Help to Buy Remortgage Difficulties - What Are Your Options?

04/10/2018
The need to get a Help to Buy remortgage most often first surfaces when you come to the end of a Help to Buy mortgage with a fixed term. Many people have reached this point already and have found that there are difficulties with Help to Buy remortgaging which were not foreseen when the scheme first launched in April 2013. What are your options?

You should additionally be fully aware of how much more money you'll have to find once you start getting charged interest fees on the equity loan portion - these may influence your decision to seek a remortgage, however challenging, to pay off some or all of the equity loan: more on this, with two illustrative tables and figures, below.

NB What follows primarily looks at remortgaging regarding the Help to Buy Equity Loan scheme, which is set to be open to new applicants until at least 2021. It is not relevant to the Help to Buy Mortgage Guarantee scheme which closed to new applicants on 31 December 2016.

Update 17 Oct 2018 - Yorkshire Building Society launched a Help to Buy Remortgage range of products* (click to more details) for those looking to pay off their HTB equity loans in full.

*Published purely for information purposes - we do not endorse any particular lender's mortgage products.

This article examines:





Bought via Help to Buy Equity Loan? Need to remortgage?

You might be looking for a rate switch at the end of your first fixed term mortgage or perhaps looking to pay off your Equity Loan.

Only a small number of lenders offer remortgages to Help to Buy Equity Loan clients: our independent mortgage brokers can ensure that you apply to these and find the best one for your needs.

* Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting - Terms Apply



    1

    What is the Help to Buy Equity Loan remortgage process?

According to Target, the Government-appointed organisation tasked with administering Help to Buy applications, mortgages, repayments and back-end matters, the process is as follows:

You must firstly seek Target's approval and approval from your mortgage lender. The following requirements have to be met for your request to be considered:
  • Any new mortgage term agreed with a new lender must not exceed the unexpired term of your existing mortgage. For example, if remortgaging a 25 year mortgage 5 years into the term, the new mortgage should not exceed 20 years.
  • The new mortgage must be no more than your existing mortgage from your main lender. The exception to this is if you are going to use the additional borrowing to repay your equity loan.
Before Target decides whether or not to consent, you have to send it:
  • A copy of the formal mortgage offer from your new lender
  • Details of the solicitor you've instructed to handle the conveyancing for the remortgage
  • A Mortgage Redemption Statement from your current Mortgage Lender
  • A copy of the New Mortgage Lenders Deed of Postponement (DOP)
You currently have to pay £115 for this service and Target advises that you pay this fee when you send over the above documents.

Once Target has received the documentation and has approved your application, it sends a Guidance Pack to your solicitor who then processes the required deeds to complete the transaction.

Target stresses that you have to inform your new lender of your existing equity loan, which is not only a second charge but entitles the Government to a share of future sale proceeds.

There is some indication in the above that the Government seeks to encourage repayment of the equity loan as soon as possible - getting a larger mortgage is acceptable only if you're using it to pay off some/all of the loan.


This is something reiterated in other parts of Target's literature.

Click on Help to Buy Buyers Guide for additional details about how Target runs the Help to Buy Equity Loan scheme on behalf of the Government.

Free Mortgage Consultation, 100% independent with access to the whole of the mortgage market.

 
    2

    What are the issues regarding Help to Buy remortgages?

Fixed rate mortgages and the Help to Buy Equity Loan scheme
Fixed rate mortgages are highly popular, particularly with first time buyers (these make up 81% of all the clients of the Help to Buy Equity Loan scheme), as these give you surety about the sum you'll have to pay each month as well as hedging against sudden interest rate rises which might be ruinous.

Of course when your fixed term comes to an end you need to secure another fix to carry on mortgaging under these terms, or choose another type of mortgage. If you do not, your mortgage becomes chargeable according to your lender's standard variable rate, which is going to be more considerably more expensive to service (and less predictable in terms of potentially costly base rate rises).

Fixed term periods of 2, 3 and 5 years are particularly popular and given that the Help to Buy Equity Loan scheme was launched in April 2013, a large number of scheme users who took out fixed rate mortgages have gone through or are going through the remortgage process.

What is the main problem?
Of around 30 lenders who offer Help to Buy Equity Loan home purchases mortgages, currently only around 8 of these actually offer remortgages once an initial fixed period has expired.

This reduced choice essentially results in the lenders who offer the facility being able to charge much more than normal for remortgaging, and on a market of clients who are already more strapped for cash than most.

