Help to Buy Equity Loan is a scheme that helped many people to get on the property ladder. Once you are there and your initial mortgage comes to an end there are few options you have.
It is worth planning and being aware of what you are planning to do next. Not having a clear plan at the right time might end up costing you dearly.
If you want to learn more about Equity Loan scheme than you can read this article. Few things to be aware of – you can still apply for one but the deadline is 31st of October 2022. You would also need to complete the purchase by the end of March 2023.
Below I will give a summary of the options available. I will not be able to say however which is the best option for you to pick. This will really depend on your personal situation.
can I remortgage my help to buy?
Help to Buy covers up to 20% of the value of the property (40% in London). The other part to this is normally covered by a mortgage. The mortgages that people mostly get are between 2 and 5 years.
One of the conditions of Help to Buy is that there are only 5 years when the interest isn’t being charged. After this initial period ends – you will be charged with interest on the Help to Buy value.
The question that many people ask – am I able to remortgage once my initial mortgage term comes to an end? The simple answer to this is YES. There is a slight catch to this though.
Not all the lenders offer products for Help to Buy. Also, the ones who offer these – will normally charge a higher interest on these products.
Below I will give few options of what you can do to get better rates. Just a head up – some of these options will be expensive!
pay the full equity loan value back in one go
Firstly, the option that I expect not many people will be able to jump on – pay out the full Equity Loan in one go with a lump sum.
This is clearly an expensive exercise to do. Your property will have to valued and the share of the original property borrowing (let’s say 20%) will be applied to the current property value.
Let’s assume an example, you borrowed 20% of £200,000 property – £40,000. In 5 years’ time your home value jumped to £250,000. You will be expected to pay back 20% of that new property price – £50,000.
While you are paying back more than you have borrowed – don’t forget, you are still significantly up.
If you do so, the numbers of lenders available to you will increase significantly. As a result, also the number of mortgage products you will be able to access will grow as well. This will result in you being able to get a better mortgage rate than previously expected.
leave help to buy as is
Another option you have – keep the Help to Buy loan as is. If you own the property for less than 5 years, you don’t have to pay any interest on that. If you are past the initial 5 year period – there will be interest you will be charged.
I would suggest comparing the two interests you will be charged – your mortgage and the Help to Buy. If the Help to buy interest is below the one you are offered by your lender – this scenario might be financially better for you.
pay part of the equity loan back
The alternative to doing nothing – is paying a part of the loan back. If you can’t afford to pay the whole Equity Loan back in one go – there is an option to pay part of this.
You can return the loan in 10% increments. This will allow you to increase your equity in the property and pay back less of the future price of your home.
In the example I used above – £200,000 home with 20% loan that increased in price to £250,000 in 5 years time. Paying back 10% would equal to £25,000.
Let’s imagine that in 5 more years time the property is worth £300,000. The remaining 10% will cost you £30,000.
While you borrowed £40,000 – you definitely have to return more than that in the example above. Paying everything back in the first 5 years would cost you £50,000. Half and half would add up to £55,000.
If you were to leave all of the loan for 10 years in the above scenario – this would cost you £60,000 to repay back. The difference in these examples is really significant so you should really consider your options.
increase your mortgage to pay back help to buy
There is a further scenario to consider here. One option you might have – increase your mortgage by the amount of loan outstanding.
In this case you borrow money from the bank and pay back your equity loan. There are pros and cons to doing this, so consider your options carefully.
Firstly, consider the interest rates on both of the borrowings you have. If your equity loan is significantly cheaper, you might be better of paying only the interest you own on that.
Secondly, if you believe the value of your home is about to increase significantly it might be better to pay the equity loan sooner rather than later in order to avoid over paying at later date.
Third consideration – increasing the amount of mortgage will require you to pay significantly more each month. The bright side here – you are not only paying out interest but also your own equity.
If all of the above sounds too complicated for you – have a chat with a mortgage adviser on what the best option might be for you to go forward with.
what is negative equity?
There can also be a scenario where you find yourself in negative equity in your home. This can happen to any mortgage.
What this means is that the value of the home has dropped significantly and the outstanding mortgage is more than the value of the property.
Finding a new mortgage in this case might become a lot harder. Selling the property would mean you own money to the bank.
One of the options you have in this case – wait out till the price of your home bounces back to get you into positive equity territory once again.
summary
A lot of people have managed to get onto a property ladder thanks to Help to Buy. While the scheme is great in many ways, it brings a lot of issues with it.
The interest rates you are normally offered are above the the standard rates you can find on the market. The interest payment structure can be complex on Help to Buy as well.
On top of the above, the options of what to do with your Equity Loan can be confusing and overwhelming.
While the above isn’t great – the key to remember, this scheme was potentially the reason what got you on the property ladder in the first place.
If you consider going down the route of increasing you mortgage – consider using one of online mortgage calculators to make the new payments will be affordable to you.