Help to Buy loans have been a welcome assistance for those wishing to get onto the property ladder but did not have the funds to put down a substantial deposit. The scheme allowed first-time buyers to purchase a home with as little as a 5% deposit and access a 20% equity loan from the government (in London this was up to 40%).
The equity loans were offered on a 5-year interest-free basis, and for many, the 5 years is soon coming to an end. Many who have accumulated savings during that time are now wondering whether they should pay back their loan, or whether they should begin paying interest on it and invest their savings instead?
If you are thinking about whether now is the time to pay off that loan, it’s sensible to consider your property’s value. Specifically, whether the value of your property is increasing or decreasing. The 20% equity loan is not a fixed amount, it is 20% of the value of your property. So, if the value of your house increases, so will the amount of the equity loan. The loan is interest-free for the first 5 years, but if your property value has risen (as many have in the last few years) you may have to pay back more than you originally borrowed.
Example: If you bought your house in 2017 for £200,000 and accessed a 20% equity loan, that 20% was £40,000. Fast forward to 2021, your house is now worth £240,000 so that 20% is now £48,000 which is the amount you would repay.
The same principle applies if the value of your house has decreased. You could pay back less than you originally borrowed. You’ll need a surveyor from the Royal Institute of Chartered Surveyors (Rics) to determine the value of your property, and this will also determine how much you need to pay to clear the loan.
The interest charged on the equity loan after the 5-year interest-free period ends is less than the interest charged on most typical mortgages, but it isn’t a fixed interest rate and could rise each year. Using the same example above, the monthly repayment on your original £40,000 equity loan might be £629 per month whilst it’s interest-free, but your monthly repayments may increase to £697 once interest is charged. *
Besides the obvious savings on interest, other advantages of paying off the equity loan can be things such as not having to seek permission should you wish to rent out the property or make any structural changes.
If you have the capital to pay off your equity loan, this may be particularly appropriate If your property’s value has decreased, and you now have to pay less than you originally borrowed. If your repayment has increased because your property value increased, and you don’t have the capital to pay it all, you can make a part payment of 10% of your current property value.
Depending on your level of savings and the likely amount of interest or gains you could make, consider whether paying off the loan or investing the funds would be better in the long run. You might want to seek the help of an expert for this, in which case Genistar can help. **
* Example assumes a 20% equity loan of £40,000 with interest rates, after the 5-year period, of 1.75% in year 6, rising to 2.05% In year 10.
** Genistar can help you understand your options and create a Financial Game Plan for reaching your goals. Genistar work with professional partners who offer financial advice and could assist you in working out the best option for your situation.