Q My wife and I have reserved a new-build property in Surrey costing £600,000. We are now considering whether or not to use the help-to-buy scheme. If we did we would put down a deposit of 7.5%, get a help-to-buy loan of 12.5% and a mortgage of 80% of the value of the house. If we didn’t use the help-to-buy scheme, we would have a 10% cash deposit and 90% mortgage.
Assuming we were to pay back the 12.5% equity loan of £75,000 within five years (so as not to attract interest), will we lose any equity if the house increases in value?
All articles I’ve read are very clear that when you sell, you will need to repay the equivalent of 12.5% on the new market value, but there is a lack of clarity out there on repaying the equity loan before we sell.
Do we need to factor in a loss of 12.5% of the increased equity assuming a five-year help-to-buy equity loan payback horizon? MOH
A If you were to pay back the whole help-to-buy equity loan at the end of five years, the amount you would have to repay would be 12.5% of its market value at that date. So the amount you would have to pay back is exactly the same as the amount you would have to repay if you sold the property. The difference is that if you repay the equity loan without moving on, you don’t have to pay it off all in one go. Instead you can choose to “staircase” by making partial repayments of at least 10% of the market value of the property at the time you make the repayment – plus £200 administration fee – and you can do this at any time after taking out the loan.
As to whether you should go down the help-to-buy route, guidance from the Home and Communities Agency in its help-to-buy guide suggests that you should think twice: “If it looks like you can already secure a 90% main mortgage you should think carefully whether a help-to-buy equity loan is right for you. There may be a better option for you to consider and you should seek independent advice.”
The main reasons for exercising caution about the scheme is that if house prices rise so too does the amount of money you have to pay back although if prices fall, so does the value of the equity loan. In addition, last time I looked the interest rates for a help-to-buy mortgage were less favourable than the rates from the same lender for a standard mortgage. Being part of the help-to-buy scheme also makes things less flexible. For example, you would have to get permission to carry out major home improvements which would be unlikely to be granted if the Help to Buy administrator felt that your money could be better spent repaying some – or all – of your equity loan. Any request to increase your mortgage would also have to be scrutinised although if you were to use the extra funds to repay the equity loan, you’re very likely to receive approval. It’s also worth mentioning that you can’t let the property – if you needed to move away for work, say – until you have repaid the equity loan in full although there are exceptions for certain members of the armed forces.
