What is the Redemption Process in Help to Buy?
What is the Redemption Process in Help to Buy?
The Help to Buy scheme, introduced in the UK, has emerged as a significant avenue for numerous individuals desiring to make their way onto the property ladder. It’s an initiative that has made homeownership more attainable for those who may not have been able to afford it otherwise. But many new homeowners still want to know more about what the redemption process is and what are their options.
Understanding the equity loan
At the heart of this scheme lies the equity loan, which is a fundamental aspect that allows prospective buyers to acquire funding directly from the government. This funding is crucial and can make up to 20% of the purchase price of a brand new home, and this percentage doubles to 40% in the higher-priced housing market of London. This decreases the mortgage amount required from lenders, making homebuying more attainable.
While this sounds beneficial to those unable to secure a sufficient deposit or mortgage without help, it’s important that homeowners are aware of how to pay back the equity loan in help to buy schemes. This is known as the redemption process (see below).
The equity loan term typically lasts 25 years. If by the end of this period you haven’t repaid the loan, it becomes due. This means you’ll need to find another way to finance the repayment, be it through refinancing, selling the property, or other financial avenues.
What is the redemption process?
Despite the numerous benefits and opportunities the Help to Buy scheme presents, those who have taken advantage of the equity loan should bear in mind that repayment is inevitable. There will come a time when the borrowed amount must be returned to the government. This obligatory part of the process is referred to as redemption, and it’s a term that prospective homeowners should become familiar with as they embark on their journey towards homeownership through the Help to Buy scheme.
The key thing to remember is that the loan is based on a percentage of the home’s value, not a fixed sum. Therefore, if the home appreciates in value, the amount owed also increases, and conversely, if the home’s value decreases, the repayment amount will be lower.
For the first five years, the equity loan is interest-free. This is a significant benefit as it reduces the financial burden on buyers during the initial years. Starting in the sixth year, an interest fee is levied on the loan amount. It begins at 1.75% and increases annually based on the Retail Prices Index (RPI) plus an additional 1%. This interest is separate from your mortgage interest.
Getting a home valuation
At the end of the interest-free five years and the time comes to repay part or all of you equity loan, you’ll need an accurate, current value of your property. This valuation must come from a RICS accredited surveyor. They will inspect the property and provide a report indicating its current market value. This valuation determines how much you owe in repayment, based on the home’s current worth.
Understanding Your Repayment Options
The question, then, is what does the redemption process entail and how does it function within the broader framework of the Help to Buy scheme? This guide aims to elucidate this critical component by breaking down its various aspects. It will provide a comprehensive overview of the diverse repayment options that are available to buyers. Each option has its own set of advantages and disadvantages, which will be outlined in detail to help buyers make an informed decision.
One option, known as ‘partial repayment’ or ‘staircasing’, allows homeowners to pay off a portion of the equity loan without clearing the entire amount. The minimum repayment is usually 10% of the current market value of your property. This is an attractive option for those who might come into some money but not enough to repay the entire loan. It can reduce future interest payments and the eventual repayment amount when selling the house.
What happens if you decide to sell?
If you decide to move, the equity loan needs to be repaid from the sale proceeds. As the loan amount is a percentage of the home’s value, you’ll repay that same percentage of your selling price. So, if your property has increased in value, the government will take a larger sum than initially loaned. If the property’s value has decreased, the government will take a smaller sum.
What fees are involved in the redemption process?
There can be various fees associated with the equity loan, especially when looking to repay it. An administration fee may be applied when making a repayment. This fee covers the costs of processing the repayment and updating records. It’s crucial to review the terms and conditions provided by your Help to Buy agent or seek advice from a financial advisor to be fully aware of all potential charges.
To sum it up, while the Help to Buy scheme can be a fantastic stepping stone towards homeownership, it is essential to thoroughly understand all its aspects, particularly when it comes to asking what is the redemption process. This guide aims to help demystify this process, providing clarity on the repayment options, associated costs, and key deadlines to ensure a seamless and financially sound journey to homeownership.
Table of Contents
- What is the Help to Buy scheme?
- What is the redemption process in Help to Buy?
- What are the repayment options?
- How does the redemption process work?
- How long does the redemption process take?
- What to expect when paying back the loan
- What are the deadlines for redemption?
What is the Help to Buy scheme?
The Help to Buy scheme is a government initiative aimed at helping people purchase a home who may not have the necessary funds to do so. There are two parts to the scheme, Help to Buy Equity Loan and Help to Buy ISA.
Help to Buy Equity Loan is available to first-time buyers and existing homeowners looking to purchase a new build property. With this part of the scheme, the government provides a loan of up to 20% of the property’s value, meaning that buyers need only provide a 5% deposit and secure a mortgage for the remaining 75%. In London, the government loan can be up to 40%, which reduces the amount needed for a deposit to just 5%.
