Yahoo Finance Help to Buy equity loan: What to do if you’re struggling to pay the interest
What the Help to Buy equity loan involves
Under the scheme, first time buyers purchase 80% of a new build home with the government having an equity share in the remaining 20%.
In London, this is a 60/40 split with a cap on the property price of £600,000 (this cap varies regionally).
Buyers need only a 5% deposit and 75% mortgage and they repay the government’s equity share when they sell their home or within 25 years.
The equity loan
The 20% or 40% equity loan is interest-free for the first five years and the government advises that, if you can, you should try paying it off by then.
“The main aim of the five-year interest free period was to give homeowners the time to pay off the loan in full at the end of that period and allow them to continue to make mortgage payments,” says Kristian Derrick of Mortgageable.co.uk.
“However, for those that live in areas where property values have increased significantly, the loan now may be much higher than originally anticipated, making it next to impossible to pay off in full for many.”
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“If they haven’t yet paid it off, over 52,000 buyers who used a Help to Buy equity loan to buy a home in 2018 will begin to be charged interest on their loan this year, on the fifth anniversary of them taking it out,” says Polly Gilbert at Tembo.
“With the average equity loan size for that cohort sitting at above £60,000, it’s likely there will be many who haven’t been able to pay off the equity loan in full.”
“Buyers will be charged 1.75% of the equity loan they borrowed in their sixth year. If someone had a £60,000 equity loan, that’s a total of £1,050 owed over the year, with a monthly repayment of £87.50,” calculates Gilbert.
“After the first year of paying interest, the rate increases by the consumer price index (CPI), plus 2%. The CPI has been rising steeply — it increased by 9.2% from 2022-2023.
“Using that CPI increase as an example, in the seventh year, the previous interest rate of 1.75% would increase by 11.2% (that’s the 9.2% CPI increase plus 2%). Their interest rate would therefore increase to 1.95%, increasing monthly repayments to £97.50.”
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While these increases seem small, against the backdrop of the cost of living crisis, stalling house prices and increased mortgage rates, they aren’t insignificant.
“The major problem is that interest repayments will increase annually, impacting homeowners’ ability to pay off the loan, therefore, it’s important to consider the long-term scenarios,” says Derrick.
What to do if you are struggling with repayments
Many people are unable to repay the equity loan in the first five years and will therefore find their repayments jump up.
Target, who manage the scheme on behalf of Homes England said: “Support measures will vary according to the individual situation. We encourage homeowners to get in touch as soon as possible so our experienced team can support them in the most appropriate way.”
They refused to give further details on what these measures might involve, only adding: “Target Group is Homes England’s appointed mortgage administrator, and so follows policies, procedures and processes set out and agreed with its client Homes England.”
While they haven’t mentioned specifics, Katie Dunstall, residential property associate at Lewis Denley, says that they can help: “Target HCA are appointed to deal with the collection of payments. They have a dedicated arrears team who will come up with a payment plan for each client and discuss their expenditure which is done on a case-by-case basis.”
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“Homeowners should speak to Target to see if they can extend the interest-free period by say, six- to 12-months, although it should be noted we haven’t seen anything to indicate this would be readily accepted,” adds Gilbert.
If Target are unable to come up with appropriate measures, there are other things you can do yourself to improve your situation.
The most drastic is to sell, which enables you to pay off the loan immediately with the capital raised from the house sale.
Another option is to remortgage and move the equity loan into your mortgage.
“The silver lining for many will be that average house prices increased by 36% from February 2017 to December 2022, so Help to Buy homeowners could be able to pay off at least some of their loan with property price gains they can access when they remortgage,” says Gilbert.
“Talk to lenders, agree a mortgage promise, and discuss your property valuation. Find out how much you can borrow, and afford, and whether you can release enough to payback the equity loan,” says Stuart Crispe of financial adviser directory service Sunny Avenue.
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Alternatively, you could keep the equity loan but extend the term of your mortgage so as to keep your repayments down.
“If you are experiencing temporary financial difficulties, you can apply for a mortgage holiday. You pay more interest in the long run, but a month off can provide short-term relief,” adds Crispe.
It's important to remember that there is a lot of help out there. “Talk to your lender’s financial difficulties department. Lenders would much rather have you on short-term interest only terms than repossess your property,” says Crispe, who also suggests talking to a debt adviser service such as Step Change, Money Wellness or National Debtline.
Another idea is making your home pay its own way.
“You could rent a room out to help with rising costs,” says Emma Morby, The Female Property Expert. “[Or], if you really cannot afford the mortgage, ask if you can rent the property for a period of time (12 months) assuming the rent will cover the repayments.”
The skyrocketing of inflation and mortgage rates has made the Help to Buy equity loan harder to pay off but there are things you can do to manage your finances so it’s always worth seeking advice and help.
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