Those who made use of the Help to Buy equity loan scheme in 2013 may end up paying a high interest rate, or have their property left with little equity in it, once their fixed deal finishes in a couple of months.
When the scheme was started back in May 2013, thousands of first-time buyers took out a two-year fix, which allowed them to purchase a new house with an equity loan of up to 20 per cent. This was interest-free and provided by the government, lasting for the first five years. They needed to make a 5 per cent deposit, and then have a mortgage for the 75 per cent still left to pay.
However, borrowers are being warned that they could be stuck with their current bank once their deal ends, and this could mean that they have to pay higher rates, such as if they are moved onto the standard variable rate. Some banks offering alternative options to buyers (which they may find more beneficial), are Lloyds, Halifax, Barclays and Leeds Building Society.
If buyers wish to exit the scheme, then they will be expected to repay the 20 per cent equity loan that the government provided, either in full or in stages. Completely repaying it will result in the property having a very low equity, and consequently re-mortgages could be more expensive.
However, this could actually be more beneficial, mainly for those in the South East and London, areas which have experienced drastic increases in house prices. Rising house prices mean a larger 20 per cent stake, so buyers would be better off repaying their 20 per cent loan as soon as possible.
“They will want to look around the market to see what rates are available, but not many lenders plan to offer switching, so borrowers will be almost completely reliant on their existing lenders to come up with a decent rate,” said David Hollingworth, of mortgage broker London and Country.