Aspiring homeowners who used the Help-to-Buy equity loan scheme to get on the property ladder could face an unexpected rise in their interest payments due to inflation.
According to the government, the Help-to-Buy scheme helped more than 375,000 aspiring homeowners turn their dreams into a reality between 2013 and 2022, the majority of which were first-time buyers. In total, £23.7 billion was lent through the scheme, which funded £105.4 billion of property purchases.
Under the scheme, buyers could borrow up to 20% of the property’s purchase price (40% in London) through an equity loan. This meant they needed just a 5% deposit and could potentially take out a smaller mortgage or buy a more expensive home.
The equity loan was interest-free for the first five years and fixed at 1.75% in the sixth year. However, after six years, the interest rate is linked to inflation. When homeowners initially took out the Help-to-Buy loan, inflation was lower, so interest payments could be much higher than previously calculated.
Inflation has been significantly above the Bank of England target since 2022
The Bank of England (BoE) has an inflation target of 2% a year. However, the rising cost of living has pushed inflation significantly above this target since the end of 2022 thanks to the long-term effects of the Covid-19 pandemic and the war in Ukraine.
In fact, inflation reached a 40-year high in October 2022 when it was above 11%.
The rate of inflation has fallen from the peak but as of September 2023, it’s still above the target at 6.7%. The BoE doesn’t expect to reach its 2% target until the first half of 2025.
So, as the interest you pay on your Help-to-Buy equity loan is connected to inflation, your interest payment might be higher than you anticipated.
After the first six years have passed, the interest rate increases every year in April, either by adding the:
It’s worth noting that the amount you owe through an equity loan has likely increased too.
When you sell your home or the mortgage is paid off, you have to repay the same percentage as the initial equity loan. So, if the value of your home has increased, so will the amount you owe.
Let’s say you used a 20% equity loan to purchase a £100,000 property. If the value of the property increased by £30,000, your loan would rise from £20,000 to £26,000.
At a time when household budgets are already under pressure, an increase in Help-to-Buy interest payments could mean some families struggle to meet their outgoings.
Help-to-Buy users could face a double whammy of rising costs
In addition to rising interest payments for Help-to-Buy loans, homeowners are also likely to face increased mortgage repayments.
Inflation is having a direct effect on the mortgage market. Homeowners with a variable-rate mortgage have likely faced repayments rising several times over the last 18 months, while fixed-rate mortgage holders may have seen a sharp rise in their repayments when their deal came to an end.
At the start of the year, the Office for National Statistics estimated that more than 1.4 million UK households would see their fixed-rate mortgage deal end in 2023. More than half benefited from an interest rate below 2%.
With average interest rates closer to 6% as of October 2023, household expenses may be much higher than they were just a year ago.
For families who use the Help-to-Buy scheme, it could mean two property-related expenses have increased thanks to high inflation.
3 practical options that could help you cut household bills
If rising payments are affecting your budget, here are three options that could help you.
We could help you search the mortgage market
If your current mortgage deal is coming to an end or you’d like to compare deals, please contact us. We could help you search the market for the right mortgage for you and may be able to help you secure a more competitive interest rate.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.