Updated 03 December 2020
If you’re on the Help-to-Buy scheme and looking to remortgage, you may hit a few stumbling blocks. Here we cover the main challenges you can expect, and how to overcome them.
The Help to Buy government loan scheme was launched in 2013 to help first-time buyers get on the property ladder. With a 20% government loan, buyers could take out a 75% mortgage and needed only a 5% deposit, making the savings journey much quicker. Unfortunately, not many lenders offer this type of mortgage these days, with the scheme due to expire in March 2023. There are also a number of legal hoops to jump through if you’re looking to remortgage.
Once your initial Help to Buy mortgage deal ends (this will usually be a fixed rate for between two and five years), you can remortgage. However, if you don’t find a new deal you’ll be switched to the lender’s Standard Variable Rate (SVR), which can prove expensive. Just bear in mind that if you switch lender, you’ll need to make a Deed of Postponement request to the scheme administrator. Your mortgage broker can tell you more about this.
As with all remortgaging, lenders will calculate your new interest rate and monthly repayments based on the loan to value ratio (LTV). A broker can help you calculate this and can also take you through the eligibility criteria of different lenders.
The other key question you face with a Help to Buy remortgage is how to handle the 20% government loan. Once you’ve owned the property for five years, you’ll start paying interest on that loan. Because of the additional borrowing risk, as well as the cost to you, many lenders will only accept you if you’ve paid off the equity loan in full before you remortgage.
However, you have a few options if you haven’t yet paid off the equity loan. The mortgage deals are harder to come by, but a mortgage broker can help you access them. Here’s a quick run through of your options.
You may be able to take out a new deal with your current lender or a new lender, although your choices will be limited and the fees can be high. The other downside is that you’ll still have 20% to pay back when you come to sell. As it’s based on the property value, the amount will be higher if the property value has gone up.
If you can afford it, you can start paying back the equity loan in monthly repayments. In this way you can work towards reducing the government loan to 10% of the property value. You’ll also build up equity in the property while keeping loan repayments manageable. Both the lender and Help to Buy scheme administrator will use an independent property valuation to calculate your repayment options.
It is possible to add the government loan to your property loan and remortgage to repay the full amount. This option completely removes the need to pay back the 20% equity loan when you come to sell, meaning you’ll get 100% of any increase in property value.
You can normally do this only if the value of your property has gone up, as remortgaging would essentially allow you to release equity you’ve built up to pay off the equity loan. You also need to ensure you can still afford the higher monthly repayments.
There aren’t a huge number of loans on the market for Help to Buy remortgages, especially if you’ve got the equity loan to repay. Because you essentially have two loans on the property, you’re a riskier borrower in the lender’s eyes. For that reason, deals are typically more expensive than for normal remortgaging, both in terms of the interest rates and fees. That said, it may still be cheaper to remortgage than to stay on your lender’s SVR.
Timing is vital when it comes to getting the best remortgaging deals. It really helps if your property has increased in value, because you can use the equity you’ve built up as bargaining power. Saving up will further improve your prospects, as being able to add a lump sum will decrease your LTV ratio. Extending your mortgage term may also be an options. Most importantly, talk to a mortgage broker who will have access to all the available deals on the market.
If your house has sharply decreased in value, your options will be limited. Negative equity means that your home’s resale value wouldn’t be enough to repay the outstanding balance of your current mortgage. Your only realistic option in this case is to wait it out on the SVR until property prices rise again. Hopefully this should not take too long.
Speak to a mortgage broker when you’re within two months of your Help to Buy mortgage deal coming to an end. They’ll help you through the process and ensure that your remortgage application is as strong as it can be.
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