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The government launched the Help to Buy scheme in April of 2013. It’s reported that over 215,000 borrowers jumped on the offer and with good reason. It is a good scheme that’s helped thousands of FSBs (First Time Buyers) get onto the property ladder.
The Help to Buy scheme offers a 20% equity loan based on the market price of the home at the time of purchase. The loan is repayable interest-free for the first five years. After the five years, interest is applied at a monthly rate of 1.75% rising annually in line with inflation.
This is five years in, so those that joined the scheme five years ago are now facing equity loan interest repayments of 1.75 % of the outstanding amount of the loan.
It stands to reason that this month sees a spike in the amount of interest there is for remortgaging, but the catch is, the government loan may need to be repaid from the equity to access the vast majority of remortgage products. There’s still a long way to go for more lenders to enter the remortgage market with products tailored to customers with equity loans from the government.
Currently, there are only four mainstream lenders catering to the Help to Buy remortgage market:
4. Leeds Building Society
It’s an inferior lender pool, limiting the consumer choice for those who used the Help to Buy scheme.
Brokers do have access to a variety of lenders, each of which uses a varied set of criteria in determining the amount that can be borrowed based on the equity and what’s repayable on the government loan if at all any is. It is possible to retain the Help to Buy equity loan and remortgage at a better rate. Just not the best rate as it turns out.
What are the repayment options?
You can choose to keep the loan in place and remortgage what’s left. If you plan on repaying the loan amount from the Help to Buy scheme, you can either repay the whole amount borrowed – 20% of the property price when you bought the home – or you can use staircasing to repay 10% of the amount borrowed. The remaining 10% will accrue interest at the current monthly rate of 1.75% per month.
The trap that consumers are finding with the remortgage situation is that the limited mainstream lenders have no or low-cost fees associated with remortgaging such as the Leeds Building Society which currently offers a no-fee option. Brokers have more options and access to better rates, but the high admin fees are making it a distant dream. Some costs are reported to be in excess of £700 before administration fees are applied. There are exceptions as lenders have products available without consumer advice, and because of that, are only available through intermediaries to ensure consumers have information before entering into any agreements associated with the products.
What can you do now?
If you’re currently subject to the terms of the Help to Buy scheme, you may find yourself limited in what you can do with the property concerning extending it, and upgrading it due to approval issues. You will need approval from a Help to Buy agent to alter the building. If you have plans that require approval, the only way around that is to repay the entire 20% back to the government and break yourself out of the agreement.
If you’re okay with the terms and happy to leave things as is, but you’ve reached the end of your mortgage term, the mainstream lenders above are the only ones offering to remortgage homes where Help to Buy schemes are in place.
The problem you’ll encounter is the amount of equity you have in your home, because technically, while that 20% equity loan is in place, that’s 20% of your property owned by the government, therefore, anything you’ve paid off will still leave you with a lower equity because there’s 20% owned elsewhere.
The good news is that the Help to Buy loan is based on the original market price of your home. The amount you can borrow is based on the equity you have in your home just now at the current market price. Therefore, if the value of your home has risen, you’ll have more stake in it. The government won’t because they’ve stipulated that the loan is based on the market price of the property when you bought it. If your home has lost value since then, you will have a more significant problem with remortgaging.
In any case, the valuation costs are the main issue because you need to know the market price of the home now, so you and lenders know the amount you need to borrow.
In addition to that, it’s worthwhile considering whether to retain the Help to Buy loan. While that’s in place, there’s 20% equity you don’t have, which is what’s currently limiting remortgage choices because you already have an existing 75% LTV mortgage, which is low but not unheard of even without the Help to Buy scheme.
The calculations you should be making are whether it makes more financial sense to keep the 20% Help to Buy loan in place, and pay the 1.75% interest monthly rather than releasing more equity from your home to repay the Help to Buy loan, thereby increasing the equity you have in your home solely without the government scheme owning any equity.
When it’s only you that holds equity in the property, there’s a larger lender pool and certainly more choice.
It’s probably worth considering approaching the broader market through a broker for advice, as the mainstream lenders are offering limited choices. Besides, some products are only provided through intermediaries ensuring there’s impartial advice offered to customers, so even going directly to a mortgage lender, doesn’t guarantee you’ll get the best deal because you need to be advised before entering into a mortgage agreement.