Help to Buy homeowners who fail to remortgage face thousands of pounds in extra costs when interest kicks in on their equity loans.
Help to Buy equity loans are interest-free for the first five years, but after that the costs can soon stack up. The good news is that remortgaging deals are available that allow homeowners to pay off the loans, even if their property hasn’t increased significantly in value.
Here, we explain how interest is charged on Help to Buy equity loans and offer advice on how to remortgage.
- If you’re considering remortgaging your Help to Buy property, you can have a free chat about your options by calling Which? Mortgage Advisers on 0800 197 8461.
The importance of remortgaging
This means that you can take out a smaller mortgage, potentially making it easier to get accepted.
This might sound like an attractive option, but after five years interest will start to kick in on the equity loan, potentially adding hundreds of pounds a year on to your bills.
Remortgaging issues for Help to Buy users
With this in mind, it makes sense to remortgage to a better deal, but that isn’t always straightforward for Help to Buy users.
That’s because not all lenders allow people with Help to Buy loans to use their remortgaging products. Of those that do, many require the borrower to pay off their equity loan as part of the process. This can be easier said than done, with some providers only allowing remortgaging at a maximum of 75% LTV.
The situation is slowly improving, however, with more lenders now allowing Help to Buy users to remortgage for bigger sums than their current mortgage balance. Some even allow you to remortgage at a 95% LTV, meaning you can pay off the Help to Buy equity loan with the extra mortgage money you’re borrowing.
The latest lender to do this is Yorkshire Building Society, which has raised its maximum LTV to 95% on two, three and five-year fixed-rate deals priced at 3.34%, 3.59% and 3.79% respectively.
The lender says that allowing borrowers to remortgage at up to 95% can ‘save them from paying additional interest and management fees while ensuring they benefit fully from any future equity in their property’.
Interest rates on Help to Buy equity loans
But how expensive are the interest and management fees on Help to Buy loans? Well, for the first five years, you only need to pay the management fee, which is £1 a month (£12 a year).
In year six, however, interest kicks in on the full equity loan at a rate of 1.75%. Then, it rises by the level of the Retail Prices Index (RPI) plus 1% each year.
In the government’s Help to Buy guide it uses a representative RPI of 5% (in reality RPI is currently at 2.7%, though this changes from month to month).
All of this means that if you bought a £200,000 home with a 20% equity loan of £40,000, your interest could theoretically grow as follows:
|Year||Estimated RPI (5%)+1%||Interest fee percentage||Interest and management fee (annual)||Interest and management fee (monthly)|
Paying off your equity loan: the options
As you can see, you could end up paying hundreds (and eventually thousands) of pounds in interest on your equity loan – so it makes sense to pay it off if you can.
If you decide to do this, you have three options:
Option 1: pay off the loan using savings
If you’ve got significant savings or have come into some money, you can settle your Help to Buy equity loan at any time.
If you’re working this out, it’s important to remember that you’ll need to pay the equity loan off based on the property’s current market value, rather than the amount you originally borrowed.
So, to use the example of a £200,000 property with a 20% equity loan, if the home is now worth £220,000, you’ll need to pay back £44,000.
You’ll also need to factor in some extra costs, including valuation fees, conveyancing fees and an administration charge of £200.
Option 2: use equity in your home to pay off the loan
If your home has increased in value you can remortgage and use the equity you’ve built up to pay off the Help to Buy loan, but this won’t be possible for everyone.
Here’s an example of how that could work, assuming your property has increased in value by 10% over the five years:
When you bought the property
|Original property value||75% mortgage||20% equity loan||5% deposit|
Your mortgage payments
|75% mortgage||Mortgage payments (3% interest rate, 25-year term)||Total capital paid off in five years||Total interest paid in five years|
|£150,000||£711 a month||£21,740||£16,930|
House price growth over five years
|Total value increase over five years||New property value||New equity loan value||Current remaining mortgage|
If your property has increased by 10% in value, you’ll own that uplift (£20,000), the 5% you originally put in as a deposit (now worth £11,000) and the capital you’ve paid off on the mortgage (£21,740). That’s a total of £52,740.
If you wanted to pay off the equity loan when remortgaging, you’d need to take out a loan to cover the £128,260 you owed on your current mortgage, plus the new value of the equity loan (£44,000) – that’s £172,260.
Overall, in this scenario you’d already own just over 30% of the equity of your home, so you’d be able to remortgage at 70% LTV and pay off the equity loan in the process.
- You can find out how much your property’s value might have changed using the interactive map in how much is your house worth?
Option 3: remortgage to a higher LTV to pay off the loan
The example above shows the kind of uplift in value you’d need to remortgage at a lower rate and pay off the equity loan at the same time.
As we mentioned earlier, some lenders allow you to instead remortgage at a higher LTV, giving you the headroom to pay off the equity loan even if the value of your home hasn’t increased significantly.
But while remortgaging upwards will allow you to settle the loan, a mortgage at a higher LTV (80%, 85%, 90% or 95%) will likely cost you more in repayments each month than your current 75% deal.
Remortgaging at a higher LTV
The good news is that if you’ve got an average-priced home, the only way you’d need to remortgage at as high an LTV as 95% is if the value of the property had gone down significantly over the five years.
Taking your capital payments and deposit into account, even if the property hadn’t increased in value at all, you’d be able to use the equity you’d built through repayments to remortgage at 82% LTV and pay off your equity loan in the process, as shown below.
|Total price increase over five years||New property value||New equity loan value||Outstanding mortgage + equity loan||New LTV required|
Paying off your Help to Buy equity loan: step-by-step
However you’re looking to pay off your equity loan, you’ll need to follow the same process, which works as follows:
- Obtain a valuation: you’ll need to have a valuation conducted by a Rics Certified Surveyor. This will be valid for a maximum of three months.
- Instruct a solicitor: you must appoint a solicitor to undertake the conveyancing aspects of redeeming the loan.
- Pay the administration fee: next, it’s time to complete the Loan Redemption Form and pay the administration fee of £200.
- Receive your redemption letter: you should receive a redemption letter including your estimated repayment figure.
- Authority to complete: your solicitor will arrange a completion date for the loan to be repaid, and the Homes and Communities Agency (HCA) will provide an ‘authority to complete’.
- Money transfer: finally, your solicitor will transfer the cash to the HCA and your equity loan will be settled.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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