Help to Buy Remortgages

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Help to Buy Remortgages - What you need to know

New mortgage deals mean that Help to Buy homeowners will be able to remortgage their properties without first paying off the 20% government equity loan.

The government began Help to Buy in 2013 to make new build homes more affordable for buyers. 

Under the scheme, cash-strapped buyers would put down a 5% deposit and then get the rest of the required amount from a government equity loan – up to 20% of the property’s value. With cash in hand, buyers could then approach traditional mortgage lenders for the remaining 75% of the funds they needed to complete the transaction.

Many people on the scheme are not sure what happens once their fixed-term mortgages run out. What happens to the equity loan then? 

Under Help to Buy, most banks and building societies put homeowners on five-year fixed-rate deals. These mortgages promise to keep interest rates fixed for the period of the contract before reverting to the prevailing interest rate, whatever that happens to be at the time. 

You usually need to remortgage onto a standard variable rate (SVR) mortgage which tracks the interest rates at the end of the five-year term. Unfortunately, many lenders don’t offer specific Help To Buy remortgage products. And those that do often insist that homeowners pay off the 20 % government equity loan first. 

For borrowers, this is a problem. They might have some capital in the bank, but they can’t usually repay the government equity loan in one payment. What’s more, equity loans usually start accruing interest after the first five years, putting even more pressure on cash levels.

New Help To Buy Mortgages

There is good news, though. Select lenders launched a range of Help to Buy remortgage deals over recent years. They hope the new products will make things easier for people on the scheme. 

Some are offering customers two and five-year fixes with initial rates that depend on the value of the mortgage outstanding. Some plans come with an initial product fee , some may offer cashback.

Should You Pay Off Your Government Equity Loan In Full?

Whether you should pay off your government equity loan in full before remortgaging is your choice. However, it may offer some distinct advantages. 

First, you won’t have to start paying the interest charges at the end of the five-year grace period. That’s more money in your pocket. 

Second, you give yourself a larger number of mortgage lenders to choose from when you come to remortgage. You don’t necessarily have to stick with your current bank if they’re giving you a less favourable deal. 

Lastly, you’ll be able to benefit from any increase in the value of your property, without having to pay off a bigger equity loan. Remember, the government’s Help to Buy scheme loan amount increases as the value of your property rises, so paying it off quickly can allow you to hold onto your capital. 

However, saving up to 20% of the value of your property is a challenge, even if you have five years to do it. 

How Property Values Affect Your Remortgage Decision

In a growing economy, house prices tend to rise over time. However, they can fall too, and there are no intrinsic reasons to suppose that they should rise above the rate of inflation indefinitely. 

The value of your Help to Buy loan relates to the value of your property. If your home goes up in value by 10%, so too will the amount you owe the government. Similarly, if prices drop by 10%, the amount you owe will fall by the same amount.

What you do in this situation is, again, a personal financial decision. If you’re not planning on moving, you might want to take advantage of the lower loan value to reduce it as quickly as possible. 

If prices are rising, you might want to sell your property. You can then use the funds that the sale generates to pay off the government equity loan, without leaving you feeling out of pocket. 

Overall, the Help to Buy scheme is popular. The government granted more than 200,000 equity loans since its inception, helping people afford new build homes.

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