How do you repay a Help to Buy equity loan?

Full answer

The Help to Buy Equity Loan scheme (England, now closed to new applicants since March 2023, but many existing loans remain outstanding) allowed buyers to purchase a new-build home with just a 5% deposit, a repayment mortgage for at least 25% (55% in Greater London), and a government equity loan covering the rest -- typically 20% of the purchase price (40% in Greater London). **The interest-free period** For the first five years after completion, no interest is charged on the equity loan at all -- the buyer only pays their mortgage and a small monthly management fee (around £1/month). **Interest kicks in from year six** From the sixth year, interest is charged on the original loan amount (not the current property value) starting at 1.75%. From year seven onwards, the interest rate increases annually by the increase in the Retail Prices Index (RPI) plus 1 percentage point. **Worked example of rising interest** On a £40,000 equity loan (20% of an original £200,000 purchase price): - Year 6: 1.75% x £40,000 = £700/year (£58/month) - Year 7: if RPI was 3%, new rate = 1.75% x 1.04 (RPI+1%) approximately = slightly higher, and continues compounding each year - Over time, the interest charge can become a significant monthly cost, which is why many owners aim to repay or remortgage before year six. **How the loan itself is repaid** Unlike a normal loan, the amount owed is not fixed in cash terms -- it is a percentage of the property's current market value at the time of repayment, not the original loan amount. If the property has risen in value, the government receives a proportionally larger payout; if it has fallen, the government absorbs a proportional loss. **Worked example** A buyer took a 20% equity loan on a £200,000 property (£40,000 loan). Five years later, the property has risen in value to £240,000. To fully repay the loan, the owner must pay 20% of the current value: 20% x £240,000 = £48,000 -- £8,000 more than the original loan amount, reflecting the property's gain. **Ways to repay** - **Full repayment**: pay off the entire equity loan percentage in one go, usually funded by remortgaging or selling. - **Partial repayment ("staircasing")**: repay in minimum 10% chunks of the current value, reducing the government's stake and the owner's future interest charges. - **On sale**: the loan is automatically repaid from the sale proceeds, calculated as the same percentage of the final sale price. **Getting a valuation** Before repaying any amount, an RICS-qualified valuation is required (arranged through the Homes England / Help to Buy agent), which determines the current market value used to calculate the repayment percentage. This valuation typically remains valid for three months.

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