Q I bought a property two years ago using the help-to-buy equity loan scheme as a first-time buyer. I want to redeem the equity loan – which is about £43,000 – at the end of this year. Does it make sense to do so or should I invest my money elsewhere?
OA
A If the value of your property has gone up – and you think it will continue to rise in the future – paying off your equity loan makes a lot of sense despite the fact that the loan is interest-free for the first five years. That’s because the sum you repay is not the same as the amount you originally borrowed from the scheme. Rather it is the percentage of the purchase price of your home that the original equity loan represents. If two years ago your equity loan was the maximum 20% of the purchase price you could get (40% in London), the amount you would have to repay now would be 20% of your home’s value now as determined by the valuation report from a qualified surveyor who is a member of the Royal Institution of Chartered Surveyors (Rics).
So if you bought a property for £250,000 with a 20% equity loan of £50,000 and the property has risen in value to, say, £270,000, the amount you would have to repay would be £54,000, which is 20% of £270,000. Until you pay for a Rics surveyor to do a valuation report, you don’t know how much you need to pay to clear the equity loan. On the plus side, if the Rics surveyor thinks your home has fallen in value, you will have to pay less than the original equity loan.
If it turns out that your £43,000 won’t be enough to clear the loan entirely, you can still make a part payment but it must be at least 10% of what your home is worth at the time of repayment.
On a practical level, clearing your equity loan entirely releases you from having to ask permission to do various things such as letting the property or making structural alterations to it. And when you come to sell, you get to keep all of the proceeds.
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