The Help to Buy equity scheme has helped thousands of borrowers enter the property market, providing a significant boost to get people onto the property ladder. Interest on the loan becomes chargeable after five years, so it may be worth considering if it’s possible and worthwhile to repay the loan. In this guide, we explain everything you need to know, including the pros and cons and the process involved.

 Understand Your Equity Loan

The Help to Buy equity loan is a useful way to get onto the property ladder, but it comes with certain restrictions and conditions.

  • You can repay the equity loan, but the minimum repayment is 10% of the property value at the time. This means you will need to get your property revalued before making a repayment.
  • The loan is interest-free for the first five years. After that, interest is charged, starting at 1.75% of the loan’s value and increasing each year by the Retail Price Index (RPI) plus 1%.
  • You cannot borrow additional funds while you have the equity loan, except under very specific circumstances. For example, you cannot borrow for home improvements or debt consolidation.
  • You cannot let the property out while it has an equity loan.
  • Remortgage options can be more restrictive and may come with higher rates compared to normal mortgage deals.

It is important to thoroughly check and understand the terms and conditions of your equity loan.

Calculate How Much You Owe on Your Equity Loan

The amount you owe on your equity loan is based on the current value of your property, not the price you bought it for. Here’s how you can calculate it:

Outside London, you could borrow up to 20% of the property value through the Help to Buy scheme. Inside London, you could borrow up to 40%.

For example, if your property is now worth £400,000 and you borrowed 20% through the scheme, you would need to repay £80,000 to repay the entire amount. If you want to make a partial repayment, the minimum you can repay is 10% of the current property value, which would be £40,000.

Here’s the calculation breakdown:

  • Property Value:** £400,000
  • Borrowed Percentage:** 20%
  • Total Amount to Repay (20% of £400,000):** £80,000
  • Minimum Repayment (10% of £400,000):** £40,000

Make sure to get your property revalued to determine the exact amount you need to repay based on its current market value.

How to Repay Your Help to Buy Equity Loan

There are several ways you can repay your Help to Buy equity loan, including using your own funds, such as savings or gifts, or by remortgaging, or a combination of both.

To repay the loan, you need to ensure you have enough equity and/or funds to cover both the existing mortgage and the Help to Buy loan. Most mortgage lenders will usually require that at least 10-15% equity remains in the property after repayment.

Example: if your property is valued at £500,000 and your existing mortgage is £325,000, you would need to repay 20% of the Help to Buy loan, which is £100,000. This brings the total amount required to repay both the existing mortgage and the equity loan to £425,000. To do this, you would need an 85% loan-to-value (LTV) mortgage, as the £425,000 is 85% of the £500,000 property value.

Alternatively, you could use savings to cover some or all of the £100,000 required to repay the equity loan. For instance, if you have £50,000 in savings, you could use this amount to reduce the remortgage amount needed to £375,000, lowering the LTV and potentially getting a better mortgage rate.

In summary, to repay your Help to Buy equity loan, you can use a combination of savings, gifts, and remortgaging, ensuring that you leave sufficient equity in the property as required by lenders.

When is the right time to overpay equity loan?

Deciding the right time to overpay your Help to Buy equity loan depends on several factors:

  • Interest-Free Period: The first five years of the Help to Buy equity loan are interest-free. It’s often beneficial to consider overpaying or repaying the loan before the interest kicks in after this period. This can save you from paying additional interest charges.
  • Property Value Increase: If your property has significantly increased in value, it might be advantageous to repay the loan sooner rather than later. The amount you owe on the equity loan is based on the current property value, not the original purchase price. Repaying the loan before further increases in property value can save you money.
  • Financial Situation: Evaluate your financial situation to ensure you have sufficient funds or equity to cover the repayment. If you have accumulated savings or received a financial windfall, it might be a good opportunity to overpay the loan.
  • Mortgage Rates: If you can secure a favorable remortgage rate, it might be a good time to repay the equity loan. Lower interest rates can reduce the overall cost of borrowing the funds needed to repay the loan.
  • Market Conditions: Consider the current and forecasted market conditions. If interest rates are expected to rise, repaying the loan sooner can be more beneficial. Conversely, if the market is stable, you might have more flexibility in timing your repayment.
  • Personal Goals: Align the repayment with your personal financial goals. If eliminating the equity loan aligns with your long-term financial strategy, it might be a good time to act.

The right time to overpay your equity loan is often before the interest-free period ends, when your property value has increased significantly, or when you have a strong financial position. Additionally, favorable mortgage rates and aligning with your personal financial goals should also be considered.

