How to remortgage your Help to Buy
It’s five years since the Government launched its flagship Help to Buy equity loan scheme, designed to help thousands onto and up the British property ladder.
But this month, the first wave of Help to Buy homeowners will start to owe interest on these loans, bumping up their monthly payments by some margin.
At the same time, those who bought and chose to fix their mortgage for five years are also facing the prospect of having to remortgage soon.
Yet higher monthly outgoings will have an impact on the mortgage they can afford.
And to add to the headache, while there were 23 lenders willing to provide a mortgage to those buying with the aid of a Help to Buy equity loan five years ago, just 10 lenders are prepared to accept a remortgage application from borrowers looking to switch from another lender today.
According to research by mortgage broker RateSwitch, this includes major institutions such as Lloyds Bank, Nationwide, NatWest and Santander.
Lee Flavin, of RateSwitch, said: ‘Help to Buy homeowners face a financial timebomb from April, with the prospect of rising Government fees and mortgages rates hitting home hard. Struggling families and homeowners could see their costs rise by thousands of pounds a year.
‘The Government should be supporting homeowners currently mortgaged under the Help to Buy equity loan scheme. But the information available on their dedicated websites is very much geared towards helping buyers onto the scheme – there’s little to no information available to support homeowners already on it, and this has to change.’
There are also various questions for borrowers who need to remortgage in the coming months.
Should you try to pay back the whole equity loan to the Government and remortgage to fund it? Can you pay back just part of the equity loan by remortgaging?
What if you’ve become self-employed since you bought? What if the value of your property has fallen since buying and you’re worried about how to remortgage?
Flavin said: ‘For those mortgaged under the scheme, the number of options available to remortgage or switch between lenders is clearly limited in comparison to those mortgaged under normal terms.
‘Put simply, if your mortgage is currently with Halifax and you want to move it across to Nationwide because they’re offering really good rates – you can’t.
‘But there’s a straightforward solution to this problem – these consumers could simply look to switch to a better rate through their current provider to save money quickly.’
What’s happening to Help to Buy loans?
The Government launched the equity loan scheme in April 2013. The deal offered borrowers an equity loan equal to up to 20 per cent of the value of the property interest-free for five years.
In London, the scheme was even more generous, affording borrowers an interest-free equity loan of up to 40 per cent.
It meant homeowners had to find just 5 per cent in savings for a deposit, while mortgage lenders would fund the remaining 75 per cent (or 55 per cent in London) with a mortgage.
This had an added advantage: the bigger the deposit, the lower the mortgage rate tends to be.
Help to Buy loans were available on new build properties only, with a maximum value of £600,000.
Since launch, almost 150,000 households have taken advantage of the scheme, with over £7billion lent out by the Government in five years.
But this month, the first of those using the scheme will see their monthly outgoings rise as the first interest payments become due.
More than 10,000 borrowers took an interest-free loan towards their deposit in April 2013 – and they will have to start paying interest on their equity loan at a rate of 1.75 per cent.
This rate will start going up by retail price inflation (currently 3.6 per cent) each year from 12 months after they make their first interest payment.
What happens if you keep the Help to Buy loan
When you reach the end of the first five years, you’ll have to start paying interest on the equity loan.
This will be charged at 1.75 per cent in the sixth year. On a £40,000 Help to Buy loan this equates to £700 a year or £58.33 a month.
From the seventh year, this rate will rise annually by the Retail Price Index, currently 3.6 per cent, plus another 1 per cent.
This will be payable monthly on top of your regular mortgage payments to your lender and you should note that you are only paying the interest – not the capital. You are not reducing the size of the original loan.
Because you will have an additional monthly repayment, this will also be factored in by your mortgage lender when they assess your application to remortgage and it could reduce the amount you can afford to repay to them each month.
You may also find it harder to remortgage than you might think. More on this below.
Should you pay back your Help to Buy loan now?
First things first: not all loans are made on the same terms.
A mortgage is a loan of debt, made to you to buy a property. You pay interest on this debt and repay some of the capital.
Eventually – usually over 25 to 40 years – you should have paid it off and the property is owned by you outright.
