Help to Buy equity loans: the basics
When you buy a new-build home using Help to Buy, the government loans you up to 20% of the property's value in England and Wales, or 40% in London. Scotland's scheme, which offered 15% equity loans, has now closed to new applications.
These equity loans allow you to put down a 5% deposit and take out a smaller mortgage, potentially making it easier to get accepted with a good rate.
It's not all plain sailing, however.
In England and Wales, interest kicks in on the loan after five years, potentially adding hundreds - or even thousands - of pounds onto your annual repayments. For that reason, many people choose to remortgage and pay off the loan at this point.
- Find out more: Help to Buy equity loans explained
Remortgaging with Help to Buy
If you've come to the end of the introductory interest rate on your mortgage, you'll usually want to switch deals (remortgage) before being moved on to your lender's standard variable rate (SVR).
With a Help to Buy equity loan, however, switching to another deal is sometimes easier said than done.
That's because many remortgaging products aren't available to borrowers who have an outstanding loan.
This leaves you with three options: remortgage for a larger amount and settle the equity loan, remortgage for the outstanding amount on your existing deal and keep the loan, or pay off the loan using savings.
Clear as mud? Keep reading.
Remortgaging to pay off your loan
Let's say you want to settle your equity loan once and for all, but you don't have the ability to pay off tens of thousands of pounds in one go.
Your first option is to remortgage to raise the extra cash.
The good news is that there's been a steady increase in the number of remortgaging deals available for borrowers looking to do this.
Remortgaging upwards: how it works
If you bought your home with a 5% deposit and 20% Help to Buy equity loan, your mortgage's loan-to-value ratio (LTV) will have been 75%.
By now, you'll have paid off some of your mortgage balance, and your property may have increased in value, meaning you hold more equity than when you bought.
Some Help to Buy remortgaging products will allow you to release cash as part of the remortgaging process, increasing the LTV of your mortgage right up to 95% in some cases.
You can then use the cash that's released to clear your equity loan, freeing yourself from Help to Buy interest payments and also paving the way for a simpler remortgaging process in the future.
On the other hand, moving from a 75% LTV mortgage to as high as 95% LTV can have a significant effect on your monthly repayments and the interest rate you pay on your mortgage.
We'd recommend talking to an expert mortgage broker for advice on the best option for your personal situation.
Remortgaging without paying off your loan
Some lenders will allow you to remortgage on a like-for-like basis, keeping the same balance and term without requiring you to pay off the equity loan.
The benefit in switching to one of these deals is that they'll be significantly cheaper than moving on to your lender's SVR. The drawback is you'll still have the equity loan - and interest payments - to deal with in the future.
If you're looking to switch deals while keeping the loan, it might be possible to conduct a product switch with your existing provider. This has become more common recently, as banks look to keep hold of customers and (in some circumstances) offer them better rates to reward their loyalty.
Switching to a new deal with your existing provider is generally easier than remortgaging elsewhere, as the lender won't usually subject you to the thorough affordability checks you'd go through if you changed provider. You also won't need to pay conveyancing costs.
The downside is you may not get as good a deal as you would from another lender.
Changes to maximum Help to Buy mortgage terms
In September 2019, the government raised the maximum mortgage term available to Help to Buy homeowners and remortgagers to 35 years.
Previously, buyers using Help to Buy or existing users remortgaging with an outstanding equity loan were limited to terms of 25 years.
Paying off your equity loan using savings
If you've got significant savings or have come into some money, you can settle your equity loan whenever you like.
Find out more in 'paying off your loan', below.
Paying off the equity loan when selling
If you decide to move home, you'll need to pay off the equity loan when you sell your property.
If your home has increased significantly in value, you can of course use your profits to pay off your loan, leaving you free to buy any property you want on the open market.
If your property value has stayed the same or fallen, however, you could face some issues.
For example, you might not be able to afford to buy a home on the open market once you've taken into account paying off the equity loan.
This means that in a time of stagnating property prices, you could find yourself stuck in a loop of only being able to afford a home using Help to Buy.
Reasons to pay off your equity loan
There are some powerful reasons to pay off the government equity loan if you can afford to do so:
- You’ll be able to benefit from 100% of any uplift in the value of your property in the future.
- You’ll have a greater choice of lenders and deals next time you remortgage.
- You won’t need to pay interest to the government on your loan.
However you’re looking to pay off your equity loan and are based in England, the process works as follows:
- Obtain a valuation from a Rics Certified Surveyor. This will be valid for a maximum of three months.
- Instruct a solicitor to undertake the conveyancing aspects of redeeming the loan.
- Complete the Loan Redemption Form and pay the administration fee of £200.
- Receive your redemption letter, including your estimated repayment figure.
- Arrange a completion date for the loan to be repaid via your solicitor
- Receive 'authority to complete' from the Homes and Communities Agency (HCA).
- Transfer the cash via your solicitor in order to settle the equity loan.