The FSA document covers a very good example as below:
Example 1 – The value of your home increases
Adam buys a house for £150,000. He has a deposit of £3,750. In addition to a standard mortgage loan of £112,500, he takes out a £18,750 equity loan from the mortgage lender and another equity loan for £15,000 from the HomeBuy Agent.
■ The mortgage lender’s equity loan is 12.5% of the property’s value (£18,750 is 12.5% of £150,000).
■ The HomeBuy Agent’s equity loan is 10% of the property’s value (£15,000 is 10% of £150,000).
When Adam decides to sell his home, the value of his house has increased by 20% to £180,000. This is an increase of £30,000. So what would he owe on the mortgage lender’s equity loan and what would he owe on the HomeBuy Agent’s equity loan?
The mortgage lender’s equity loan
Adam originally borrowed 12.5% of the property’s value from his mortgage lender. So, in addition to the £18,750 he originally borrowed, he will also owe 12.5% of the £30,000 increase, which is £3,750.
So, on the mortgage lender’s equity loan, Adam now owes £18,750 plus £3,750, giving a total of £22,500.
The HomeBuy Agent’s equity loan
Adam originally borrowed 10% of the property’s value from the HomeBuy Agent. So, in addition to the £15,000 he originally borrowed, he will also owe 10% of the £30,000 increase, which is £3,000. So Adam now owes the HomeBuy Agent £15,000 plus £3,000, making a total of £18,000.
What happens to the equity loans if the value of my home increases?
The amount you finally repay to the mortgage lender and HomeBuy Agent on the equity loans will depend on the value of your home at the time you repay the loans. The share of any increase in value that you owe will be based on the percentage of your home’s value you originally borrowed.
Adam will also have to pay back the amount he borrowed on the standard mortgage loan from his mortgage lender, but this isn’t affected by changes in the value of his home.
Remember:
If you borrow under the scheme, part of any increase in the value of your home will belong to the mortgage lender and the HomeBuy Agent. This means that the amount you owe them both will increase if the value of your home increases. The more the value of your home goes up, the more money you’ll owe on your equity loans. This could mean a big increase in the amount you owe. You need to keep this in mind – think about what you owe and how you will repay it.
Link to Previous article: Open Market Home Buy Scheme - I
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