One of the most attractive features of the Help to Buy equity loan is that the first five years are completely interest-free. During this period, the only charge is a modest £1 per month management fee. However, from year six onwards, interest charges begin and increase every year. For many homeowners, this transition comes as a significant financial shock, making it essential to understand the numbers and plan ahead.
How Interest Charges Begin in Year 6
When you enter the sixth year of your Help to Buy equity loan, you start paying interest at an initial rate of 1.75% per annum on the outstanding equity loan amount. This is not calculated on the original purchase price but on the equity loan value itself. For a £50,000 equity loan, the year six interest charge would be £875 per year, or approximately £72.92 per month.
While this initial charge may seem manageable, it is the annual escalation that catches many borrowers off guard. Each year after year six, the interest rate increases by the Consumer Price Index (CPI) plus 2%. This means the rate rises every single year, regardless of what happens to the Bank of England base rate or general mortgage rates.
Understanding the CPI + 2% Escalation
The CPI is a measure of inflation published by the Office for National Statistics. The Help to Buy interest rate formula takes the previous October's CPI figure and adds 2 percentage points. For example, if October's CPI is 4%, your interest rate increases by 6% (4% + 2%) compared to the previous year's rate.
This compounding effect means your interest charges can grow rapidly. Unlike a standard mortgage where you can shop around for competitive rates, the Help to Buy interest rate formula is fixed in your equity loan agreement and cannot be negotiated or changed.
Worked Example: £50,000 Equity Loan Over 10 Years
Let us look at how costs escalate on a £50,000 equity loan, assuming an average CPI of 3% per year (meaning the rate increases by 5% annually, which is CPI of 3% plus the fixed 2%):
Years 1 to 5: Interest-free. You pay only the £1 monthly management fee, totalling £12 per year.
Year 6: Interest rate is 1.75%. Annual cost: £875 (approximately £73 per month).
Year 7: Rate increases by 5% to 1.8375%. Annual cost: £919 (approximately £77 per month).
Year 8: Rate rises to 1.929%. Annual cost: £965 (approximately £80 per month).
Year 9: Rate reaches 2.026%. Annual cost: £1,013 (approximately £84 per month).
Year 10: Rate climbs to 2.127%. Annual cost: £1,063 (approximately £89 per month).
By year 10, you are paying over £1,000 per year in interest on the equity loan alone, on top of your regular mortgage payments. And crucially, these payments do not reduce the equity loan balance at all. They are purely interest charges. The full equity loan still needs to be repaid in its entirety when you sell or at the end of the 25-year term.
What Happens If CPI Runs Higher?
The worked example above assumes a moderate CPI of 3%. In recent years, UK inflation has been considerably higher, with CPI reaching over 10% in late 2022. In a high-inflation environment, the interest rate escalation is much steeper. With CPI at 6%, for instance, the annual rate increase would be 8% (6% + 2%), pushing costs up far more aggressively and potentially reaching rates of 3% or higher within a few years of the interest-free period ending.
Your Options for Managing Rising Costs
Repay the equity loan early: You can make voluntary repayments at any time, in chunks of at least 10% of your property's current market value. This requires a RICS valuation and is processed through Target Group. Many homeowners choose to repay the full loan before year six to avoid interest charges entirely.
Remortgage to raise funds: If your property has increased in value and you have built up sufficient equity, you may be able to remortgage to a larger loan amount and use the additional funds to repay the equity loan. This effectively converts the government equity loan into a standard mortgage, which may offer more predictable and competitive rates.
Plan ahead with our calculator: Use the Help to Buy Calculator to model your specific situation. Enter your equity loan amount and see exactly how your costs will escalate year by year, helping you decide the right time to act.
The key takeaway is that the Help to Buy equity loan becomes progressively more expensive every year after year five. The sooner you develop a repayment strategy, the more control you will have over your housing costs in the years ahead.