 The Process to Overpay Your Help to Buy Equity Loan

Overpaying your Help to Buy equity loan involves several steps. Here is a detailed guide to help you navigate the process:

  • 1. Obtain a Property Valuation: First, get your property revalued by a chartered surveyor approved by the Help to Buy scheme. This valuation determines the current market value of your property, which is essential for calculating the amount you need to repay.
  • 2. Contact the Help to Buy Agent: Inform your Help to Buy agent of your intention to overpay the equity loan. They will provide you with the necessary forms and guidance on the process.
  • 3. Calculate the Repayment Amount: Based on the current property value, calculate the amount you need to repay. For example, if your property is valued at £400,000 and you initially borrowed 20%, you would need to repay £80,000. The minimum partial repayment is typically 10% of the property value.
  • 4. Arrange Funding: Ensure you have the necessary funds to cover the repayment. This could come from savings, gifts, or by arranging a remortgage.
  • 5. Book an Appointment with a Mortgage Broker (if applicable): If you plan to use a mortgage to repay the equity loan, book an appointment with a mortgage broker. They will help you explore your options, secure a remortgage deal, and guide you through the application process.
  • 6. Complete the Required Paperwork: Fill out the necessary paperwork provided by the Help to Buy agent. This includes the application forms and any additional documents they require.
  • 7. Pay the Administration Fee: There is usually an administration fee required to process the overpayment. This fee covers the cost of handling your request.
  • 8. Settle the Loan: Once the paperwork is complete and the administration fee is paid, the Help to Buy agent will provide you with a final settlement figure. Arrange for the payment to be made to the Help to Buy scheme.
  • 9. Confirm the Overpayment: After the payment is made, you will receive confirmation from the Help to Buy agent that the overpayment has been processed. Keep this confirmation for your records.
  • 10. Update Your Mortgage Lender: If you have remortgaged to cover the repayment, ensure that your mortgage lender is aware of the changes and that your mortgage reflects the new terms.

Costs to repay help to buy equity loan

When repaying your Help to Buy equity loan, there are several costs you need to consider:

  • Professional Valuation: You will need to get your property revalued by a chartered surveyor approved by the Help to Buy scheme. The cost of this valuation can vary but typically ranges from £150 to £400.
  • Help to Buy Agent Fee: There is usually an administration fee required by the Help to Buy agent to process the repayment. This fee is typically around £200 to £300.
  • Solicitor’s Fees: Engaging a solicitor to handle the legal aspects of repaying the equity loan is necessary. Legal fees can range from £500 to £1,000, depending on the complexity of the transaction and the solicitor you choose.
  • Early Repayment Charges – If you are remortgaging to repay the equity loan, check if your existing mortgage lender imposes any early repayment charges. These charges can vary significantly based on your mortgage terms.
  • Arrangement Fees: If you are taking out a new mortgage to repay the equity loan, there may be arrangement fees involved. These can range from £0 to £1,500 depending on the lender and mortgage product.
  • Valuation and Survey Fees: Your new lender may require another property valuation or survey, which can add to the costs. These fees typically range from £150 to £1,500.
  • Broker Fees: If you use a mortgage broker to arrange your new mortgage, there may be broker fees involved. These can range from £0 to £500 or a percentage of the mortgage amount.

How Can Strive Help with Repaying Your Equity Loan

At Strive, we provide personalised advice to help you understand the benefits and implications of repaying your Help to Buy loan. We assist with finding reputable surveyors for property valuation and help you secure the best mortgage deals if remortgaging is needed. 

Our team connects you with experienced solicitors to handle the legal aspects, ensuring all procedures are completed smoothly. We also help you create a financial plan to manage the repayment, making the process as seamless and beneficial as possible.

FAQ’S

  • Do I Need a Solicitor to Repay My Help to Buy Loan Early?: Yes, you will need a solicitor to handle the legal aspects of repaying your Help to Buy loan early.
  • Can I Rent Out My Property with a Help to Buy Loan? No, you cannot rent out your property while it has a Help to Buy loan. You may need to repay the loan or switch to a buy-to-let mortgage if you wish to rent out the property.
  • Is It Worth Paying Off the Help to Buy Loan Early? Potentially, paying off the Help to Buy loan early can be beneficial depending on your financial scenario and the current interest rates. It can save you money on interest payments and increase your equity in the property.
  • Can I Pay Off My Help to Buy Loan Early? : Yes, you can pay off your Help to Buy loan early, subject to your affordability and available equity in the property.

Contact us today, and we’ll work hard on your behalf to find you a competitive mortgage.

For more information on mortgages for contractors, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.