Help to Buy ISA is available to anyone saving for their first home. The government will provide a 25% bonus on savings of up to £12,000, which can be used towards the purchase of a property.
What is the redemption process in Help to Buy?
Redemption, in the context of the Help to Buy scheme, refers to the process of paying off the equity loan that was used to purchase a property. The loan can be redeemed in part or in full, depending on your circumstances, and the amount to be repaid will depend on the current market value of the property.
For example, if you used a 20% equity loan to purchase a property worth £200,000, the loan would be for £40,000. If the property has increased in value to £250,000, the amount that needs to be repaid would be 20% of £250,000, or £50,000.
What are the repayment options?
When it comes to repaying the equity loan, there are several options available.
Repaying the loan in full
This is often the preferred option for many homeowners who have the means to do so. Repaying the loan in full involves paying off the entire amount of the equity loan in one go. It removes the need to make monthly loan repayments and minimises the interest charges.
Making partial repayments
This involves making repayments of a set amount or percentage of the equity loan each month, alongside any mortgage repayments. This can be a good option if you who want to reduce the size of the loan gradually, without needing to find a large lump sum upfront.
Staircasing refers to when you gradually increases their stake in the property by purchasing additional shares in the equity loan. This can be done in increments of 10% or more, up to a maximum of 100%, effectively buying out the government’s stake in the property over time.
How does the redemption process work?
The Help to Buy Equity Loan is interest-free for the first five years, after which interest will be charged at a rate of 1.75%. The loan must be repaid within 25 years, or earlier if the property is sold.
The redemption process begins when you decide to sell their property or pay off the Help to Buy Equity Loan early. In either case, you will need to contact the Help to Buy agent in their area, who will provide them with a redemption statement outlining the amount that needs to be repaid.
The redemption statement will detail the amount outstanding on the equity loan, the interest charged, and any fees that may apply, such as an administration fee. You will need to provide the Help to Buy agent with a redemption figure to settle the loan. This can be obtained by contacting the agent directly or using the online calculator provided by the Help to Buy scheme.
Once the redemption figure has been obtained, you will need to instruct their solicitor to liaise with the Help to Buy agent to settle the loan. The solicitor will also need to ensure that the borrower’s mortgage lender is aware of the redemption and that any charges associated with the property are paid off.
How long does the redemption process take?
Upon receipt of the undertaking, Target (HCA) will provide the Authority to Complete within 5 days, verifying that the loan can be repaid on the specified date.
What to expect when paying back the loan
When it comes to paying back the Help to Buy Equity Loan, you should be aware that they will need to repay the loan based on the current market value of their property. This means that if the property has increased in value since it was purchased, the amount that needs to be repaid will be higher than the original loan amount.
For example, if a property was purchased for £200,000 with a 20% equity loan of £40,000, and the property has increased in value to £250,000, you would need to repay 20% of the current market value, which is £50,000. This represents an increase of £10,000 on the original loan amount. Therefore, you will need to obtain a Help to Buy valuation from a qualified surveyor to determine the current market value. It’s important to remember that this valuation is usually valid for around 3 months.
You should also be aware that they will need to pay for their own legal fees and any fees associated with their mortgage lender when redeeming the Help to Buy Equity Loan. These fees can vary, but the Help to Buy agent will provide a breakdown of all costs in the redemption statement.
Finally, paying back the Help to Buy Equity Loan early may result in early repayment charges. These can vary depending on the lender and the terms of the loan.
What are the deadlines for redemption?
Once you understand what the redemption process is, you need to consider the deadlines. Failing to meet a deadline can result in additional costs or even the loss of the property. The key deadlines are:
- The loan term – The equity loan is interest-free for the first five years, after which interest charges will apply. The loan term is 25 years, but it can be repaid earlier if desired.
- Selling the property – If the property is sold, the equity loan will need to be repaid in full, and the government’s stake in the property will be released. This must be done within 90 days of completion of the sale, or additional costs may be incurred.
- Staircasing deadlines – If you want to staircase, there are deadlines that must be met. For example, if you want to staircase by more than 10%, they must give the government at least 21 days’ notice.
- Interest charges – After the first five years, interest charges will apply to the equity loan, and these will be added to the amount to be repaid.
Redemption in the Help to Buy scheme is the process of paying off the equity loan that was used to purchase a property. You have several options for repayment, including making partial repayments, repaying the loan in full, or staircasing. However, you need to be aware of the costs involved, including valuation fees, legal fees, and early repayment charges, as well as the deadlines they must meet to avoid additional costs. By understanding the redemption process, you can make informed decisions about your future in the property market.