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Is it worth paying off my Help to Buy Equity Loan?

Many homeowners who used the Help to Buy Equity Loan scheme have been in their homes for approaching 5 years now, and 5 years is a significant milestone if you have a HTB equity loan – it marks the end of the interest-free period, meaning interest will soon become payable.

If you have a HTB equity loan, you probably remember that it was interest free for the first 5 years, but what happens after then might be a bit hazy.  Here’s a reminder…

In year 6 – you’ll be charged interest at a rate of 1.75%.  So for example, if you paid £500k for a property, took an equity loan of £100k, you’re looking at £1,750 for the year, or £145.83 per month.

In year 7 (and each year thereafter) the previous year’s interest rate increases by the Consumer Price Index (CPI) plus 2%.  Now stick with me on this – increasing a percentage by a percentage can be a bit of a headscratcher!  Let’s say CPI is 2.5%, that would mean the previous year’s 1.75% would increase by 4.5% (CPI +2%).  This works out to be 1.83%, so your annual interest due increases to £1,830 or £152.50 per month.

So far so good?   Well if we fast forward a few years to say year 15 and assume CPI has always been 2.5% then the interest rate will have increased to 2.74% and your payments to £228.33 per month.  Now that may well still be manageable once you factor in inflation in terms of pay rises etc, but bear in mind what else is happening to your HTB Equity Loan… It’s got bigger!

The HTB equity loan started off as a percentage of the property value (usually 20%) and although the interest is always charged on the original amount (£100k in the example above) the amount it will cost to repay the equity loan will have increased in line with the value of the property.  Using the example above again of a property worth £500k and a HTB loan of £100k, if that property goes up in value by 2.5% per year, then the equity loan will be £113,300 after 5 years, or £128,370 after 10 years.

If house price inflation averages 5% per year then the equity loan would be £128,300 after 5 years, or £164,700 after 10 years – that’s an increase of 65%!

So whether it’s interest or house price inflation, the numbers only get bigger the more time passes, so if you’re considering refinancing to pay off your equity loan, it’s probably a case of the sooner the better.

If this has got you thinking and you’d like to have a chat, we’d love to hear from you.   Get in touch and we’ll be help you understand what’s possible, or sign up to our monthly newsletter, to keep your finger on the pulse.

Sam Murphy – 13th August 2021

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