What is a Help to Buy loan and how does it work?
The Help to Buy equity loan scheme was launched in 2013 and will run until March 2021. It is available on new build properties in England and anyone can benefit (not just first time buyers). Similar schemes are available in Scotland Wales and Northern Ireland however they operate slightly differently.
With a Help to Buy equity loan the government will lend you up to 20% (40% in all London boroughs) of the cost of your newly built home and the buyer will need at least a 5% cash deposit and then a 75% mortgage (or lower, depending on the deposit amount) to make up the rest. No interest will be charged on the 20% loan for the first five years of owning your home.
As a result of providing this assistance, the government has an entitlement to a share of the future sale proceeds, equal to the percentage contribution made to assist your purchase. For the first five years of Help to Buy home ownership, you will pay an initial monthly management fee of £1. This will continue until the loan is repaid. After five years, the equity loan will be subject to an additional interest fee (collected from you on behalf of Homes England by Homes England’s Mortgage Administrator) of 1.75% per annum on the outstanding amount of the equity loan. From the fifth anniversary of the loan, this fee will increase each year by the increase (if any) in RPI plus 1%.
The government loan will be repaid when the property is sold and this could be up to 20% of the sale price, so the value of the outstanding loan can go up (as well as down) over time.
Example of how the help to buy equity loan works
Original purchase price - £240,000
Government loan - £48,000 (20% of property purchase price)
Buyer deposit - £12,000 (5% of property purchase price)
Mortgage - £180,000 (£75% of property purchase price)
If the value of the property on sale had increased to £360,000 then the government loan to be repaid would have increased to £72,000 (20% of sale price)
Who is eligible for a Help to Buy equity loan?
A Help to Buy loan is available on new build properties (until March 2021) and buyers must provide a minimum 5% cash deposit and a first charge mortgage must be taken on the property by a qualifying lender up to a maximum purchase price of £600,000. It must be the buyer's only residence.
Can I remortgage if I have used a Help to Buy equity loan?
Mortgages on new build properties (purchased using a Help to Buy loan) are often arranged on a fixed-rate basis. With a fixed-rate loan the interest rate remains the same for a period of time, typically 2, 3 or 5 years. A fixed-rate loan will give the buyer confidence that there will be no increase in their mortgage payments for that period, enabling them to manage their outgoings better.
However, once the fixed-rate period has ended the mortgage will be moved onto the lender's Standard Variable Rate (SVR) which will inevitably be more expensive. To mitigate any increase in mortgage payments the buyer will probably want to transfer their mortgage to either another fixed-rate deal with their current lender or remortgage to another lender with a better deal.
Also, remember if you have owned your property for 5 years and not repaid the government loan, then interest will start to be charged on the outstanding balance increasing your outgoings.
What are my options if I want to remortgage a Help to Buy loan?
There are a number of options available when considering a Help to Buy remortgage and they are as follows:
Remortgaging and keeping the full loan
At the end of your current fixed-rate mortgage deal or at any time if you are on a variable rate deal you can either swap to another deal with the same lender or switch to another lender who offers Help to Buy loans.
If you are considering moving lender, a 'Deed of Postponement' request must be made to the Help to Buy scheme administrator.
At the end of the mortgage deal you can switch to a new product, typically for two, three or five years.
An intermediary will look at the options with your existing lender, and also compare to the rest of the market, as lower rates may well be available.
If moving lender, even without extra borrowing, a ‘Deed of Postponement’ request must be made to the Help to Buy scheme administrator as well as incurring some extra costs in processing a new mortgage.
Remortgaging and staircasing (part paying) the loan
Staircasing a Help to Buy loan is the process of reducing the government loan in 10% value stages.
Depending on your current income and expenditure you may be able to remortgage to an amount that will allow you to start a partial repayment of the Help to Buy loan on your property. If you have no plans to move from your current property then staircasing your Help to Buy loan makes sense as you will be increasing the equity in your property at the same time as paying down your debt. An independent valuation of the property will be completed for both the Help to Buy scheme administrator and the mortgage lender to asses the current value of your property. There are some set fees involved in the process as well as some strict timeframes.
