Help to Buy  

How can borrowers repay Help to Buy loans?

This article is part of
Guide to Help to Buy

How can borrowers repay Help to Buy loans?

There are a few options for Help to Buy equity loan borrowers who now have to pay interest on the government's portion of the loan.

Borrowers can begin to repay the equity loan within five years, before interest starts to accrue.

Richard Bradley, head of data at Boring Money, explains after five years, borrowers will start to pay interest on the equity loan, initially at 1.75 per cent.

“For a borrower in London that took out the maximum 40 per cent loan, this is likely to be a significant cost,” he warns.

The first option is for borrowers to pay off their loan.

“The amount due to be repaid is based on the current market value of the property, so the amount due could be higher than the original loan amount. 

“Each payment must also be a minimum of 10 per cent of the current market value, which some borrowers could find to be quite a high hurdle,” Mr Bradley notes.

What are the typical repayment amounts that borrowers should be prepared to set aside?

Lindsay Judge, a housing expert at The Resolution Foundation, says she has been doing some number crunching, which shows the different amounts those who bought a property in London will have to repay, compared to those who purchased outside the capital.

“People who took out an equity loan in the second quarter of 2013, the average loan outside of London was just over £36,000 and we estimated that this fiscal year they would have to pay back £652 and by 2023, assuming they haven’t paid it off or drawn it down, that would be £788,” she says. 

“I think it was in 2016 when the government changed the amount of loan you could take out in London from 20 per cent of the value of the property to 40 per cent, so there’s people down the pipeline who have got really big loans in London.

“But just for those who took out a loan in the second quarter of 2013, in London, the average loan was just over £52,000 so this year they would be paying back £927 and, by 2023, they’d be paying back £1,121 for the year.” 

Time to sell?

The second option for borrowers is to sell the home they bought with the equity loan and use this to pay it off.

One important feature of the equity loan to remember is it is secured on a percentage of the value of the property.

Ms Judge confirms: “It is 20 per cent of the value when you bought the property, but what you have to pay back is 20 per cent of the value at the point at which you sell.