In the first of our remortgaging clinics, David Blake of Which? Mortgage Advisers offers advice to Lucia, who is looking to remortgage with an outstanding Help to Buy equity loan.
Lucia and her partner Ben bought a £450,000 property in September 2017 using London Help to Buy, a scheme that allows buyers to borrow cash from the government to put towards a home.
They took out a two-year fixed-rate mortgage with a term of 30 years, and will reach the end of their introductory period this autumn.
Remortgaging with a Help to Buy equity loan
When they bought the property, Lucia and Ben put forward a 5% deposit (£22,500) and benefited from a 40% equity loan from the government, which was offered interest-free for the first five years. They currently pay around £1,100 a month in mortgage repayments, and have around £240,000 remaining on their mortgage.
Lucia says: ‘At this stage, we’re not sure what we’ll do in three years when interest kicks in on our equity loan, and we may even consider selling the property. With this in mind, we’re considering fixing our rate for the next three years.
‘We’d also like to know if it’s possible to borrow extra when remortgaging to pay off any of the 40% equity loan.’
The most important thing is to ensure you’re not still tied into a mortgage in three years’ time, as you’ll want the flexibility to choose between selling your home (and paying off your mortgage with no early repayment charges), or remortgaging to clear or pay down your equity loan.
Based on your current household income, most lenders would let you borrow up to £360,000. Right now, to remortgage and pay off your equity loan in full, you’d need to borrow at least £420,000 – which is 93% of your property’s value. Lenders would consider this too high a figure when set against your income, so clearing the loan by remortgaging is unlikely to be a viable option at the moment.
In the short term, it would be more realistic to consider paying down some of your equity loan, if you’re able to. To do this, you’ll require approval from the Help to Buy scheme administrators to make partial repayments (sometimes known as ‘staircasing’).
The administrators will also require a valuation and would be likely to conduct their own affordability assessments.
Keeping your equity loan when remortgaging
Should you choose to remortgage and keep your equity loan as it is, your options are to remortgage with a different lender or conduct a product switch with your existing provider. The latter has become more commonplace of late, as banks look to keep hold of customers and (in some circumstances) reward their loyalty.
This is great news for homeowners, as if your current provider offers you competitive terms it would allow you to avoid the hassle of remortgaging to someone else.
Land Registry data shows that house prices in your area have broadly remained the same since you bought your home in September 2017, so if we assume you’d be taking out a mortgage of £240,000 with a 28-year term, this would be likely to cost you between £807 and £905 a month.
Should you fix for three years?
You could consider taking out a flexible product with no early repayment charges, rather than locking yourself into a three-year fix.
This would give you the freedom to reassess your situation – say in six months or a year – and be able to switch deals if you wish.
The right option will depend on your future plans, both at home and in your career, and your appetite for risk.
Finding a flexible mortgage product
If you do choose a three-year fix, you’ll need to plan in advance to avoid being moved on to your lender’s standard variable rate if you choose not to sell the property at the end of this period.
This is why I’m a big fan of mortgages with no early repayment charges, as flexible deals can offer you protection against the uncertainties of life.
The only potential downside to these products is that they’re more common with variable-rate mortgages (such as trackers or discount mortgages), rather than fixed term mortgages, so if the Bank of England base rate rises then it’s highly likely your payments would too.
Overpaying your mortgage
In this period of economic uncertainty, we simply don’t know what’s going to happen to interest rates and property values, and this can have a big impact on homeowners looking to sell or remortgage.
On this note, my advice to you – and anyone with a mortgage – is to try to overpay by as much as you can while interest rates remain low. When interest rates rise, having the lowest level of debt against your property could save you thousands in interest moving forward.
Remortgaging: your next steps
Your first port of call is to speak to your existing lender and find out if it can help you. Most lenders will allow a mortgage broker to do this on your behalf, which has the added benefit of them being able to compare your current lender’s offer with other providers.
The mortgage market has changed considerably over the past few years, and the majority of mortgages are now arranged through brokers. This reflects the importance of taking professional advice on such a costly, long-term loan.
Finally, you should think about your future plans before rushing in, as ultimately it’s this, along with the cost of potential deals, that will determine the best mortgage option for you.