In April 2013, the Government launched an equity loan scheme to help people on to the housing ladder. Today, Help to Buy borrowers are facing increased bills as the interest-free terms on those loans come to an end. There’s a space for brokers to fill by helping borrowers cut their costs and secure better deals.
The Government offers an equity loan equal to up to 20 per cent of the value of the property, interest-free for five years. In London, the scheme offers borrowers a more generous loan of up to 40 per cent.
The loan means that buyers only need to find 5 per cent in savings for a deposit, while mortgage lenders would fund the remaining 75 per cent (55 per cent in London) with a mortgage.
Because it’s an equity loan, the Government effectively owns shares in the borrower’s home. The borrower has 25 years to repay the loan, unless they sell the home beforehand.
The interest charged on the loan is nil for the first 5 years. This will be charged at 1.75 per cent in the sixth year, meaning on a £40,000 Help to Buy loan this equates to £700 a year or £58.33 a month. This will then rise each year by RPI (2.9% as of June 2019) plus 1%.
So those used to monthly mortgage costs will now have the added cost of repaying the interest on the equity loan, and higher outgoings will of course impact the mortgage they can afford.
The stage is set, therefore, for brokers to step in with full knowledge of the market to support and advise on the available options.
Not all lenders will accept remortgaging applications from Help to Buy customers. There were 23 lenders willing to provide a mortgage to those buying with the aid of a Help to Buy equity loan five years ago. Today, just 10 lenders are prepared to accept a remortgage application from borrowers looking to switch from another lender. According to research by mortgage broker RateSwitch, this includes major institutions such as Lloyds Bank, Nationwide, NatWest and Santander.
According to Which?, however, the situation is improving, with more lenders allowing equity loan borrowers to remortgage at a 95% LTV, meaning the extra mortgage money can be used to pay off some of the Help to Buy equity.
The latest lender to do this is Yorkshire Building Society, which has raised its maximum LTV to 95%. The lender says that allowing borrowers to remortgage at up to 95% can ‘save them from paying additional interest and management fees while ensuring they benefit fully from any future equity in their property.’
Because of the limited number of lenders offering remortgaging solutions to Help to Buy borrowers, if there isn’t a better rate elsewhere on the market they could simply look to switch to a better rate through their current mortgage provider.
Lenders such as NatWest Bank and Yorkshire Building Society insist on the equity loan being repaid in part or in full as part of the remortgage. This means taking out a bigger loan with ultimately higher repayments, the affordability of which will need to be assessed, but the end benefit being the homeowner owns more of their home.
The major advantage of repaying the equity loan in full is that any future uplift in the value of the property will be 100% to the homeowner’s benefit and won’t be shared with the Government.
Staircasing - the term used for when you gradually buy more shares in your home - has a number of requirements which must be applied:
- The minimum amount the borrower can staircase at one time is 10% (of the total market value of the property at the time they staircase).
- The above requirement means that, when the lenders’ equity in your property is less than 20%, the borrower can only repay the loan in full.
- They may only staircase in multiples of 10%, that is 10%, 20%, 30% etc.
- They cannot staircase if there are any arrears of interest payments and/or management fees on your mortgage account. Any arrears must be cleared, before a staircase transaction can proceed.
Before staircasing, it’s important to gauge whether it’ll be worth the cost, particularly if another mortgage loan will be used for the purpose, because of the way that Help to Buy equity loans differ from standard mortgages.