A mortgage should be seen as something that you review on a regular basis, particularly at the end of any fixed or tracker term, to make sure you are getting the best deal for your circumstances – just like you would with your car insurance. This remains the same for those who have used the government Help to Buy equity loan scheme to purchase their home.
However, remortgaging with Help to Buy is not quite as straightforward or as easy as remortgaging without one. But don’t worry – we can help you navigate the market and test your eligibility.
What is the Help to Buy Equity Scheme?
The Help to Buy Equity Scheme was set up by the government in 2013, and it will run until March 2021. It was initially launched in 2013 to give first-time buyers a leg-up onto the housing ladder, however it is currently open to all homeowners who are looking to move. It is only available on new build properties in England and the new home must be the applicant’s main residence and only property. Similar schemes are available in Wales and Scotland but are subject to slightly different rules.
When making use of this scheme, you must put down a minimum 5% cash deposit on a new build property. As part of the scheme, you are then eligible for an equity loan (provided by Homes England) of up to 20% to make up the rest of your deposit. In London, this figure is 40% due to the higher house prices. The remaining 75% (or 55% in London) of your property purchase is funded by a personal mortgage.
Property purchase price – £240,000
Buyers cash deposit (minimum 5%) – £12,000
Government equity loan – £48,000
Mortgage remaining (minimum 75%) – £180,000
Your equity loan is provided interest free for the first five years. After five years, you’ll incur a fee of 1.75% of the loan value and this fee increases each year by a further 1%, plus any increase in the Retail Price Index. This fee does not contribute towards the repayment of the loan amount. Your equity loan must be fully repaid upon sale of the property from the sale proceeds, or after a maximum of 25 years.
It’s also important to remember that the government owns 20% of what your property is worth – not what you paid for it. If your property increases in value over the years, so does your equity loan.
With many people now coming to the end of their initial mortgage term or coming up to that 5 year mark where they will begin to make annual fee payments on the loan, they are faced with the prospect of higher monthly outgoings unless they take action.
How can remortgaging help?
With all mortgages, it is recommended that you review your mortgage product on a regular basis to ensure that you have the best mortgage product available to suit your circumstances. It is particularly important to do this at the end of any fixed term agreement, such as a 2 year, 3 year or 5 year fixed interest or tracker deal. This will avoid you defaulting onto your mortgage lenders Standard Variable Rate (SVR), which is typically higher than the rates that might be available elsewhere.
This is equally as important when you have a Help to Buy equity loan, although the remortgage options are generally more restricted. Remortgaging could allow you the opportunity to not only enjoy the best market rates, but also to consider borrowing additional funds to repay some or all of your equity loan.
Before you decide to remortgage your Help to Buy equity loan, ask yourself:
- Do I want to remortgage for a lower rate?
- Do I want to remortgage and reduce my Help to Buy loan?
- How much will it cost to remortgage?
- Do I have the finances to obtain the mortgage I need?
If you’re unsure about the answers to any of these questions, a mortgage broker or advisor will be able to help and to find the answer with you.
Should I repay some or all of my Help to Buy equity loan?
The equity loan can be repaid at any time over the 25 year maximum term, paying either 50% or 100% of the outstanding equity loan sum, however doing this will usually incur a fee. In London where the Help to Buy equity loan can be up to 40% of the purchase price, you are able to pay it off in four 10% increments instead. You could consider using a large amount of savings, inheritance money, a bonus or a cash gift to pay off your loan – or you could pay it off through remortgaging.
The equity loan may appear to be ‘free money’, particularly for the first five years where you’re not making any monthly repayments, not paying interest and not incurring any fees. After those first five years however, that 1.75% fee comes into play, increasing year-on-year. This will quickly amount to a sizeable annual fee.
The important thing to also bear in mind is that your loan amount is not a fixed amount as it is based upon the market value of your property, which may have increased or decreased since purchasing. If the value of your home goes up by 50%, so does the amount of the equity loan, meaning you may eventually have to pay back a much higher amount than you originally borrowed. This is why you will need to have your home valued by a suitable RICS valuer before you plan any repayment to your equity loan, or decide to remortgage to pay it off in full.
By remortgaging to raise additional funds to pay off some or all of your equity loan, you may be increasing your monthly outgoings (by having a bigger mortgage) but you will be reducing the government’s share of the equity in your property.
Staircasing out of an equity loan
You can pay off part of your equity loan, and this is known as staircasing. Let’s say you purchase a property for £200,000 with the benefit of an equity loan of £40,000 (20% of £200,000). After a few years you decide you want to repay the minimum lump sum (10%) off the equity loan. You get your property valued and it has increased to £220,000, so your equity loan amount now stands at £44,000 (20% of £220,000). The minimum you would be able to repay is £22,000 as this is 10% of the property’s current value.
What are my remortgaging options?
Essentially, you have three options available to you to consider:
Transfer your existing mortgage to a new product and/or lender and keep your full equity loan. Not all mortgage lenders will fund alongside the equity loan scheme and so may find yourself a little restricted.
With this option, a £200 fee is payable to Homes England in addition to the cost of your RICS valuation. There might also be additional legal fees, particularly if you move to a different mortgage lender. Remember, if you keep the equity loan, you will begin to pay that 1.75% increasing annual fee after five years.
Arrange a remortgage for a higher amount to repay your existing mortgage and all of the equity loan, thus giving you full ownership of your property. This is the most common way to pay off the equity loan. A £200 fee is payable to Homes England and you will need to pay for a RICS valuation too. There shouldn’t be any additional legal fees above those usually involved with remortgaging.
Arrange a remortgage for a higher amount in order to repay your existing mortgage and partially repay your equity loan. Again, the mortgage market for this option is limited, so you may struggle to get the deal you want.
Once again, a fee is payable to Homes England in the amount of £200. You will also have to pay for the valuation by a RICS certified valuer, along with additional legal fees associated with the equity loan. Going forward, you will have the new monthly mortgage cost charged by your new lender, plus the annual Homes England fee after the initial five year period has expired. This fee will be based on the new equity loan balance following the partial reduction.
How can Mortgage Light help?
Remortgaging with help to buy can certainly be confusing. But that’s exactly what we’re here for – to break it down and make it simple.
- Book in some time to speak to the Mortgage Light remortgage team. We’ll discuss your affordability and see what options are available to you – a like-for-like remortgage, a staircasing remortgage or a full ownership remortgage
- We’ll do all the relevant checks to ensure that the remortgage option that you have chosen is affordable. Upon receipt of the relevant documentation from you, we will be able to provide you with an AIP/DIP
- Then you’ll need to instruct a RICS valuation. You’ll need to pay for this upfront, and we can advise you how to do this
- We will submit your application to the lender
- Time to appoint a solicitor – we can provide you with details of specialist solicitors who deal with Help to Buy remortgages
- If staircasing or looking to repay the equity loan in full, you’ll need to instruct a valuation to find out the current market value of your property
- We’ll support you in contacting Help to Buy to advise them that you wish to repay the equity loan. They will then send up to date loan settlement figures to the solicitor
- Come back and see us. We’ll review your mortgage offer and discuss any protection needs
Going through an experienced broker and advisor will be invaluable when remortgaging with Help to Buy. You’ll have an answer to any question and be guided through every step of the process. If you want to talk to an advisor about how best to remortgage with Help to Buy, get in touch with us today.