Long Term Finances of Help to Buy Equity Loans

[Skeeter]

This is relating to the Government Equity Loan scheme where they will provide an interest free (for 5 years) loan of 20% of the value of a newly built house to allow buyers to get into the 75% Mortgage bracket using only a 5% mortgage from themselves.

Does anyone do this? I'm keen to work out the long term finances, but I'm getting a bit confused once it gets into 5+ years and remortgage territory.

So, imagine you buy a house worth £100,000. The Government loan you £20,000 (20%) and you put in £5,000 (5%) meaning your mortgage is £75,000.
After 5 years the house is now worth £120,000. You owe the Government £24,000 (20%), and have paid off £10,000 of the capital so your outstanding balance on the mortgage is £65,000. This is now the point the Government start charging interest.

So. Does the interest charge apply to the £20,000 the Government lent you, or the current £24,000 value of their share of the home? Presumably if its the latter you would need to get the house valued at the 5 year point to know how much the Governments 20% share is?

Also, can you pay off the loan in bits, or does it have to be a single payment of the whole lot? All I can find is things saying that you must pay back the loan when you sell, rather than being able to pay it back proactively.

And if it is restricted to selling, can 'selling' the house actually be a remortgage? So using the above example, you remortgage the house with the value of £120,000. £55,000 (£120,000 minus the £65,000 outstanding on your mortgage) is what you release, but you need to give the Government £24,000 of that to pay off the loan. This leaves you with £31,000 equity to use as the deposit on remortgaging the £120,000 house, which will mean you are now looking for a mortgage of £89,000.

Is my Top Gear Maths correct? The ideal situation would be to get to a stage in 5 years where the capital growth of the house plus the capital repayments you have made on your mortgage account to a value that is at least equal to 20% of the value of the home, as you can then pay off the whole Government loan?

The difficulty comes in the middle. Its going to be quite hard to make 20% on a house in 5 years, so I'm trying to work out the formulas to use that will show at which point its best to remortgage and pay off the government, over sticking with the scheme and paying the interest on the loan after the initial 5 years.

What I would love is a calculator that can figure this out for me, but I'm struggling to find one. It gets even more complicated when you start looking at overpaying on the mortgage while you can afford too in the first 5 years.

My brain hurt

 

[therealpieman]

https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-equity-loans seems to cover it, the last example is not paying back the whole loan but half of it.

From reading that the fees are only calculated on the original loan amount, not the current amount owed (20% of current market value whatever that is) but they don't reduce the original loan at all.

Not sure how it works if the value of the property goes down, they don't seem to give that as an example.... Also I don't like the phrase

In the sixth year, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year. The increase is worked out by using the Retail Prices Index plus 1%. It seems to imply that you will get a yearly fee increase no matter what... I would get them to explain what that means in practise.

 

[Skeeter]

Yeah it is only Interest thats applied after 5 years, the capital amount of the loan never reduces. I hadn't thought about the value going down either, so thanks for highlighting that. I'd hope that if the loan amount is 20% of the house value, it would go down as well as up.

As for the interest increase, yes it will go up every year regardless. Hence why I would be keen to get rid of the Governments 20% as soon as financially viable. The key is working out when this point actually is.

 

[krooton]

The increase on the interest after year 5 is VERY low.

When they say it goes up by the RPI+1%, that is the percentage your interest will rise.

So year 6 you get charged 1.75% of you equity loan.
Retail Price Index for the new year is 2%, so you equity interest increases by 3%.
Year 7 you get charged 1.8% on your equity loan. The percentage increase is not additive, it is a literal increase of a certain percentage.

So provided the RPI doesn't rise is silly huge amounts, it would still take a number of years for the interest on that equity loan to even match that of your mortgage.

 

[Skeeter]

Agreed. I've seen a few examples that run to 10+ years and the interest amount is low.

I'm more looking for a way to work out when is best to remortgage and pay off the whole amount, and if thats even possible? The wording of the websites suggest that the only way to pay off the loan is to sell the house?

 

[krooton]

You can staircase, which is buying out a portion or all of the equity loan, but this is always done at the current market value.

 

[Glaucus]

Are they all the same scheme now? When I looked that was a fair few with slightly different rules and rates. So it was developer specific.

 

[Lima]

If all things go to plan, I will be using this Help to Buy scheme in the next month or so. I've just agreed a price on a new build apartment, just need to sort the paperwork. I'm planning on paying back as much as possible in the first 5 years, in yearly intervals. I don't think I'll be able to pay it all back in the 5 years unless I get a huge pay rise but I'm hoping to be able to pay back half of the loan (i.e. gain a further 10% equity in my property. I would love to be able to pay it all back in 5 years as it would give me loaaaaads of equity to climb the ladder at year 6, however I just don't think I can manage the full loan and a high mortgage.

I just set up an excel sheet and calculated different examples of what I could do and how much it would cost me over the years.

 

[Skeeter]

You can staircase, which is buying out a portion or all of the equity loan, but this is always done at the current market value.

You can do that for Shared Ownership (which is where you buy part of a house, and pay rent on the rest to a Housing Agency), but I can't find anywhere that says you can do the same with the Equity Loan.

Are they all the same scheme now? When I looked that was a fair few with slightly different rules and rates. So it was developer specific.

There are a number of different schemes under the Help to Buy banner. The key ones are:

NewBuy - A Government backed loan of 20% of the value of a New Build house that is interest free for 5 years.
Shared Ownership - Where you buy between 25% and 75% of a house, and a Housing Agency owns the remainder. You pay a mortgage for your share, and rent for the share the HA own.
Mortgage Guarantee - A scheme where the Government are offering to secure 95% Mortgages with financial institutions to encorage them to offer more 95% Mortgages out.

What we are looking at is the first one, where you own the house outright, but owe the Government 20% of its value.

 

[krooton]

What we are looking at is the first one, where you own the house outright, but owe the Government 20% of its value.

Well you don't own it outright, it's effectively a joint mortgage between you and the government

 

[FoxEye]

Shared ownership is a leasehold arrangement too isn't it? So you still have to pay ground rent, and the Housing Association can charge what it likes for repairs/maintenance to the property?

Was looking at that myself but it seemed to be a minefield.

 

[Skeeter]

Well you don't own it outright, it's effectively a joint mortgage between you and the government

Nope. The Government loan the individual(s) the money, and the individuals then use that as a deposit. The loan is not tied to the property, it is just tied to a percentage of the value of the property.

It would be like borrowing a chunk of money from your parents, and promising to pay them back the money plus any capital growth. The Government are basically using newly built houses as an investment portfolio .

Shared ownership is a leasehold arrangement too isn't it? So you still have to pay ground rent, and the Housing Association can charge what it likes for repairs/maintenance to the property?

Was looking at that myself but it seemed to be a minefield.

Shared Ownership is leashold yes, but to be clear Shared Ownership is a different scheme to the New Buy Equity Loan scheme we are looking at here.

I'm currently a tenant in a Shared Ownership house (long story) that my Landlord (the owner) is trying to sell. It has to be sold through the Housing Agency, who own 40% of the house, and it has to be offered to people on lower incomes as part of 'affordable housing' (read 'privately run council houses'). The owner basically has zero control over selling the house, or even defining the properties value. This is not the case with an Equity Loan, where you are the owner.