Help to Buy equity loan– when should I repay it?
The longer you take to repay, the more it could cost
More than 375,000 homeowners used an 'equity loan' to get onto the property ladder – many of them first-time buyers – whilst they were still available. Like a mortgage, an equity loan will eventually need paying off. But repaying an equity loan is not always straightforward, especially if you don't have the funds up front. This guide explains what you need to know, including the various ways to repay.
Have you got an equity loan?
The Help to Buy equity loan was a government initiative designed to get more people onto the property ladder. It was aimed primarily at those struggling to save for a deposit.
Under the scheme, want-to-be homebuyers could borrow up to 20% of a property's value – up to 40% in London – via a government loan (the equity loan). This loan is interest-free for the first five years.
By using an equity loan, borrowers could apply for smaller mortgages – meaning they had access to cheaper interest rates. Without the equity loan, they would have faced applying for bigger mortgages (90%, 95% loan-to-value) and being restricted to more expensive deals.
Initially open to both first-time buyers and previous homeowners, equity loans were limited to first-time buyers during the final two years of the scheme's existence. In all, more than 375,000 equity loans were taken out between 2013 and 2023.
Two main costs of an equity loan
There's a degree of flexibility as to when you'll actually need to repay your Help to Buy equity loan. That's because the decision when to repay will be yours – except in the following scenarios:
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You reach the end of your equity loan term (for example, after 25 years).
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You finish paying off your main mortgage.
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You're selling your home.
In any of the scenarios above, the equity loan will need repaying in full.
So, unless you're planning on moving home, it's possible you might not have to repay your equity loan for years... perhaps decades.
However, there are two important costs to consider when deciding the point at which to repay your equity loan. These are:
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Interest payments. Interest begins to accrue on your equity loan once you've had it for five years (in other words, from year six). The rate starts at 1.75% – likely equivalent to £100s annually – and goes up each year after that (until the loan is repaid).
How much your interest payments increase by each year is based on annual inflation figures, meaning one year's increase might be different to the next. See the section below for more detail on how equity loan interest payments are worked out.
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Property prices. As the equity loan is lent to you as a percentage of a property's value (the value at the point of purchase), when you repay the loan it will also be as a percentage of the property's value (the value at the point of repayment). Depending on whether the value of your property has gone up or down in the time, this might mean you have to repay more or less than you originally borrowed.
Let's say you used a £20,000 equity loan to purchase a £200,000 property, equivalent to 10% of the property value. If the price of your property increases to £250,000 by the time you come to repaying the equity loan, this means you'll owe £25,000 (equivalent to 10%. but an increase of £5,000, or 1/4 of what you originally borrowed).
How is interest charged on an equity loan?
If you don't repay your equity loan within five years, you'll start being charged interest. Here's how it works:
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Interest kicks in on the fifth anniversary of your equity loan (in other words, from year six).
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The initial interest rate is 1.75%.
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That rate then increases each April by the Consumer Prices Index (CPI) measure of inflation, plus 2%, until the loan is paid off.
Here's an example of how that could look in practice:
ANNUAL COST FOR EQUITY LOAN OF £40,000 | ||
|---|---|---|
Year | Interest rate (1) | Yearly cost |
1-5 | 0% | £0 |
6 | 1.75% | £700 |
7 | 1.84% | £742 |
8 | 1.93% | £778 |
9 | 2.02% | £815 |
10 | 2.12% | £856 |
(1) Assumes constant CPI rate of 4%, plus 1 = 5% | ||
The longer it takes to repay your equity loan, the more it could cost...
It's hard to predict just how much an equity loan will cost you overall as there are too many variables at play, but the likelihood is the longer you take to repay the equity the more it's likely to cost you (though even that's not guaranteed...).
Here are two things to consider:
1. Interest will have more time to accrue if you delay repaying
The interest-free period of any equity loans ends after you've had it for five years. From year six, interest will begin accruing.
It's possible you might end up shelling out thousands of pounds in interest over time, something that's more likely the longer you keep the equity loan once the interest-free period expires.
In a scenario where you paid roughly £800/year in interest for five years before repaying your equity loan, that would be equivalent to £4,000 in interest alone.
2. Property prices tend to rise over time (though not necessarily)
As the value of an equity loan is tied to property prices, this means any changes to the price of your home will impact the value of your equity loan – in other words, how much you'll ultimately need to repay.
So if you used an equity loan to borrow the equivalent of 10% of your home's value at the point of purchase, you'll need to repay the equivalent of 10% of your home's current market value when it comes to paying back the equity loan. If you borrowed the equivalent 20%, you'll need to repay 20%.