Why won't lenders grant Help to Buy Equity Loan remortgages?
First and foremost, lenders have been reluctant to sign up to the Help to Buy Equity Loan scheme at all because they have to accept a second charge on your property, i.e. the equity loan portion, repayable to the Government, as well as their own first charge.

Specifically regarding remortgaging, many commentators have reported that lenders have been additionally reluctant to enter the market in numbers because the process set down by the Government for Help to Buy remortgaging, from valuations to required paperwork, is much more time-consuming and administratively complex than normal. Any Help to Buy applicant, as described above, needs to secure permission for changing mortgage lenders for any reason and reserves the right, as described above, to withhold it.

Additionally with Bank of England Governor Mark Carney stating that more interest base rate rises are in the pipeline, lenders have a reason for further reluctance because affordability becomes even more of a factor.

Up to September 2017, around 38% of people who've used the Help to Buy Equity Loan scheme to buy a home had an income of below £40,000/annum.*

*Source: HM Government Ministry of Housing, Communities and Local Government August 2018


This issue is set to hit those who've used the Help to Buy London scheme hardest, because most users will have secured the maximum 40% equity loan available for the region rather than 20% loan available for the rest of the UK.

Additionally, Target,has been singled out for criticism from various industry quarters regarding the speed with which it processes matters such as remortgage applications.

What is the potential scale of the issue?
Most recent figures state that 169,102 properties were bought using the scheme up to 31 March 2018 with first time buyers accounting for 81% of these purchases.

The total value of equity loans over the period was/is £8.93 billion, with a mean loan size overall of £52,834.


    3

    What are your options regarding securing a Help to Buy remortgage?

  • Your best strategy is to approach your current lender in the first instance for a new fixed rate mortgage. The largest advantage in doing this, obviously, is that mortgage lender already has a relationship with you and the application process should be far speedier.
  • If this approach fails, then given the current small size of lenders that are offering Help to Buy remortgages, you are highly advised to consult an independent mortgage broker - we offer a free initial consultation with a specialist, see below - at least to find out what your options are and likelihood of success.
  • From Target's perspective, 'advances to be used for staircasing or repaying the equity loans (sic) will usually be welcomed and approved' - so you may want to consider a rate switch as well as a cash advance for this purpose from the outset of any application to a lender.

    4

    How big a difference do the equity loan interest fee charges make?

According to Target's literature, the way the interest fee structure works (i.e. no interest fees to pay for the first 5 years, only the management fee of £1/month) is intended to encourage you to staircase and more to full ownership as soon as you can.

Given that the interest fee payments start in year 6, it's worth examining what difference this makes given that you'll have to cover these every month in addition repayments on your main mortgage. These interest and management fee payments don't contribute towards equity loan repayments of course and should you want to sell up or clear the equity loan, you'll have to clear any arrears.

Interest and management fees on a £40,000 equity loan (non-London)

Estimated-Interest-and-Management-Fee-costs-Annual-and-Monthly HTB Equity Loan £40,000 not London

Interest and management fees on a £160,000 equity loan (London)

Equity-Loan-London-HTB-160000-Required-Loan-Interest-and-Management-Fees

    5

    What other options do you have which don't involve remortgaging?

1 Pay off the equity loan with savings or a gift
If you have any way of paying off or even reducing your equity loan with cash, via your own savings or via a gift from a family member, you put yourself on a much stronger footing with lenders because you'll be diminishing or eradicating the second charge on your home. .

Additionally the interest charges can end up becoming very expensive the longer you don't repay your equity loan. As the projections in the table above shows, for the case of a London Help to Buy Equity Loan of £160,000, you might end up having to find a massive £296/month extra, just to cover the interest and management fees alone.

2 Sell your property
Your equity loan has to be redeemed in full when you sell up. Now if the property has increased in value, you'll have an increased equity loan sum to pay off, however at the current time property prices have generally stopped rising so fast and depending on where you live, some areas have property prices which are not rising or, in the case of some parts of London, are even falling. 

With continuing uncertainty over the direction of travel regarding Brexit, there is possibly even more scope for prices to fall and while it is true that you'll have less equity loan to pay back if prices fall, the price fall itself will dwarf any advantage you gain from this.


Bought via Help to Buy Equity Loan? Need to remortgage?

You might be looking for a rate switch at the end of your first fixed term mortgage or perhaps looking to pay off your Equity Loan.

Only a small number of lenders offer remortgages to Help to Buy Equity Loan clients: our independent mortgage brokers can ensure that you apply to these and find the best one for your needs.

* Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting - Terms Apply



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