Equity Loan Repayment under the UK Help to Buy Scheme: Economic Considerations

If you are thinking of an early repayment of your Help to Buy loan, you'd better know its meaning, how the repayment works and any costs involved. Making a fully informed decision can help prevent surprises and help you manage your finances sensibly. Keep reading on, we will go through the essential points you should know about Help to Buy loan repayment.

What Is a Help to Buy Loan?

The Help to Buy program provided an equity loan to help buyers get onto the property ladder. Normally this is up to 20% of the price of the home (or 40% in London). You would have put down a deposit of usually 5% and taken out a mortgage for the rest of the money needed. The loan is interest-free for the first five years.

With the Help to Buy loan repayment, you pay back a percentage of the current value of your home, not the initial loan amount. So, for example, if you had a loan of 20%, you will pay back 20% of whatever the market value is when you want to repay. This means if the value of your property had gone up, your repayment amount will be higher than originally anticipated.

You are able to repay the loan fully or in part at any time you want, but once the interest-free period ends, you will start paying interest which will increase the payment.

When Can You Pay Back Your Help to Buy Loan?

You have the flexibility to pay back your Help to Buy loan at any time and by any means you want, whether that is partially or in full. Many homeowners choose to repay their loan when they sell their home, or when they remortgage. You can also pay back the loan without penalty in the early repayment period (prior to your first five years being interest free), but once the five-year interest free period ends, you will start to incur interest which may make early repayment simply more expensive.

You also need to consider that you are paying back the percentage of the property’s current market value that the loan is based on. So, for example, if it was a 20% loan and the value has gone up, you will pay back 20% of what the property's new value is, which may be more than your original loan amount.

What is the Repayment Process?

When you repay your Help to Buy loan, you will need a valuation from a RICS registered surveyor, to confirm the current market value of your home. The value of your home will give you the amount you will repay. You will typically contact the Help to Buy agent that administers your loan and will notify them you are repaying the Help to Buy loan.

If you are remortgaging, the solicitor will draw down the funds to repay the equity loan and the existing mortgage. If you are selling your property, the repayment will happen as part of the sale completion. It is important to discuss the exchange early as this whole process can take several weeks to complete.

What Costs to Expect?

Apart from repaying the loan value of your home based on its value, there could be other charges in the form of valuation fees, legal fees, plus interest charges if the loan is repaid after the interest free period.

The interest rate starts at 1.75% in year six and then increases annually in line with inflation with an additional 1%. Therefore the longer you leave it the potentially more interest you will pay. Early repayment may reduce the interest payments for the future. Repaying early can save you money, but keep in mind that you may incur costs for valuation and legal work.

Should You Repay Early?

Whether or not early repayment of your Help to Buy loan is a good decision will depend on your financial circumstances and future plans, including the total cost of early repayment. Early repayment may save you interest and increase the equity in your home, but, as stated above, consider the upfront costs of getting the property valued and selling your Help to Buy loan will typically incur legal fees.

Depending on the property market and the demand for property prices, the amount you have to pay back may be a lot higher than you expect, so it may be worth getting some advice to ensure you understand the amount of the repayment at that time.

Final Thoughts

Repaying your Help to Buy loan represents a big step, and it is something you will need to consider carefully; it is important to understand how your repayment amount is calculated, when it must be repaid, and what fees may be incurred. Exploring options, planning ahead, and seeking professional advice can make the process much easier to manage.