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How to remortgage your Help to Buy

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.

How to remortgage your Help to Buy

When you use a Help to Buy equity loan to buy a home the government loans you up to 40% of the value of the property. The loan is interest-free for the first five years – but after that the costs start to rise. So, what should you do when the five years are up?

The importance of remortgaging Help to Buy

A Help to Buy equity loan helps you get onto the property ladder as it means you need to borrow less through a mortgage which can help with affordability issues. 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. 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.

Interest rates on Help to Buy Equity loans

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.

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.

Here is an example of the interest bill if you bought a £200,000 home with a 20% (£40,000) Help to Buy equity loan.

Year Estimated Annual Interest Increase (RPI + 1%) Interest Rate Annual cost of Interest and Management fee Monthly cost of Interest and Management fee
1-5 n/a 0% £12 £1
6 6% 1.75% £712 £59
7 6% 1.86% £756 £63
8 6% 1.97% £800 £67
9 6% 2.08% £844 £70
10 6% 2.21% £896 £75

 

With this loan example you could end up paying almost £1,000 a year in interest. However, if you live in London and therefore take out a bigger Help to Buy loan your interest charges could be far, far higher. The government’s own example sees a Help to Buy homeowner with a 40% equity loan paying almost £250 a month in interest when it starts being levied in year six. That is huge when you consider you’ll also be paying your mortgage on top of that.

Here’s an interest example for someone using a Help to Buy equity loan at 40% to purchase a property worth £400,000.

Year Estimated Annual Interest Increase (RPI + 1%) Interest Rate Annual cost of Interest and Management fee Monthly cost of Interest and Management fee
1-5 n/a 0% £12 £1
6 6% 1.75% £2,812 £234
7 6% 1.86% £2,988 £249
8 6% 1.97% £3,164 £264
9 6% 2.08% £3,340 £278
10 6% 2.21% £3,548 £296

Can I remortgage my Help to Buy?

The good news is you don’t have to pay those interest charges. An increasing number of mortgage lenders are allowing you to remortgage your Help to Buy. However, it can be a complicated process with lenders having strict rules in place when it comes to Help to Buy.

Help to Buy remortgage issues

One of the main issues you’ll face in order to remortgage your Help to Buy is that many lenders require borrowers to pay off their equity loan as part of the remortgage process. This can be quite difficult to do, especially if the lender will only remortgage up to 75% LTV.

So for example, if you bought a £200,000 property using a 20% Help to Buy loan, a 5% deposit and a mortgage then your LTV will have been 75%. Assuming your house has grown in value by 10% over five years you now have a £220,000 home and owe the government £44,000.

That house price growth combined with your mortgage repayments (assuming a 3.5% interest rate) means you have built up £90,511 of equity in your home. That’s more than enough to repay the loan, but the problem is you may not be able to release that money from your home.

That’s because the maximum LTV lenders impose. In order to release £44,000 from your home you would have to increase your LTV to 80%. Some lenders limit Help to Buy remortgages to 75%, but others will go to 90% LTV and some will even lend up to 95% LTV to Help to Buy homeowners. Yorkshire Building Society, Atom Bank and Newcastle Building Society all offer up to 95% LTV on Help to Buy remortgages.

So, remortgaging could be an option. We’d recommend speaking to a mortgage broker to find out which lenders might consider your application.

Get free advice from award-winning mortgage brokers London & Country, and find out how to start this process online or over the phone now

Help to Buy remortgage comparison

You have three ways you can remortgage your Help to Buy home in order to pay off your equity loan.

1. Use money from your property

If house prices have risen, you might be able to clear your loan using equity that has built up in your home. Let’s take that same example again of the person who bought a £200,000 property with a 20% Help to Buy equity loan. If house prices have risen by 5% a year then after five years their home would be worth £256,000. They would then owe the government £51,200.

Assuming they took out a 75% LTV £150,000 mortgage at 3.5% interest they 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.

2. Remortgage to a higher LTV

If house prices haven’t risen, then your option is to remortgage to a higher LTV in order to pay off the Help to Buy 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 your monthly mortgage repayments increase. 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.

3. Pay off the loan with savings

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.

Staircasing your Help to Buy loan

If you can’t afford to repay your entire Help to Buy equity loan don’t panic. You don’t have to clear it when you remortgage. Some lenders will remortgage Help to Buy with the loan remaining.

Alternatively, you can also 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.

How to pay off your Help to Buy loan

If you want to pay off your Help to Buy equity loan this is how you do it:

  1. Get a valuation. Find out what your home is worth with a valuation by a surveyor. This will tell you how much you owe the government as the loan is a % of the value of your home.
  2. Find a conveyancer. You’ll need a solicitor or conveyancer to handle the legal side of clearing the loan.
  3. Fill out the paperwork. You need to file a Loan Redemption Form. You can get this from the housing association that handles your Help to Buy. Once you’ve filed this and paid an admin fee of £200-£250 the redemption process is underway.
  4. Redemption letter. You’ll receive this in the post, and it will include an estimated repayment figure.
  5. Give your solicitor the OK. They can then arrange a completion date for the loan to be repaid. Then Target – the organisation in charge of collecting equity loans – will issue an ‘authority to complete’.
  6. Pay up. Your solicitor will transfer the money to Target and your loan will be cleared.

What happens if you keep the Help to Buy loan?

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 the property is sold. But you’ll pay a lot of interest if you don’t repay it quite quickly.

Also, you will struggle to remortgage without repaying the loan as many lenders insist the equity loan is cleared as part of the mortgage process.


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