Slowing house prices spell bad news for Help to Buy equity loans

House prices in England are stagnating, which could be bad news for home owners – but if you’re one of the 160,000 who bought using a Help to Buy equity loan, you may be particularly hard hit.

Recent house price data from the Land Registry suggests English property values are beginning to grow at a slower rate, with the average price actually decreasing from February 2017 to February 2018. But the trends vary, with some local authorities seeing much larger dips.

Which? explains how the change in house price fortunes could affect owners who bought with a Help to Buy equity loan.

House price growth tapers off

Over the past five years, home owners in most areas of England have enjoyed significant growth in the value of their homes.

Since 2013, the average price for England has risen by 20% – and in some areas of London, including Waltham Forest and Hackney, owners have seen their homes almost double in value over the same period.

Not all areas have been so lucky, though – 24 out of 303 local authorities saw price growth of less than 10%. Hartlepool was hardest hit, with house prices dropping by an average 19% during this period.

It’s a trend that looks to be spreading – in fact, the average house price for England as a whole fell from £285,438 in February 2017 to £282,775 in February 2018, representing a decrease of 1%.

While some areas recorded significant average house price increases – the Staffordshire Moorlands, for example, saw a jump of 27%, although the small sample size is likely to have had an impact here – over the past year, just over a third of local authorities saw the average price decrease and 17 recorded no change.

Some areas – especially many of the inner London boroughs – saw decreases of more than 10%.

Help to Buy hotspots slow down

Some of the areas with the highest number of Help to Buy loans also experienced some of the highest price growth over the past five years – but many of these areas are now beginning to slow.

Wiltshire, where 2,489 Help to Buy loans have been approved, enjoyed a 30% surge over the past five years. But over the past year, prices in this area have eased off by 3%.

Leeds is another example, with 2,109 Help to Buy loans having been taken out. After a 26% surge from 2013 to 2018, prices over the past year have edged back by 1%.

In the Aylesbury Vale, meanwhile, the past five years brought a 27% boost – but this past year has seen prices drop by 9%. In total, 1,663 Help to Buy loans have been approved in this area.

How does this affect your Help to Buy loan?

Under the Help to Buy scheme, a buyer can put down a 5% deposit, the government gives them a 20% equity loan (40% in London), and they take out a mortgage to cover the rest of the house price. The scheme is open to people buying a new-build property for less than £600,000.

For the first five years, the equity loan is interest-free – and often, buyers also take out five-year fixed-rate mortgages offering low rates.

After the first five years, the homeowner starts paying interest on their Help to Buy loan and also, a lot of the time, significantly more interest on their mortgage after being transferred on to their lender’s standard variable rate.

Interest on the equity loan increases each year, so you could end up adding hundreds to your bill over time.

For that reason, many homeowners opt to remortgage their property, pay off the equity loan and continue paying mortgage interest at the new rate. In fact, most banks require you to pay off the equity loan in order to remortgage.

But this is usually only possible if your property has grown significantly in value, meaning slow price growth could be a stumbling block.

How it works in practice

Say you buy a £200,000 property with a 20% Help to Buy loan, putting in a £10,000 deposit yourself. In the first year, you’d owe the bank £150,000, and the government £40,000.

By year five, you’re likely to have repaid a chunk of your mortgage through repayments – say £30,000. So at this point, you owe the bank £120,000.

The good news: your property’s value has grown by 20%, meaning it’s now worth £240,000. The bad news is you owe the government 20% of the current value – so your equity loan debt has grown to £48,000.

By using the equity you’ve built up in your property, you can remortgage and repay the government loan in full.

But what if your property’s value doesn’t grow? After five years, you’d still owe the bank £120,000 and the government £40,000 – but banks are unlikely to allow you to remortgage for the full value of the property, making it difficult to pay off your loan.

Options for paying back a Help to Buy loan

If remortgaging is off the table, you may need to start paying interest on the loan instead. In the sixth year of your loan, you’ll pay annual interest at 1.75%. Each subsequent year, the rate rises by the Retail Prices Index plus 1%.

On a £40,000 equity loan, for example, you could be paying up to £712 for the first year after the interest kicks in, and almost £896 by year 10 (assuming RPI of 6%).

You’ll need to pay this annually in addition to your monthly mortgage payments.

Keep in mind that this is just the interest payments – the loan will remain at 20% until you repay it.

As an alternative, you could sell your home, repay the mortgage and the Help to Buy loan, and buy a new home with the equity you’ve accrued. Make sure you factor in any fees and costs you’re likely to incur, including solicitor fees – and, as you’re no longer a first-time buyer, stamp duty.

Seek advice on remortgaging

Remortgaging can be complex, particularly if you also hold a Help to Buy loan. For this reason, you should consider speaking to a whole-of-market mortgage broker who can help you find the right lender for your circumstances.

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