Help to Buy homeowners who have reached the end of their five-year interest free period face paying heft sums in interest payments, and that could spell trouble for many of those struggling with the cost-of-living crisis, according to Benham and Reeves.

The original Help to Buy scheme ran from 1st April 2013 to 31st May 2021, offering an equity loan of up to 20% on the purchase price of a new-build home of up to £600,000, climbing to a 40% loan for those buying in London.

The five year interest free equity loan meant that the government had an entitlement to a share of the future sale proceeds equal to the contribution required to assist a purchase.

The research by the London-based estate agency shows that when taking into account both the depreciation of a property over the last five years, coupled with growth in property values, the government has made a tidy sum on each Help to Buy property across almost every region of England.

The East Midlands has proved the most profitable for the government when it comes to their Help to Buy hand outs, with the average Help to Buy home in the area now worth an estimated £300,690 versus £256,089 five years ago. This means that the government’s original share for those utilising the loan to the full 20% has increased from £51,218 to £60,138 – an increase of £8,920.

Benham & Reeves says the government has also benefited to the tune of more than £8,000 in the North West (+£8,432), the South West (+£8,025) and West Midlands (+£8,001).

In fact, their Help to Buy handout has backfired in just one region, London, where their potential 40% share in the average property has apparently fallen by £1,590.

What’s more, many Help to Buy homeowners have now reached the end of their five year interest free period, just as interest rates have started to spiral.

The good news is that for the first year, the interest charged is fixed at 1.75%. However, this still means that the average Help to Buy homeowner is facing increased costs. In London, the average annual interest and management fee due in the sixth year of a Help to Buy loan and the first year of the non-interest free loan payback period is a notable £3,455 per year, equating to £288 per month on top of the cost of a Help to Buy mortgage.

Even in the North East, where this additional cost is at its lowest, Help to Buy homeowners will still see an additional £751 added to the annual cost of their Help to Buy repayments.

The bad news? Beyond year one the interest owed increases each year by the annual increase in the Retail Price Index inflation plus 1%. A figure that has climbed substantially in recent years, from 3.2% in July 2018 to 9.0% in July 2023.

This means for those Help to Buy homeowners approaching their seventh year, the monthly interest paid is set to climb considerably. For example, those in London who were paying a fixed rate of £3,455 in their sixth year of homeownership, will now see this cost climb to £3,809 as a result of inflation – a jump of £354.

Director of Benham and Reeves, Marc von Grundherr, commented: “Many homebuyers scrambled to utilise the Help to Buy scheme with the promise of a five year interest free period acting as the cherry on the cake. However, this five year countdown is set to expire for thousands who bought under the scheme at a time when the cost of living has soared and interest rates have followed suit.

“As a result, they not only face far higher costs with respect to their monthly mortgage repayments, but the addition of the interest charged as well.

“This is a cost that is only going to climb as the years go by and it’s fair to say that the ticking time bomb of Help to Buy could soon explode, with those who can’t afford these escalating costs potentially facing the repossession of their homes if they aren’t able to manage. This would spell disaster for the housing market and would only pile further pressure on a rental market that is ill equipped to deal with current demand due to the government’s crackdown on landlords.

“Unfortunately for those facing this Help to Buy spike in unaffordability, the options are limited. You can only pay off the equity loan in half, or full, meaning that this isn’t an option for most. There are also very limited options when it comes to remortgaging, with many banks refusing to touch Help to Buy homes, while others require 10% equity in addition to the deposit you originally placed.

“This only really leaves you with the option to sell your home, although this will again prove problematic for those who may have fallen into negative equity.

“It’s fair to say that the consequences of yet another poorly devised government housing incentive, focused on feeling demand rather than supply, are now becoming very apparent.”