An equity loan is different. When you take equity in an asset (the property in this case) you own a share.
Under Help to Buy, the Government is making the equity loan and therefore owns a share of any change in the value of the property between the date you bought it and the date you sell it.
If you took a 20 per cent Help to Buy loan, the Government is owed the original capital amount plus 20 per cent of any change in the overall value of the property.
If you choose to pay back the Government equity loan today, you will therefore owe them the original loan, plus or minus a fifth of any change in the value of the property.
If you’ve built up savings since you bought your home, or you have access to cash you are allowed to repay the full equity loan today.
It’s also potentially possible for you to remortgage to a bigger loan amount than you borrowed five years ago, in order to raise extra finance to repay the equity loan today.
A potential advantage of repaying the equity loan in full today, is that any future uplift in the value of the property after you pay back the Help to Buy, will be 100 per cent for your benefit and won’t need to be shared with the Government.
The disadvantage – if you’re having to remortgage to finance it – is that your loan-to-value may rise significantly and your mortgage payments are therefore likely to rise by quite some margin too.
Can I remortgage and repay the Help to Buy loan?
The answer to this will depend on your circumstances as there are a number of moving variables that will affect how easy it is to remortgage.
These variables include your loan-to-value, how much the property value has risen or fallen, whether you have any equity to put in and how much income you have.
To help you see how the different options would affect a typical borrower, we’ve included the examples below.
These examples are based on the most straightforward circumstances – and they don’t include the fact that not all lenders will accept your application to remortgage unless you are repaying the full Help to Buy loan.
The actual figures will also depend on how much you borrowed from the Government, how much you borrowed on the mortgage and the change in the value of your home.
To qualify for a mortgage, you’ll also need to be able to show that you can afford the loan repayments out of the income you have left over each month after fixed costs.
Can I remortgage to repay part of the Help to Buy loan?
Technically this is possible but it’s not at all easy to do. Many mortgage lenders have restrictions on this and it’s likely you’ll find you’re stuck with your existing lender.
They might let you remortgage part of the equity loan and transfer to a new deal with a better mortgage rate. On the other hand, they might not. If the latter, then you may find you roll onto your lender’s default standard variable rate.
These vary by lender and may change when the Bank of England changes the base rate, which is currently 0.5 per cent but is tipped to rise later this year.
My circumstances have changed, can I remortgage?
If you have changed jobs in the past five years but are still employed full-time, it’s likely you’ll be alright when remortgaging.
However, those who have gone self-employed in the past three years are likely to find that the number of lenders that will offer a mortgage is reduced.
Rules enforced by the financial services regulator mean that lenders need evidence that you can afford repayments – if you’re self-employed, this usually means providing a minimum of one year’s accounts and more typically three years.
Should I stay with my existing lender or switch?
You may find you don’t have a choice. Research by mortgage broker Rateswitch has discovered that fewer than half of the lenders that gave borrowers a Help to Buy mortgage will accept remortgage applications from borrowers who want to switch lenders.
This means one of the most likely ways for these homeowners to save money is to switch to a better rate with their current lender.
Lee Flavin, of RateSwitch, said: ‘Homeowners mortgaged under this scheme need to consider switching to improved rates as soon as possible to help combat soaring costs.’
What if my property value has fallen?
Seeing the value of your home fall only really becomes an issue if you want to sell and move or if you need to remortgage.
The Government made a commitment to share in any change in the value of your property through Help to Buy, meaning if you see a 10 per cent drop in the value of your property then you’ll owe the Government the original loan minus a 20 per cent share of that drop.
On the £200,000 property example above, this would mean that your property was now worth £180,000.
A 20 per cent share of the drop in value would equate to £8,000 of the £40,000 Help to Buy equity loan. This means if you wanted to repay the loan, you’ll owe the Government £32,000.
Note however, this value is only realised when you sell the property or repay the equity loan. If you’re remortgaging and keeping Help to Buy, you’ll still have a loan of £40,000.
Remortgaging could prove harder too. We’ve put the example below to illustrate how a fall in your home’s value would affect your mortgage.
– 10th April 2018 –