Many Help to Buy customers will now be reaching the end of their interest-free loan periods and will be ready to remortgage. Greg Cunnington of Alexander Hall explains what they should do next…
The Government’s hugely popular Help to Buy scheme launched in April 2013, with Help to Buy London following in February 2016. Take-up has been even higher than forecast with over 180,000 properties being purchased with a combined value of over £46.5 billion.
More than 90% of these buyers used an intermediary to arrange the mortgage, for reasons explained in last month’s article on Help to Buy.
Now it’s been over five years since the scheme’s inception, many of the initial five-year fixed rate periods have come to an end, as well as the interest-free period on the equity loan.
So, if you purchased using the scheme it’s important you come back to speak to an intermediary such as ourselves to ensure that you receive the best advice and to evaluate all of your options.
So many questions….
In this article, I will guide you through the options you have when looking at your Help to Buy remortgage, and will highlight exactly why an intermediary is so vital for you when assessing these.
There are often a lot of questions people ask in relation to Help to Buy and the remortgaging process.
Are there lenders who offer Help to Buy remortgage products? Can I change lender at the time of renewing my mortgage products? Can I purchase my property outright? Can I lower the percentage on the Help to Buy equity loan I have on the property?
I will help answer some of these questions, and to give you a steer on the processes and options involved.
When you purchased via the Help to Buy scheme you most likely took out a mortgage product that was fixed in for an initial period of time, typically for two, three or five years.
For Help to Buy the government can assist with an equity loan of up to 20% of the purchase price, and with Help to Buy London this increases to 40%. The table below shows some examples of this. The equity loan is interest free for the initial five-year period, after which interest is payable on this element.
At the time the initial product rate ends you should always review your options. Otherwise you will most likely revert to the existing lender’s Standard Variable Rate (SVR), which is often quite a lot higher.
There is also the consideration that after the initial five-year period, interest becomes payable on the equity loan. At this point you may want to assess your options for remortgaging in order to repay the equity loan, either in part or in full. This process is known as ‘staircasing’.
When assessing your options for a Help to Buy remortgage there are typically three avenues open to you. Let’s take a look at these.
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.
This means that there will be some additional steps to the application process and also some costs that will be incurred. A good intermediary will talk you through this and can help you to determine whether a lower rate would still work out as beneficial, and whether you should proceed down this route.
Depending on your updated income and expenditure, it could be you can remortgage to partially staircase and decrease the size of the Help to Buy equity loan on your property.
An intermediary who specialises in this area (such as ourselves) will be able to check the affordability for you to determine whether this is possible.
You can staircase in 10% value stages – for example, if you have a 40% equity loan with Help to Buy London you can reduce this to 30%, 20% or 10%. The value used to assess these figures will be calculated by an independent valuation of the property.
When staircasing, a new application and valuation are required to be carried out for both the Help to Buy scheme itself – ie the Government department responsible for the scheme – and the mortgage lender. There are some set fees involved with this, and also some strict timeframes.
You will also need to appoint a solicitor for a staircase remortgage, as there will be legal work to carry out on behalf of Help to Buy and the mortgage lender, and so you should also take into account this additional cost.
There are currently fewer lenders that have products for Help to Buy staircasing applications than there are for Help to Buy purchase, so it is important that you are speaking to an intermediary who will be able to access all of these options.
Full ownership remortgage
Your ultimate goal may well be to own the property outright. This can be done via a remortgage to full ownership.
A new affordability assessment would need to be carried out to ensure that your income is sufficient to obtain a mortgage to do this.
You can repay the equity loan by taking a larger mortgage as part of this process, and some lenders will offer a loan of up to 95% of the updated property valuation (this is known as the loan-to-value). You can also use lump sum payments if you have the funds available.
An application must be made to Help to Buy via the scheme administrator as well as a mortgage lender, as a new valuation will need to be carried out to determine the value used for this application. There is also an administration process to follow with the scheme.
An intermediary will guide you through this part of the process and liaise with the scheme administrator on your behalf. You will again need to appoint a solicitor to act on your behalf.
Because the Help to Buy equity loan will no longer remain in place on completion of the remortgage, there are more lender options available. However, they can vary quite significantly in terms of the maximum loan-to-value (LTV) available and in how they process these applications.
We will be able to guide you through these options to ensure the best recommendation for your circumstances.
How an intermediary can help
The lending options are more limited for a Help to Buy remortgage and therefore the process can be more complicated.
We currently have access to over 100 lenders from across the market, including some of the biggest household names, as well as smaller, more niche lenders.
As such, we can ensure that you see a full range of lenders that offer Help to Buy remortgage products. This gives you access to more options, ensuring the very best product for your circumstances will be found.
When staircasing or remortgaging to outright ownership, an intermediary will also help liaise with the solicitors, administrators and Help to Buy directly (if applicable) and take care of a lot of the heavy lifting.
There will also be various considerations to take into account in relation to the different mortgage rates now available.
For example, if you remortgage to full ownership with a 95% LTV mortgage, your mortgage rate, and therefore your monthly payments, are likely to be higher than on a like-for-like remortgage where lenders take the equity loan into account for their loan to value calculations and so can offer lower mortgage rates.
An intermediary will be able to navigate you through these various options, and make them as clear and concise as possible for you.
Key Stages of the Process
You should meet an intermediary to assess your affordability to outline what options are open to you. Then choose a like-for-like remortgage, a staircasing remortgage or a full ownership remortgage.
If staircasing or looking to repay the equity loan in full, you will need to instruct a valuation and also complete the application to the scheme administrator. Your intermediary should be able to assist with this.
After discussing specific options and agreeing on the most competitive mortgage for your circumstances your intermediary will submit your mortgage application to the lender.
Once the mortgage offer has been issued, your solicitor will have some work to carry out on behalf of the mortgage lender and the Help to Buy scheme. Once this has been carried out you can then arrange completion on the remortgage.
Let’s take a look at a new case study that illustrates how a Help to Buy remortgage can help a client to staircase and reduce the equity loan (names have been changed).
Gavin, a young professional, used the Help to Buy scheme to get onto the property ladder two years ago. He had a 5% deposit and took a 40% equity loan using Help to Buy London, with a purchase price of £380,000.
Gavin’s income had increased slightly since the initial purchase, and his initial two-year fixed rate was coming to an end, so he wanted to assess his remortgage options. He was keen to reduce the equity loan if possible as he was aware that the interest would begin to become payable in three years’ time, and Gavin’s ultimate goal was to own the property outright.
We sat down with Gavin and, after affordability checks with mortgage lenders and with Help to Buy, we calculated he could staircase to increase his mortgage balance and reduce the equity loan to 30%.
The monthly payments remained comfortably within Gavin’s monthly mortgage budget, and so he was naturally delighted to be able to reduce the equity loan.
He wanted another two-year fixed rate so that he could reassess his options again before the initial interest free period comes to an end, when he hopes to staircase again, as his income is set to increase further.
- Property value: £380,000 (updated lender and Help to Buy valuation)
- Loan amount: £247,000 (and a £175,000 equity loan)
- LTV: 65%
- Rate: 1.59% 2 year fixed
- APRC: 3.8%
- Term: 33 years capital repayment
- Lender arrangement fee: £999 added to loan amount
- Mortgage payment: £805pcm
This article was originally posted in What Mortgage online. You can see the original article here. Please note this will launch a new web page.