There are a number of lenders that offer Help to Buy mortgages so it is important that you seek independent mortgage advice.
There are currently fewer lenders that have products for Help to Buy staircasing applications than there are for a Help to Buy purchase, so it is important that you speak to an intermediary who will be able to access all of these options for you.
Remortgaging and repaying the full loan
If you are keen to own the property outright then adding your Help to Buy loan to your current outstanding mortgage and arranging a remortgage for that full amount is a possible way of achieving this. The amount you can borrow will depend on your current income and expenditure and some lenders will offer up to 95% of the updated property valuation. This is called the Loan To Value (LTV).
As the Help to Buy equity loan will no longer exist after the remortgage is complete there are more lender options available.
Remortgaging a Help to Buy loan and the self-employed
Being self-employed should not prevent you from remortgaging your Help-to-Buy loan. If you are self-employed then arranging a mortgage or remortgage is the same process as if you are employed, you will just have to provide evidence in a slightly different way.
The main issue will be proving your income to the satisfaction of the lender which will not be as straight forward for an employed worker. A lender will require 3 years financial records and if you have not been trading for that period will require a minimum of 2 years accounts and a financial projection for the 3rd year. All financial records will need to be prepared by a chartered accountant.
In addition to proving your income, you will need to have a good credit history and the lender will also carry out an affordability check on your outgoings to see if you will be able to afford the mortgage payments going forward.
If you are considering a Help to Buy remortgage in the near future it will be well worth getting your finances in order now so that they are ready for when you want to arrange a remortgage.
Which lenders offer Help to Buy loans?
There a range of lenders that offer Help to Buy loans and remortgages with a variety of qualifying criteria, costs and interest rates. We always recommend that you seek independent financial advice and so you may want to consider Habito, one of the first online mortgage brokers on the market. It offers a full range of mortgage broking services, providing online advice for first-time buyers as well as those remortgaging (including buy-to-let landlords).
Help to Buy remortgaging process
1. Find your new home
Find a new-build home with a developer registered to offer properties for sale through Help to Buy.
2. Complete a property reservation form
Reserve your home with the developer. You will need to fill out a property reservation form and will normally pay a reservation fee, up to a maximum of £500.
3. Seek professional advice
As stated above, we always recommend that you seek independent financial advice and so have partnered with Habito, one of the first online mortgage brokers on the market who offer a full range of mortgage broking services. Habito specialises in providing online advice for first-time buyers and those who wish to remortgage. It has access to over 90 lenders, which amounts to a choice of over 20,000 products. It takes around 10 minutes to enter your personal details and can take as little as 5 minutes to confirm those details with one of Habito's expert mortgage adviser's and to get an agreement in principle.
4. Arrange funding
You will need to:
- pay a reservation fee
- arrange a mortgage
- pay a 5% deposit on exchange of contracts
- pay any other applicable fees on completion (such as stamp duty, legal charges, and any costs associated with your mortgage).
5. Complete a property information form
This confirms the property details, important dates, and agreement that the equity loan funds are paid directly to the house builder. You can complete a Property Information Form here and return it to EquityLoan@helptobuyagent2.org.uk
Should I pay off a Help to Buy mortgage early?
It makes sense to pay off your Help to Buy loan at some time in the future and here are some points to bear in mind when deciding to do this:
- the earlier you pay off your loan the less the outstanding loan amount will have increased
- during the first 5 years, there is no interest to pay on the loan
- interest will be payable on the outstanding loan amount after 5 years
- if you can remortgage now you may not be able to remortgage in the future due to your employment situation or restrictions imposed by lenders
- if current property price increases are low then there is no real rush to pay off the loan at that time as the outstanding loan is not increasing substantially
Things to consider before remortgaging a Help to Buy equity loan
- do I want to remortgage for a lower rate?
- do I want to remortgage and reduce my Help to Buy loan?
- do I want to remortgage to completely pay off my Help to Buy loan?
- how much will it cost to remortgage?
- do I have my finances in order to be able to obtain the mortgage I need?
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