Remortgage to pay off Help to Buy Loan

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Remortgage to pay off Help to Buy Loan, Yellow Brick Mortgages

Remortgage to pay off Help to Buy Loan

Mark Swaby explains the options when remortgaging to pay off your Help to Buy loan.

Approved by The Openwork Partnership on 16/04/2024.

Can I pay off my Help to Buy loan by remortgaging?

Yes, you can pay off your Help to Buy loan, and unless you’ve got a large pot of money that Great Aunt Edith left you, or you’ve won the lottery, it’s usually the only way to redeem your Help to Buy loan.

The Help to Buy loan came out in April 2013 and ceased in October 2022. You could borrow up to 20% of the value of your property through a Help to Buy Equity loan from the government. That would be used as part of your deposit, along with your own personal deposit plus a mortgage. It helped buyers get onto the property ladder.

That 20% loan stayed interest-free for a five year period. Now, although people can’t take out new Help to Buy loans, many people out there are coming up for their five year mortgage renewal.

You can meet up with a mortgage broker to have a look at what you owe Homes England – the people who look after the government funding for the Help to Buy equity loan scheme. You would use the equity within your property to then pay off your loan.

Can you give an example of how it works?

As an example, let’s say we bought a house for £100,000. £20,000 would be available as a 20% Help to Buy equity loan to help fund the purchase. That loan stays in place and if you do pay interest at a later stage you’d pay it on that £20,000.

Five years down the line, let’s say for argument’s sake that the property is now worth £200,000. The government still owns 20% of that property. So their £20,000 is now £40,000 – but obviously you’ve gained a lot of equity too. You’ve got another £80,000 worth of equity in that property.

You use that gain of equity to pay off your Help to Buy equity loan. You will then own that property outright.

When you remortgage, you don’t have to pay the whole loan off. You can pay some of it off, or none of it if you want to. But that’s how you’d use your remortgage to clear your Help to Buy equity loan.

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Is it a good idea to remortgage to pay off debt? What are my Help to Buy remortgage options?

While you’ve got a Help to Buy equity loan on your property, Homes England has a second charge on your property. They want to obviously keep as much equity in the property as possible.

If you weren’t clearing your Help to Buy equity loan, Homes England would not allow you to do a remortgage and take out money to consolidate other debt. So debt consolidation is not possible whilst the Help to Buy loan is outstanding.

The only time Homes England would allow you to remortgage on a property and release money would be for home improvements – something that’s going to increase the property value.

Obviously once you have paid off your Help to Buy loan, you could remortgage with some of the equity to pay off debt. What brokers do is look at each individual line of debt and decide whether it’s worth consolidating.

For instance, if you have interest-free debt, why would you want to put that on an interest accruing fund? Just carry it on interest-free. Also, if you’ve only got a short time left on the debt, why extend it over a much longer term? A mortgage broker will sit down and go through each debt and assess whether it is worth adding that into a remortgage.

What happens with Help to Buy after five years?

A lot of clients are coming up to that stage now, so this is a frequently asked question. The first five years of Help to Buy equity loans are interest-free. After that, the government will want to start getting some money back on the loan.

Obviously if you remortgaged and cleared your Help to Buy loan, there’s nothing more to pay on it. It’s all cleared. But if you decide not to remortgage and repay your Help to Buy equity loan, you are charged in the first year at 1.75% per month.

If you took your equity loan out after December 2019, it then increases every year following that by the Consumer Price Index plus 2%. If you took your loan out before December 2019 it will go up by the Consumer Price Index plus 1%.

Can you pay off Help to Buy monthly?

Help to Buy loans are a secure charge on the property. You can make monthly repayments out of your own income in the first five years – you don’t have to leave it until the end of the interest free period.

But as it’s interest-free money, it’s worth discussing whether it’s worth paying off while it’s interest free. Are you better off reducing your mortgage balance and creating more equity? You could then remortgage in five years.

How much will I need to repay on my Help to Buy loan after 5 years?

When they give you the loan, it’s 20%, and that charge stays at 20%. It doesn’t stay at the loan amount. Although, if your property remains the same value from when you buy it, and five years later it’s exactly the same value, your equity loan would be exactly the same amount.

If your property has gone down in value – say your £100,000 house is now only worth £80,000 – you will still owe £20,000 because that’s what they gave you five years ago.

Alternatively, if the house price goes up, which is the usual pattern, you have to pay back 20% of the value of that property.

Can you rent out a Help to Buy property after five years?

Yes, you can, but there are a lot of stipulations around it – including whether the Help to Buy loan is still outstanding.

If you paid off the equity loan in full, that house is yours. You can either ask your lender for Consent to Let or get a Buy to Let mortgage, because it’s your own home. There’s no other charge on the property. Homes England doesn’t have an interest in that property any more.

You can let that out with no problem, subject to a suitable shorthold tenancy agreement being in place.

But, contrary to popular belief, you can actually rent a property out with a Help to Buy loan still outstanding on it. It’s only in situations where you have financial challenges that are no fault of your own, though. Ill health is an example, or the need to care for a family member.

Maybe you’ve had a change of work location where you now can’t commute from that property. If you’re struggling financially and renting out is an option to get you out of that position, Homes England will consider it. They look at each individual case separately.

Is it worth remortgaging to pay off Help to Buy?

It comes down to your plan for that property. If you eventually want to own the property as your forever home, certainly take the benefit of the interest free element. After five years will be a good time to get rid of the Help to Buy loan.

House prices usually increase over the longer term. So that 20% is always growing. Every time the price goes up, 20% of that gain is technically the government’s.

Once you clear your loan and the property is in your own name, your mortgage will increase and you’ll have to pay that off. Whereas with the Help to Buy equity loan it’s just the interest payment. So you may find your monthly commitments might be a little bit higher after a remortgage.

But the risk is that the longer you leave it, the more that 20% becomes. If you can try to pay the equity loan off just outside of that five year period it would be beneficial. You’ll have a 100% gain in the property value, rather than having to give 20% away to the government.

How can a mortgage broker like Yellow Brick Mortgages help?

Your first port of call should be someone who knows the market – especially today, as it’s forever moving. From one day to the next, rates and criteria are changing.

About half an hour ago I had a conversation with a lender about a criteria change that can impact a client’s borrowing capacity. This client is looking at buying tomorrow.

So a mortgage broker will not only help you decide whether or not to remortgage to pay off Help to Buy, or whether to consolidate your debt to become financially better off. We do anything property related.

We’re there for you and we know the market better than anyone else. I’d never go to an open heart surgeon and decide to do the operation myself. So why would you risk your biggest asset and your biggest commitment to something if you’re not 100% sure?

We look at the market, the criteria, the rates and the lenders. We’ll find the ones that will say yes and disregard those that will say no. We do everything in the most cost effective way for our clients. That’s how a mortgage broker will help you.



Approved by The Openwork Partnership on 16/04/2024.