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If you have purchased a home via the Government’s Help to Buy scheme, you may be wondering about your options when you come to the end of a fixed term and want to remortgage.
What was Help to Buy?
Under the Help to Buy scheme, which ran from April 2013 to March 2023, eligible borrowers could purchase a new build home with a 5% deposit, an equity loan of up to 20% (40% in London), and a mortgage for the remainder. The equity loan was interest-free for the first five years.
Borrowers usually repay the loan through a remortgage or the sale of the property. The amount owed is determined by the value of the property at the point of repayment – not at the time of purchase some years earlier.
With house prices having risen, those with Help to Buy loans often pay back more than they expected.
What happens after five years with Help to Buy?
The loan is interest-free for the first five years, although you may have to pay a small monthly admin fee during this time.
After five years, interest becomes payable. It is 1.75% initially, and goes up each year. The yearly increase in rate depends on when you took the loan out.
Remember, this is purely interest, so you aren’t paying back any capital.
Ways to pay back the Help to Buy loan
The equity loan has to be repaid either when you sell the house or after 25 years, whichever occurs first.
There are three main ways of paying back the Help to Buy loan:
Sell the house
The Help to Buy loan is repaid with proceeds of sale. You need enough equity in the property for that to be possible. In other words, the house has to sell for more than you owe on your mortgage and Help to Buy loan combined.
Remortgage
Borrow more on a standard mortgage to repay the loan. This is subject to lenders deeming it affordable.
Personal funds
Use savings to clear the debt.
Why The Mortgage Store Chorley?
Exclusive rates you won’t get directly from lenders
A dedicated point of contact from initial enquiry right through to completion and beyond
Appointments seven days a week, to best suit your schedule
Ongoing rate monitoring until completion as standard
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Advantages of paying back the Help to Buy loan
Paying back the Help to Buy loan has several advantages. These include:
No more interest payments
You start paying interest after five years. In the sixth year, interest is 1.75%. After that, the amount of interest charged isn’t fixed; it increases each year based on either the Consumer Price Index (plus 2%) or the Retail Price Index (plus 1%). By repaying the loan in full, you avoid further interest charges.
Removal of a charge
The Help to Buy equity loan is secured against your property. Once you repay it, the charge is removed, and Help to Buy has no further claim to your home. You then benefit more from any increase in house prices.
Better choice
Once you repay the loan, you should have a much wider choice of deals and lenders to choose from when it comes to refinancing.
Freedom of choice
The Help to Buy scheme has strict refinancing conditions. For example, while the loan is still in place, you can’t borrow more on your mortgage to consolidate other debts or for minor home improvements.
Once you repay the loan, you could also choose to rent the property out, something that isn’t allowed while the loan is in place.
Disadvantages of paying back the Help to Buy loan
If you repay the loan by remortgaging for a higher amount, you might need a higher loan-to-value product.
This probably means higher monthly payments at a higher rate of interest, especially if you secured a long-term fixed rate when rates were at historic lows.
Bear in mind, though, that the loan needs to be repaid in full after 25 years if you haven’t sold the property or paid it back through other means.
Do you have to pay back the Help to Buy loan when you remortgage?
No, but your choice of mortgage lenders will be more limited. Not every lender will let you keep the Help to Buy loan if you want to remortgage to them.
In addition, they will factor in ongoing interest payments when working out what you can borrow.
Under Help to Buy rules, while you have the loan you might not be able to borrow more for another purposes, such as consolidating other debt, and you might not be able to increase your mortgage term.
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What happens if I can’t afford to pay back the Help to Buy loan?
If you can’t afford to pay back the Help to Buy loan after five years, you’ll start paying interest. The interest rate increases every year, so it could get expensive.
You don’t have to pay off the loan all at once. You can repay 10% at a time, which might be more manageable. However, you can’t make monthly payments or pay back a smaller lump sum.
If you don’t have a lump sum of cash, you can repay the loan by remortgaging or selling the property. You have 25 years from the day you bought the house to repay the loan, which gives you a lot of time. If you can’t afford to do it straight away, your circumstances might improve in the future.
How to remortgage to pay off Help to Buy
A Help to Buy remortgage where you repay the loan differs slightly from an ordinary remortgage.
You may want to speak to a mortgage advisor before carrying out any of these steps. An advisor can tell you if your plan is feasible.
Help to Buy valuation
First, you need to pay for a RICS-approved surveyor to value your property. This valuation determines how much you owe on the loan. For example, if the surveyor values the house at £300,000 and you have a loan for 20%, you will owe £60,000.
The valuation needs to be carried out by a RICS registered surveyor who is independent of an estate agency, and who isn’t related to you. They need to inspect the inside of the property as well as the outside.
We can help you find a suitable surveyor.
The key thing to note is that the Help to Buy valuation is only valid for three months. If the Help to Buy valuation expires before your new mortgage starts, you’ll need to pay for another one.
Mortgage application
Decide if you want to pay off all, some, or none of the Help to Buy loan. This is important as it will determine which lenders you can look to apply to.
You’ll also need to see if you can borrow enough regardless of which option you choose. Remember, if you are keeping some or all of the loan, ongoing interest payments will impact what you can borrow.
While we usually recommend securing a rate up to six months in advance of your existing deal ending, we can’t do that with a Help to Buy remortgage. This is because the Help to Buy valuation report, which tells us how much extra we need to raise to pay back the loan, is only valid for three months.
We still recommend speaking to us before the three-month window begins so we can get a picture of your circumstances. If your borrowing is restricted to such an extent that you can’t borrow more, for example, it saves you paying for the report unnecessarily.
Help to Buy and legal work
The Help to Buy loan is secured against your property, so when you pay it back, you need to pay for the legal charge to be removed.
Your new mortgage deal might come with standard remortgage legal fees covered by the lender, but you’ll have to pay extra for the firm to remove the charge.
You’ll also have to pay an admin fee to Help to Buy, and fill in a form to tell them that you intend to repay the loan.
Help to Buy remortgage deals
The available lenders and products depend on whether you are paying off the loan or keeping it.
If you are remortgaging to pay the loan off, your monthly payments are likely to increase. This is especially true if you secured a low rate just before or during the COVID-19 pandemic.
What is the cost of a Help to Buy remortgage?
Costs vary depending on the value of your house and whereabouts in the country you are.
You should expect to pay for a property valuation as well as the Help to Buy admin fee and legal costs. Even if your mortgage deal comes with free standard legal fees, there will typically be extra to pay for repaying the Help to Buy loan.
How can The Mortgage Store Chorley help with a Help to Buy remortgage?
At The Mortgage Store Chorley, we specialise in guiding you through the intricacies of a Help to Buy remortgage. Whether you’re repaying the loan or looking to keep it, we understand the unique dynamics of these options and will help you navigate the complexities of remortgaging with Help to Buy.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
