The Help-to-Buy equity loan scheme was launched in 2013 to help young buyers get onto the property ladder. Now, more than five years later, the first of those who took out the scheme are ending their fixed term period and are now required to start paying back interest.
Here enters a problem: there has been limited Help-to-Buy remortgage options, until now.
How Does the Current System Work?
When you buy a property using Help-to-Buy, you put down a 5% deposit and a government equity loan tops it up by 20%, meaning you only need to loan 75% and repayments become more affordable.
This 75% mortgage is usually a two or five year fixed rare deal, meaning you’ll have to remortgage to avoid being moved on to the lender’s standard variable rate (SVR) and paying more once the period ends. However, traditionally, this was easier said than done.
Until recently, most lenders did not offer Help-to-Buy remortgage products and those that did would require borrowers to pay off the 20% equity loan. This was understandably tricky for many homeowners who did not have tens of thousands in the bank going spare in order to pay off the loan and then pay higher repayment rates and interest costs.
In fact, according to This is Money, in April 2018, just 10 of the 23 lenders who were willing to provide a mortgage for those coming to the end of a Help-to-Buy equity loan were prepared to accept a remortgage application.
Read more: Help-to-Buy Statistics: 5,000 Homes Were Bought in Wales Using Help-to-Buy
Many Banks Now Offering Help-to-Buy Remortgage Deals
This issue will now hopefully be in the past for many as banks and building societies such as NatWest and Leeds Building Society introduce new remortgage products.
These products will allow Help-to-Buy property owners remortgage to a like-for-like loan which maintains the same balance and term. However, the Homes and Communities Agency (HCA) will need to be notified of plans.
However, please note, this may remain difficult if you have had a change in circumstances since first purchasing your home. For example, you have changed from full-time employment to being self-employed. If this is the case, we would recommend speaking to a professional mortgage broker.
Should I Pay Off My Help-to-Buy Equity Loan?
There are of course some benefits to paying off your 20% equity loan, if you can afford it. Doing so will mean you will benefit 100% from any uplift in property price, you’ll have greater choice when it comes to remortgaging, and there will be no need to pay the associated interest after the initial five-year period is over.
If you decide to keep the equity loan, you’ll be required to start paying interest at 1.75% from the sixth year onwards. This will rise in the seventh year by the Retail Price Index plus 1%. This is required on top of regular mortgage repayments. This will likely mean higher monthly costs but will not require a lump sum payment.
The deciding factor may be how much your property has risen in value and how much you predict it will increase in coming years. An equity loan is based on 20% of the property price, meaning paying it off later could mean a bill considerably higher than it would have been had you done so years before.
Of course, there is the option of a middle ground. Home owners could staircase when remortgaging, meaning paying back just part of the Help-to-Buy loan. This can provide more remortgage options, however will likely accrue administration and valuation fees, and borrowers are expected to make payments in 10% increments.
Coming to the End of Your Help-to-Buy Interest-Free Period?
If you are considering remortgaging your home and require a conveyancer, our team of friendly and experienced solicitors can help. We managed 23% of the first 5,000 Help-to-Buy purchases in Wales, so we know this scheme better than most.
Get in touch today for help with the legalities of remortgaging.