How to repay your Help to Buy loan
Posted on 4th January 2024 at 11:40
Since the Help to Buy scheme was introduced by the UK government back in 2013 to help first time buyers get on the property ladder, many buyers have been left wondering how is best to clear their Help to Buy loan. Often buyers were drawn in by the dream of owning their 1st home and knowing this would soon be a reality without reading all the terms and conditions of how to clear the loan in the future.
As this scheme has since ended (The scheme was moth balled in March 2023) we take it that if you are reading this blog post that you currently have a help to buy loan in place on your current home. So, we won’t waste time by telling you what the scheme is and how it works, instead we will jump into how you repay the equity loan.
Firstly, you will need to have your home valued by a survey recognised by Target*. This can be done either by contacting Target and having them arrange a surveyor to come out to your property to conduct the valuation or you can instruct your own RICS (Royal institute of chartered surveyors) to complete the valuation. The surveyor you use must be RICS certified for them to approve the report. Either of these options will be at a charge to yourself, typically for this type of survey you are looking at £4-500.
Now that you know your property value, you can then establish how much you owe to Target. For example, if your property is valued at £200,000 and you took a 20% Help to Buy equity loan, your equity loan stands at £40,000 so this is the figure you need to work around to repay the loan in full.
When it comes to repaying the loan, this is typically done by most clients when they come to the end of the 5 year interest free period. Repaying your loan in full has 3 main options. The 1st which you would have planned for since you bought the property, or you are just fortunate to have enough surplus money to clear the loan is to pay the loan off with savings. But not all people have this luxury. The 2 remaining methods are the most common. Number 2 is selling your home, clearing your mortgage and the loan in one transaction, any money left over after paying these and your agent/solicitor fees is your equity that can be used as a deposit on your next home.
The 3rd and most popular method are to clear the loan when your remortgage is due just before you hit the 5 year mark on your help to buy loan. Using the example above we have a £200,000 property that is owing target £40,000 Help to Buy equity loan to target. As we are approaching the end of your current mortgage deal, we request a redemption statement from your current lender which shows exactly how much you have left to pay to make things simple let’s assume you owe £100,000. When it comes to your new mortgage (by remortgaging) your new mortgage balance will be £140,000 - £100,000 mortgage plus an additional £40,000 to repay Target. A mortgage of £140,000 gives you a loan to value of 70% or £60,000 of equity in your current home.
As part of the standard conveyancing process required when you remortgage your chosen solicitor will repay your Help to Buy loan to Target on your behalf when they request the funds from your new lender. Upon completion you will be loan free and left with a standard mortgage with a new lender for a new amount.
If you did nothing with your help to buy loan you would begin to pay interest on the loan at an interest rate of 1.75% on the original amount you borrowed. This rate changes each year with CPI. Best advice is to clear the loan at your earliest convenience because the loan remains the % of your property value. Historically property values increase year on year so the longer you hold the loan, the larger it is going to become.
*Target are the providers of the help to buy loan on your home
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