How can borrowers repay Help to Buy loans?

Borrowers can begin to repay the equity loan within five years, before interest starts to accrue.

Richard Bradley, head of data at Boring Money, explains after five years, borrowers will start to pay interest on the equity loan, initially at 1.75 per cent.

“For a borrower in London that took out the maximum 40 per cent loan, this is likely to be a significant cost,” he warns.

The first option is for borrowers to pay off their loan.

In 2016 the government changed the amount of loan you could take out in London from 20 per cent of the value of the property to 40 per cent, so there’s people down the pipeline who have got really big loans in London.Lindsay Judge

“The amount due to be repaid is based on the current market value of the property, so the amount due could be higher than the original loan amount. 

“Each payment must also be a minimum of 10 per cent of the current market value, which some borrowers could find to be quite a high hurdle,” Mr Bradley notes.

What are the typical repayment amounts that borrowers should be prepared to set aside?

Lindsay Judge, a housing expert at The Resolution Foundation, says she has been doing some number crunching, which shows the different amounts those who bought a property in London will have to repay, compared to those who purchased outside the capital.

“People who took out an equity loan in the second quarter of 2013, the average loan outside of London was just over £36,000 and we estimated that this fiscal year they would have to pay back £652 and by 2023, assuming they haven’t paid it off or drawn it down, that would be £788,” she says. 

“I think it was in 2016 when the government changed the amount of loan you could take out in London from 20 per cent of the value of the property to 40 per cent, so there’s people down the pipeline who have got really big loans in London.

“But just for those who took out a loan in the second quarter of 2013, in London, the average loan was just over £52,000 so this year they would be paying back £927 and, by 2023, they’d be paying back £1,121 for the year.” 

Time to sell?

The second option for borrowers is to sell the home they bought with the equity loan and use this to pay it off.

One important feature of the equity loan to remember is it is secured on a percentage of the value of the property.

Ms Judge confirms: “It is 20 per cent of the value when you bought the property, but what you have to pay back is 20 per cent of the value at the point at which you sell. 

“Rising house prices are a good thing because at the end of the day you’re making 80 per cent of the rising house price. But the government has a bit of a charge over some of that because it’s an equity loan and not a mortgage.” 

She reiterates: “It’s a percentage of the loan and not a fixed amount against the value. 

“You can never be in negative equity with an equity loan, that’s the upside of it. If the house price goes down, then the value of the equity loan goes down.”

Mr Bradley agrees the equity loan “cushions borrowers from any falls” but it also means those same borrowers only see a proportion of any gains.

If neither of these options works for the borrower then it is possible to remortgage.

Less choice

As Rob McCoy, senior product and business manager at TMA suggests, this is likely to be open to only a select few.

He reasons: “To do this, the borrower will need to meet revised affordability rules for their new deal and will need to find a lender who will allow capital raising or debt consolidation up to the higher loan-to-value (LTV) on the property.”

As Craig Hall, new build manager at Legal & General Mortgage Club, points out there are 20 lenders supporting Help to Buy purchases but only nine who, at the time this guide was published (May 2018) were offering remortgage products to Help to Buy equity loan borrowers.

However, he confirms more lenders are likely to enter this market this year.

"In the meantime, many lenders are focusing their efforts on product transfers and this has led to a significant improvement in offerings over the last 12 to 18 months," he observes. 

“Of the lenders that support Help to Buy remortgaging, some allow for remortgaging with a raise of capital to partially repay the loan, while others allow a full repayment of the loan.”

David Blake, principal mortgage adviser at Which? Mortgage Advisers, agrees those who bought using the Help to Buy equity loan scheme are likely to have less choice when it comes to remortgaging.

He recommends: “I would encourage those in this position to plan ahead and seek independent mortgage advice to understand their options."

Whether a borrower can remortgage will depend on individual circumstances, he adds, including:

• Income
• Credit score
• Expenditure
• Property value

How does remortgaging work in practice? 

Mr Blake explains: “There are many lenders who are willing to receive remortgage applications if you are raising additional funds to pay off your equity loan.” 

But he cautions: “For those that are looking to keep the equity loan in place, it becomes a very restrictive market as not many providers are willing to accept remortgage applications with the equity loan remaining. 

“That said, most lenders these days will offer existing customers new products as they are approaching the end of their deal, so I would imagine a high proportion of people could end up staying with their existing lenders.” 

That is not to say borrowers should not shop around though.

Anyone who bought a property using the Help to Buy scheme with a five-year fixed rate mortgage in 2013 would now be able to remortgage at a significantly lower rate than was available then.Ray Boulger

Richard Norrington, chief executive at Ipswich Building Society, notes: “Borrowers can remortgage to another lender, either for a like-for-like Help to Buy loan where offered, or when purchasing 100 per cent of the equity they can transfer onto a residential remortgage.”

In February this year, the building society announced it was updating its residential mortgage range in an effort to help first-time buyers in particular. 

As part of this, it introduced a new ex-Help to Buy remortgage offering.

In a press release, Ipswich Building Society revealed: “All standard remortgage products will be available to Help to Buy applicants, at up to 95 per cent LTV, and the society’s standard mortgage assessment and affordability calculation, through its manual underwriting process, will apply.”

Mr Norrington says: “This enables borrowers to access our usual mortgage deals, underpinned by our manual underwriting approach which gives a real life assessment of an individual’s affordability, helping those creditworthy individuals who may be otherwise ruled out by a computer algorithm.”

Property value

Whatever decision is made timing is crucial, as Ray Boulger, senior mortgage technical manager at John Charcol, observes.

“Anyone who bought a property using the Help to Buy scheme with a five-year fixed rate mortgage in 2013 would now be able to remortgage at a significantly lower rate than was available then,” he acknowledges. 

“Five years ago, the cheapest five-year fixed rates for a 75 per cent LTV mortgage were about 3 per cent. 

“Today, the best rates are under 2 per cent and so, even after paying interest on the 20 per cent equity loan second charge mortgage, total monthly mortgage payments will not change much.”

Of course, whether borrowers decide to remortgage is a decision they need to take for themselves.

Not everyone who has a Help to Buy equity loan will find this the best option.

If the value of their house has fallen, this may add another layer of complexity to their situation.

Mr Blake says: “If the value of the property has dropped, you could find yourself in a position where you have a higher loan to value than your existing lender or any other lender can accommodate.” 

This means the borrower would have no choice but to default to a standard variable rate. 

“In light of this, it’s vitally important that anyone taking a mortgage considers this possibility as some lenders are more flexible at offering existing customers higher loan-to-value products,” he adds. 

“It should never, ever be assumed property prices will remain the same or go up.”

eleanor.duncan@ft.com