On the 1st April 2013 the government launched the current Help to Buy: Equity Loan scheme and up until 31st December 2018, there have been 210,9641 properties bought using the loan. By the end of September there will be over 6,000 of these who will be required to start paying interest, a number that will continue to grow over the coming years. Who knows how many have forgotten that this becomes payable this year, that this initial interest rate of 1.75% increases annually and that is an interest only loan repayable after 25 years or on the sale of the property, whichever comes first.
What may may not have also factored in to the cost of this loan is the amount of equity they will also be giving up. Whilst RPI and house prices will fluctuate, using the government’s own projections in the Help to Buy buyers guide2, at a projected house price growth of 5% in London and 2% elsewhere, by year 6 home owners would be giving up £16,653 and £4,416 of their equity respectively. A sum which will increase exponentially with house price growth. So, whilst this year is the first year that interest will become payable, it hasn’t been “free money” and there is a business case to be made for redeeming this loan as soon as possible, protecting equity and future gains. It should be noted though that should house prices fall, the government also share in any losses incurred.
They can redeem the loan in full by whatever means you have be it savings, a new mortgage (1st or 2nd charge) or you can simply service the interest and charges for the remainder of the 25 year term. Bearing in mind that the interest rate payable increases every year by RPI + 1%, this could be a costly option. Also, remember that this is an interest only loan so there will need to be an appropriate provision to repay the balance outstanding1 plus the government’s equity share at the end of the term.
Staircasing is an option but paying a proportion of the loan has limitations and rules. The minimum amount you can staircase at one time is 10% (of the total market value of the property at the time and in multiples of 10% thereon). This means that, when the lenders’ equity in the property is less than 20% redeeming in full is your only option.
It is important to note that there are several other costs involved in redeeming. Valuation fees, administration fees, solicitors’ fees and potentially others that will need to be factored into the decision.
At Shawbrook we can help with a full redemption up to 95% of the valuation and with over 65% of our valuations proceeding on an AVM; the borrower could avoid the duplicate cost. Many of our Specialist Distributor partners will absorb costs such as the valuation within their own fee, so worth checking with them what they do. We absorb the legal costs to remove and replace the existing second charge and we can add any fees incurred up to the scheme limit. Our max term is 30 years which can be after the end date of the first charge, useful where you look to smooth out the repayment of the loan in full.
The process is quite involved2 and with all the above to consider, advisers are best positioned to guide these borrowers through their options and help them achieve the financial freedom that comes with being debt free.