This means while 10% would be equivalent to £20,000 on a £200,000 home, if your its value rises to £250,000 by the time you come to repaying the equity loan, you'll now owe £25,000. That's an increase of £5,000 (or 1/4 of what you originally borrowed).
Historically, property prices tend to increase over time (and more so over the long-term). So, on that basis, the longer you take to repay your equity loan, the more time your property has to increase in value – which means the more your equity loan could end up costing you.
Yet at the same time, nothing is guarantee with house prices. In fact, your home could actually go down in value... If it does, this means you would end up repaying LESS for your equity loan than you originally borrowed.
Using the example above, if your property value dipped to £190,000 by the time you came to repaying your equity loan, you'd end up repaying £19,000. That would be £1,000 less than you originally borrowed.
Should I overpay my mortgage instead?
As interest rates are far higher right now than they were whilst it was possible to get an equity loan, the interest rate on your mortgage might've become much more expensive than what it is on your equity loan.
It's quite possible that for some homeowners, their equity loan could be costing them in the region 2% – while their mortgage sets them back nearer to 5% or even 6%.
This raises the question: should you be prioritise overpaying your mortgage or clearing your equity loan?
Unfortunately, it's a tough question without a straightforward answer, primarily because there are variables at play. Here are a few things to ask yourself:
What's the gap in interest rate between your equity and mortgage? The higher the interest rate on your mortgage compared to your equity loan, the more you'll likely to save by overpaying your mortgage (in the short-term, at least).
How different are the two outstanding balances? Again, the bigger the gap in balance between your mortgage and equity loan, the more you'll likely save by overpaying your mortgage (in the short-term, at least).
Is the cost of your property likely to rise? While it might seem preferable to overpay your mortgage based on interest rate and outstanding balance alone, there's a risk that delaying repayment of your equity loan could actually eat into those savings – possibly wiping them out completely. In other words, if the value of your property rises significantly, the extra value added to your equity loan could negate the interest savings you made by overpaying your mortgage.
In addition, the sooner you repay your equity loan, the more you will benefit from any long-term rises to the price of your home. That's because after the loan has been paid back, you'll enjoy the full benefit of any future price rise, rather than having to share it as part of the equity loan agreement.
Of course, predicting the direction of property prices is, for the most part, a matter of complete guesswork (unless you've got a crystal ball).
With such a big variable at play, it means you need to weigh up carefully whether it's worth delaying the repayment of your equity loan – even if overpaying your mortgage might win based on interest rate and outstanding balance.
Homeowners who are paying a low rate of interest on both their equity loan and mortgage might even consider pumping any spare cash into a top savings account instead. Our Should I overpay my mortgage? helps you weigh up whether to overpay and save.
Unsure what's the best course of action? It's worth speaking to a mortgage broker.
Choose how to repay your equity loan
You can repay your equity loan either in full (in other words, in one go) or in part. Repaying in full will probably work out cheaper.
Here are a few things to consider if you plan to make partial repayments:
There's a minimum repayment threshold of 10%. The smallest equity loan repayment you can make is equivalent to 10% of your property's current market value.
You'll likely face extra fees. Repaying an equity loan involves fees, such as administration and valuation charges. These fees will apply each time you make a repayment.
Latter repayments could cost more than earlier repayments. Each repayment you make is based on a fixed percentage of your property's current market value. This means if your property increases in price between equity loan repayments, the later ones will cost you more than the earlier ones.
For example, let's imagine you've got a 20% equity loan, which you split into two repayments of 10%. The first repayment is made when the property is valued at £220,000, meaning you repay £22,000. But the second repayment is made some years later when property has increased to £240,000 in value, meaning the second installment costs you £24,000.
Ways of repaying an equity loan
There are a few ways of actually repaying the equity loan. These are:
Use your own money. For example, through any savings you've built up or inheritance you've come into. You'll need to confirm where the money has come from. See the Gov.uk website for detailed steps on repaying an equity loan with your own funds
Sell your home and use the proceeds. Where your property has increased in value since you bought it, you could use the proceeds from selling to repay the equity loan. See the Gov.uk website for detailed steps on repaying an equity loan by selling your property
Remortgage. Probably the most common way of repaying an equity loan is through remortgaging. You'll have two options if remortgaging: remortgage and clear the equity loan at the same time, or remortgage and add the equity loan to your mortgage balance (which isn't actually repaying the equity loan).
Both of these options could mean having to borrow more money, which might increase your loan-to-value and force you on to a higher rate of interest. Do note there aren't many lenders that will let you remortgage and add the equity loan to your mortgage balance (most prefer you to clear the loan).
Speak to a mortgage broker if you've got an equity loan and need to remortgage, or see the Gov.uk website for detailed steps on repaying an equity loan by remortgaging.
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