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How to remortgage with a Help to Buy Equity Loan
Through the Help to Buy Equity Loan Scheme, the government provided you with up to 40% of your property’s value as a loan. While these loans remain interest-free for the initial five years, costs begin to accumulate thereafter. If you don’t remortgage after the five-year period, you could end up paying thousands in extra interest charges.
It is therefore essential to understand the benefits of remortgaging your Help to Buy loan once the initial five-year period comes to an end.
What happens if I don’t remortgage my Help to Buy?
If you don’t remortgage once the initial five years has come to an end, your monthly payments will start to increase significantly for two reasons:
1. The interest you pay on your Help to Buy Loan will increase
For the first five years of your loan, you only have to pay £1 a month in management fees. However, when the initial period runs out, you have to pay interest on your equity loan.
The amount of interest you will pay depends on when you first took out your loan. If you originally took out the loan between 2013-2021, the interest rates starts at 1.75% in year 6 and rises in line with the Retail Price Index (RPI) measure of inflation plus 1% for each consecutive year.
If you originally took out the loan between 2021-2023, the interest rate starts at 1.75% in year 6 but then increases every April by the Consumer Price Index (CPI) plus 2% each consecutive year.
For more detailed information regarding the interest charges for the Help to Buy, read here.
2. You will automatically fall onto your lender’s Standard Variable Rate (SVR)
Upon enrolling in the Help to Buy equity loan scheme, you likely secured a mortgage with a fixed term. When the fixed rate comes to an end, you’ll automatically transition onto your lender’s default rate, commonly referred to as the standard variable rate (SVR).
Each lender choses it’s own interest rate for their SVR, but it’s usually significantly higher than your initial rate. Opting for your lender’s SVR can lead to a notable increase in your monthly repayments. These payments also become unpredictable as lenders can change their SVRs on a monthly basis.
What options are available for remortgaging a Help to Buy Equity Loan?
When it comes to remortgaging your Help to Buy Equity Loan, you have three main options:
• Option 1 – Pay the loan off in full
• Option 2 – Pay of part of the loan (otherwise known as Staircasing)
• Option 3 – Remortgage whilst keeping the full equity loan.
It is important to note that your loan balance will be determined by the current value of your home and not the initial purchase price. If you initially took out a 20% equity loan, you will now owe 20% of the CURRENT property value.
For example, if you initially purchased a property for £200,000 with a 20% equity loan of £40,000 and it has since risen in value by 10% to £220,000, the loan balance would now be 20% of £220000 which means the equity loan would now be £44,000.
Paying off the loan in full
Many lenders require you to pay off your equity loan in full when it comes to remortgaging. If you wish to pay off the full balance, you can do this in one of three ways.
1. Use Equity from your property to pay off your loan
You may be able to use equity that has built up in your home to pay off your loan in full, providing your home has risen enough in value. In order to do this, you would need to know the current value of your home and work out whether or not there was enough equity in your home to pay off the loan in full.
What is Equity?
Equity is basically the amount of your home that you own. You can calculate your equity by finding out the current market value of your property and subtracting your current mortgage balance.
For example, if you home is worth £250,000 and you have a mortgage of £150,000, you will have £100,000 worth of equity in your home.
2. Remortgage to a higher Loan To Value
If your house doesn’t have sufficient equity for you to repay the loan in full, you may opt to remortgage at a higher Loan to Value. The advantage of this is that you will retain any future increases in your home’s value without increasing your debt.
Not all lenders will allow this and different lenders have varying maximum Loan to Value thresholds but here at The Mortgage Masters our expert advisers can help you navigate the market and ensure we approach the right lender for you.
3. Pay of the loan using savings or investments.
If you have money in savings or investments, you could potentially use this to pay off your Help to Buy Equity Loan in full. This may enable you access better mortgage deals. However, it is worth consulting your financial adviser first to ensure this is the best option for you.
Option 2 – Pay of part of the loan (otherwise known as Staircasing)
You have the option to gradually settle your equity loan through a method called “staircasing,” This involves making partial payments to reduce the loan amount. If your home has gone up in value, you could remortgage based in the new value and then release some of the equity that has built up in your property to partially repay your loan.
However, the smallest amount you can repay through staircasing is 10% of your home’s total value. For instance, if you have a 20% equity loan, you’ll need to pay off at least half of it via this method. Additionally, each time you opt for staircasing, you’ll incur administrative and valuation charges.
Option 3 – Remortgage whilst keeping the full equity loan.
There are few lenders who will allow you remortgage whilst keeping your full equity loan in place. However, your options of mortgage products and landers will be limited.
Under the Help to Buy Rules, you can opt to keep the loan in place for up to 25 years or until your Help to Buy Property is sold.
Do I need to ask permission to remortgage if I have a Help to Buy Equity Loan?
If you still have a portion of your equity loan remaining, you will need to get consent from Homes England. This is known as a Deed of Postponement. Your solicitor can help you through this process.
How will the lender assess my Eligibility for a remortgage?
When remortgaging with an equity loan, you will have to go through a full affordability assessment and meet lender criteria just as you would with any remortgage. The main factors affecting your eligibility include your income, outgoings, age and credit history. You can find out more about how they will assess your eligibility here.
What Costs do I need to Consider when Remortgaging a Help to Buy Property?
There are various fees that need to be considered when remortgaging your Help To Buy. These include:
• Survey Fees – In order to settle or part repay your equity loan, you will first need to get a valuation report from the Royal institute of Chartered Surveyors. This will tell you how much your property is worth so that you can work out home much of the loan needs to be repaid.
• Solicitor Fees – When remortgaging, you will need to instruct a solicitor to carry out work on your behalf. The cost of this may vary depending on which solicitor you choose and the property value. You will need to contact them directly for a quote.
• Administration Fees – You may face administration fees of up to £200 when remortgaging with an equity loan.
• Mortgage Broker Fees – You may have a mortgage broker fee to pay. A mortgage broker can search the market to find the best possible lender and product available to you. Although paying them a fee is an additional expense, getting expert advice could save you thousands over your loan term.
My Mortgage is in arrears. Can I still remortgage my Help to Buy Equity Loan?
Unfortunately, you’re unable to remortgage if you have outstanding payments.
Before attempting to remortgage, you will need to settle any debts owed to the government entirely or arrange a payment schedule with them.
Why should I use a Mortgage Broker when remortgaging my Help to buy Equity Loan?
Although the process may seem simple, there are certain steps to adhere to in order to secure approval for your refinance and settle your equity loan. Handling it on your own may lead to potential mistakes and might result in you overlooking exclusive deals accessible only through brokers.
Contact our expert team to support you through the whole process and ensure the best possible outcome for you with your remortgage.
Your home may be repossessed if you do not keep up with repayments.