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Fail to remortgage your Help to Buy and you could end up paying thousands of pounds extra in interest charges. But, remortgaging with a Help to Buy equity loan can also be tricky. Here’s everything you need know.
With the Help to Buy equity loan scheme, the government loaned you up to 40% of the value of your property. These loans are interest-free for the first five years, but after that the costs start to rise. So, here’s what to consider and why it’s a good idea to remortgage your Help to Buy loan when the five years are up.
The Help to Buy equity loan scheme was designed to make it easier for people to get on the property ladder as it meant you needed to borrow less through a mortgage. But when the government starts charging interest – after five years – it is time to reassess your options.
You can carry on as you are, but your monthly bills will start to climb thanks to the new interest you have to pay. Plus, if your mortgage deal ends at the same time, you’ll roll onto your lender’s standard variable rate which could be much more expensive too. That’s why this could be the time to remortgage your Help to Buy. That way you can either pay off the loan completely or move the loan onto your mortgage.
If you are thinking about remortgaging we’d recommend speaking to a fee-free mortgage broker. They can help with a Help to Buy mortgage comparison to see what the best option is for you.
Fail to remortgage your Help to Buy, and you’ll find your outgoings start to get higher and higher. For the first five years you only pay a management fee of just £1 a month. But when you reach year six, the government starts charging you interest on your equity loan.
With the original Help to Buy equity loan scheme (2013-2021), the interest rate starts at 1.75% in year six. After that it rises in line with the Retail Price Index (RPI) measure of inflation plus 1% each year.
While with the Help to Buy equity loan scheme (2021-2023), in the sixth year, you’ll be charged interest at a rate of 1.75%. The interest rate will then increase every year in April, by adding the Consumer Price Index (CPI) plus 2%. Find more detailed information on how much you’ll pay in interest rates in the Government’s Homebuyers’ guide to the Help to Buy: Equity Loan (2013 to 2021)and Homebuyers’ guide to the Help to Buy: Equity Loan (2021 to 2023).
When you signed up to the Help to Buy equity loan scheme you will have taken out a mortgage for a fixed term. Once this initial term ends, you’ll roll onto your lender’s default rate – the standard variable rate. Each lender sets its own standard variable rate and they are often significantly higher than the initial deal you were on. If you go onto your lender’s SVR your repayments will not only shoot up, but are subject to change as lenders can freely change their SVRs monthly.
Remortgaging your Help to Buy is a way of avoiding this happening. So get in touch with a fee-free mortgage broker and set them to work finding you the best remortgage deal.
Get fee-free remortgage advice from our partners at L&C. Use the online remortgage finder or speak to an advisor today.
Many lenders require borrowers to pay off their equity loan as part of the remortgage process. You have three ways you can do this:
If your house has risen in value, you might be able to clear your loan using equity that has built up in your home. Let’s say you bought a £200,000 property with a 20% Help to Buy equity loan of £40,000. If the property’s value rose by 5% a year then after five years your home would be worth £256,000. You would then owe the government £51,200.
Assuming you took out a 75% LTV £150,000 mortgage at 3.5% interest, you would have a £129,489 mortgage left after five years.
So, you would now own £126,511 of your property or just over 50%. In order to raise the £51,200 needed to pay off your equity loan you could remortgage at the same LTV level as you had originally.
If house prices haven’t risen, then your option is to remortgage to a higher loan to value in order to pay off the Help to Buy equity loan. Take that £200,000 property again. Let’s say it hasn’t increased in price at all over the five years. As long as you’ve met your mortgage repayments you will still have reduced your mortgage to £129,489 and built up £70,511 in the property.
In order to clear the equity loan, you would need to increase your mortgage to £169,489 (85% LTV). This will mean a bigger mortgage and your monthly mortgage repayments will increase. However, the benefit of borrowing more on your mortgage to repay the equity loan though is that you get to hold on to any future growth in your home’s value. The Help to Buy equity loan is a percentage of your property’s value. So, if house prices go up so does the amount you owe. Increase your mortgage to clear the debt and any future growth in your home’s value will be yours and yours alone.
However, this isn’t always straight forward as the maximum LTV lenders will let you borrow varies by lender. We’d recommend speaking to a mortgage broker to find out which lenders might consider your application.
Your third option is to pay off your equity loan with savings. If you can manage this, then it means you can remortgage your Help to Buy loan at a lower LTV (taking into account what you’ve already repaid on your mortgage and any increase in your home’s value). This could mean you can access lower interest deals and save yourself money.
However, whichever route you choose, it can be a complicated process with lenders having strict rules in place when it comes to Help to Buy so make sure you get expert advice.
If paying off the whole equity loan isn’t possible, there are other options:
You may choose to pay off your equity loan in chunks. Known as staircasing, you partially pay off the loan. However, the minimum you can repay using staircasing is 10% of the total value of your home. So, for anyone with a 20% equity loan you’ll have to pay back at least half of it with staircasing. You will also pay admin and valuation fees every time you pay off part of your loan.
Some lenders will let you remortgage your Help to Buy with the equity loan remaining. Although your choices will be more limited and often come with high fees. It’s advisable to speak to a mortgage broker who will explain the best options for you.
If you want to pay off your Help to Buy equity loan this is how you do it:
You don’t have to pay off your Help to Buy loan when interest starts being levied. Under the rules you can keep the loan for 25 years, or until your Help to Buy property is sold.
When you remortgage a Help to Buy to pay off your equity loan, not only will you not have to pay interest on your equity loan after five years but you’ll also get to keep all of any future growth in your home’s value. But it’s vital that you get expert mortgage advice on this. To find more about how a broker could help you, read our guide on Do I need a mortgage broker?
If you’ve bought a house using the Help to Buy equity loan scheme, then when you sell you must repay the equity loan if you haven’t already done so. There are a few more steps you’ll need to jump through – find out more in our guide on Selling a house with a Help to Buy equity loan. But your property shouldn’t be harder to sell.
There are lots of reasons why someone’s remortgage application could be refused, including if they have a poor credit history, or if the property’s value has decreased and they have little equity in it or are in negative equity. However, just because one lender has turned you down doesn’t mean another won’t accept you. Find out more in our guide Mortgage declined? Here’s what to do next.
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