The government’s Help to Buy scheme celebrates its fifth birthday in April. But there won’t be many happy returns for its earliest buyers, who will now have to start paying interest on their equity loans and may not find it easy to remortgage.
Since its launch in April 2013, nearly 150,000 equity loans have been granted to first-time buyers and home movers, with many of the first buyers now reaching the end of five-year fixed-rate mortgages.
But remortgaging with an outstanding Help to Buy equity loan isn’t always easy – in fact some lenders, including Nationwide and Santander, do not offer any remortgaging options to homeowners in this situation.
Here, we take a look at the options available to Help to Buy homeowners as they face the prospect of remortgaging, coupled with interest payments kicking in on their equity loans.
- If you have a Help to Buy equity loan and need help from an independent broker in finding a lender to remortgage with, call Which? Mortgage Advisers on 0800 197 8461.
Help to Buy equity loans: your options
If you’re coming to the end of your fifth year in your Help to Buy home, it’s time to consider your options.
Option one: remortgage to buy out part or all of the government’s loan
If your property has increased in value, you could consider releasing some cash to pay off some or all of your equity loan by remortgaging.
When doing your calculations, remember that you could well be paying off more than you borrowed, as the loan is a percentage of the property’s current market value rather than the amount of cash that you originally borrowed.
This means that if your equity loan was for 20% of the property price and your home has increased in value by £20,000 in the last five years, you’ll be paying the government an extra £4,000.
You’ll also need to factor in legal and valuation costs, and will have to obtain permission from the post-sales Help to Buy agent.
Option two: start paying interest on your equity loan
Only the first five years of a Help to Buy equity loan are interest free.
When your interest charges kick in at the start of year six, you’ll pay a rate of 1.75%. This rises each year by any increase in the Retail Prices Index (RPI) plus 1% – which could add a significant chunk to your monthly outgoings.
The table below shows how the government estimates your repayments will increase after the first five years based on an equity loan of £40,000, with the interest rate going up by 6% each year. It includes the £1 monthly management fee, which applies from day one.
|Start of year||Estimated increase in interest (RPI+1%)||Interest fee percentage||Interest and management fee (annual)||Interest and management fee (monthly)|
Option three: sell your home and pay off the loan
In this scenario, you could sell your home and pay off the equity loan in full.
Whether you should do this depends on your personal plans and the local market: depending on how much your home is worth, settling the loan could wipe out your equity, preventing you from progressing up the property ladder outside Help to Buy.
Remortgaging with a Help to Buy equity loan
At the end of January, Skipton Building Society launched a new range of remortgage products for Help to Buy users who want to pay off their equity loans.
The deals, which are being dubbed ‘hexit’ mortgages, allow borrowers to use increases in the value of their home to pay their equity loans off in full.
Similarly, Leeds Building Society is offering a deal with £1,000 cashback for Help to Buy homebuyers and remortgagers, though this deal is only available through mortgage brokers.
Which banks can you remortgage with if you have a Help to Buy equity loan?
There are only a handful of lenders offering specialist Help to Buy remortgage products, and we’ve found that a lot of mortgage providers aren’t willing to give borrowers with outstanding equity loans access to their standard remortgaging deals.
We’ve asked all the major lenders what their remortgaging policies are for Help to Buy customers. Those that responded to our request are listed in the table below.
Understanding your mortgage options
If you’re coming to the end of your fixed-rate mortgage, it’s a good idea to start researching your options.
A new deal can be agreed well in advance of your end date and with many experts predicting a base rate rise in the next few months, it could be worth fixing now in case rates start increasing.
David Blake of Which? Mortgage Advisers says: ‘It’s really important that homeowners have a clear understanding of the value of their property. They also need to get to grips with exactly how much they will pay on the equity loan once their five-year interest-free period runs out.
‘Having all this information should enable people to make an educated assessment of the right option for their circumstances.’
If you’re unsure of which route to take, you can get impartial advice by calling Which? Mortgage Advisers on 0808 252 7987 or filling out the callback request form at the bottom of the page.
Help to Buy equity loan scheme in numbers
The Help to Buy equity loan scheme has been very popular with first-time buyers and home movers since its launch in 2013, though it has faced criticism in some quarters for driving up house prices.
As it stands, the scheme is set to run until 2021.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.