ratio will be lower.

Partial Repayment: Staircasing

Staircasing allows homeowners to gradually repay their Help to Buy loan in chunks of 10% or more of the property’s current market value. This approach can be beneficial for those who cannot afford to repay the entire loan at once but want to reduce the amount of interest they are paying on the equity loan.
To staircase, you’ll need to obtain a professional valuation of your property to determine its current market value. The repayment amount will be calculated as a percentage of this value, and once repaid, the government’s share of the property decreases.
Example:

• Current property value: £250,000
• Partial repayment: 10% of the current value = £25,000
  After this repayment, the equity loan would decrease from 20% to 10%, and the homeowner would retain a larger share of the property’s value.

Interest Charges and RPI Adjustments

Starting from the sixth year of the loan, borrowers begin paying interest on the Help to Buy loan at a rate of 1.75%. This rate increases annually based on the Retail Price Index (RPI) plus 1%. The RPI is a measure of inflation that tracks the cost of goods and services in the UK.
For example, if the RPI increases by 2%, the interest rate on the loan will rise by 3% (2% RPI + 1%). Over time, these incremental increases can significantly raise the cost of borrowing, making it more expensive to hold onto the equity loan for an extended period. As a result, many homeowners opt to repay the loan as soon as possible to minimize the interest payments.

Professional Valuation Requirements

When repaying the Help to Buy equity loan, whether in full or through staircasing, a professional valuation of the property is required. This ensures that the repayment is based on the most accurate and up-to-date value of the home. The valuation must be conducted by a chartered surveyor who is registered with the Royal Institution of Chartered Surveyors (RICS).
The cost of the valuation typically ranges from £150 to £300, depending on the location and size of the property. This valuation report is valid for three months, giving homeowners ample time to complete the repayment process. If the process takes longer than three months, a new valuation will be required, incurring additional costs.

Potential Challenges and Considerations

While the Help to Buy scheme has provided a pathway to homeownership for many, repaying the equity loan can present challenges. Some potential issues to consider include:

• Property Value Fluctuations: The amount you owe depends on the market value of your home at the time of repayment. If property prices have risen sharply, you could face a significantly larger repayment than anticipated.
• Interest Costs: After five years, the interest charges on the loan can accumulate quickly, making it more expensive to delay repayment.
• Remortgaging Difficulties: Securing a new mortgage to repay the equity loan may be challenging, especially if your financial situation has changed since you first purchased the property.
• Selling the Property: If you sell the property to repay the loan, you may need to consider additional costs such as estate agent fees, legal fees, and moving expenses.

Conclusion

Repaying the Help to Buy equity loan is a crucial step in your homeownership journey. Whether through selling the property, remortgaging, or staircasing, understanding the repayment process and planning ahead can help you manage the financial impact. It’s important to carefully consider your options, seek professional advice if necessary, and stay informed about property values and interest rates. By doing so, you can make informed decisions and ensure a smooth repayment experience, ultimately securing full ownership of your home.