Homeowners can pay off the equity loan, but many are unable to because house price growth has been so extreme. While the interest charged on the loan is based on the amount borrowed at purchase, the repayment cost is calculated based on the property’s current value.
Jenny Frawley*, 47, is worried she will have to sell her home. Ms Frawley lost everything financially after she left her ex-husband due to domestic abuse. Five years ago, she used Help to Buy to get back on the housing ladder and purchased a three-bed semi in Cornwall.
Since then, house prices have soared. Ms Frawley took out a £53,000 20pc equity loan to buy the property. Now, to buy her way out, she would have to pay £64,000. She said: “I lost my job during the pandemic and had to use all of my savings to support myself.”
This means that when her interest-free period ends in November, her housing costs will surge by 42pc. “Right now my mortgage costs £775 per month. From November, I think I’m looking at paying £1,000 or £1,100. I might have to sell up. Maybe I’ll be left with £50,000. I’ll buy a motorhome and give up on the housing ladder,” she said.
But she will still be better off than those who purchased the following year. As inflation soars, the Bank of England is expected to raise interest rates further. Capital Economics, a research firm, has forecast that the Bank Rate will jump from 1pc today to 3pc in 2023. This will push up remortgaging costs even further.