April 2018 marked the fifth anniversary of the HTB loan launch. As only the first five years of borrowing are interest-free, from April, interest begins occurring at 1.75 per cent for many, rising each subsequent year, plus 1 per cent until the loan is paid off.
HTB : Help to Buy
FTB : First time buyer
How does the HTB scheme work?
Under the scheme in England and Wales (it works differently in Scotland), FTBs and homeowners who want to buy an eligible new-build home can get a helping hand if they have at least a 5 per cent deposit saved. The government lends the borrower up to 20 per cent of the property price - 40 per cent in London - as the loan.
To clear the loan in full, the homeowner must repay the same percentage of the property’s value as they initially took out. So, if the loan was 20 per cent of the purchase price, they must pay back 20 per cent of the value when it is paid back, which could be more or less than what they first borrowed.
The loan can be voluntarily paid back but any part-payment must be at least 10 per cent of the market value at the time.
Which borrowers will be affected by the interest charges?
Completions that were taken out in the second quarter of 2013 (just after the scheme launched) with the aid of an HTB loan, are the group soon to be hit with extra fees.
The monthly interest payable will become yet another burden on often younger owners who may have already had to stretch their finances to the brink to afford the cost of buying a UK home.
Here’s an example of what is about to hit some borrowers:
- the interest on a £40,000 loan at 1.75 per cent is £700 a year
- on a £120,000 loan, the interest would be £2,100 a year.
(Borrowers also pay a £12 annual fee.)
Getting independent advice is key
The options to re-mortgage to help cut costs can be limited if borrowers want to keep the equity loan, as just a handful of high street banks and building societies offer a re-mortgage where the equity loan can remain in place.
The pool of lenders is even smaller for anyone who wants to move their mortgage and also raise extra money to chip away at the equity loan. However, this would be a stretch for many as they would probably need their house price and/or income to have grown significantly over the past few years to fulfil the necessary criteria.
Darren Simpson of Amathus Financial Services recommends that for those who are about to face interest rate hikes on their HTB loan: "you should contact a mortgage broker for them to do a wider market review of the options available to you."
HTB borrowers may also want to sell their home and pay off the loan, therefore avoiding interest completely. However, the sudden burden of interest may not be enough to force such a drastic lifestyle change for many.
This article was written and contributed by Amathus Financial Services
DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances; it is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered in this article, please speak to Amathus Financial Services directly.
Published on 20th April 2018
(Last updated 11th July 2018)