26 Sep, 2016/ by Homeward Legal /Remortgage
Remortgaging is one of the smartest ways to cut a loan amount, switching your loan from one lender to another to take advantage of a better interest rate or tying into a long-term deal that cuts your repayments.
However, when you are a first-time buyer who has used a Help to Buy equity loan to purchase your first home, remortgaging is not as simple as finding a new lender. There are complications around the amount of money you must repay to the government, so it makes sense that you should get some independent advice on the best way to remortgage.
We can offer some general advice on Help to Buy equity loans and how to remortgage, with the help of a Homeward Legal converyancing solicitor, when you bought with an equity loan.
What is Help to Buy?
The Help to Buy scheme is a government-funded equity loan designed to help first-time buyers get on the housing ladder. It allows homebuyers to purchase a property worth up to £600,000 with just a 5 percent deposit. The government lends the buyer another 20 percent on top of their 5 percent, bringing their deposit up to 25 percent and giving them access to a better range of low interest rate mortgages.
How do Help to Buy repayments work?
The first five years of a Help to Buy equity loan are interest free, meaning you only pay interest on the amount borrowed from a lender. However, after five years, the interest rate rises to 1.75 percent on the equity loan and will then rise every year by any increase in the Retail Prices Index (RPI) plus 1 percent.
That may mean a hefty rise in your repayments. Paying off the loan as quickly as possible makes a lot of sense because you can repay 10 or 20 percent of the equity loan at any point without penalty charges. If you sell the property before the loan has been repaid, you must give the government back their 20 percent share, which is likely to be much higher than the original amount you borrowed if the value of your home has risen.
Paying off an equity loan with a remortgage
Some people feel uncomfortable having loans hanging over their heads, and one of the more common questions we hear from customers is whether they can reduce their equity loan amount through remortgaging. Paying off any debt when you have the spare cash is always a good idea, but there are a few stipulations surrounding paying off the equity on your Help to Buy loan.
Do factor in the costs of remortgaging: You will have to pay for the valuation and the legal costs associated with it. Homeward Legal offers excellent low-cost conveyancing services tailored for remortgaging. Talk to our expert team on at any time to find out how we can smooth your remortgage process.
Restrictions on remortgaging an equity loan
Most homeowners remortgage to get a better deal on interest rates or to release equity tied up in the house. For those who have bought with a Help to Buy equity loan, any equity now available in the house can be released to repay the government loan that helped buy it.
However, you will find fewer lenders offer remortgaging on this type of mortgage. According to research from mortgage broker Rate Switch, only 10 banks currently offer remortgaging on Help to Buy, including Lloyds Bank, Nationwide, NatWest and Santander. All the lenders offer different rates and each will also require there is now at least 10 percent of equity built up in the property, not including the deposit you were loaned initially.
Are there any disadvantages to paying off Help to Buy loans?
Obviously, the equity loan is interest free for the first five years and that's a financial boon not to be sniffed at. Conversely, the best time to repay a loan is when there is no interest due on it because the repayments are lower. Remortgaging would allow you to reduce the loan amount to zero and reset your homeowning status so you alone (or you and your partner, spouse or co-owner) are now sole owners of the property.
Time to do your sums to ensure remortgaging is the right way forward financially.
What would be a better idea than remortgaging?
It might be more beneficial to use the money to pay off some of your actual mortgage, rather than the Help to Buy loan, particularly in the first five interest-free years. For example, if you're paying 4 percent interest on your mortgage and are still within the first five years of your Help to Buy loan, you will save more money by paying off some of your mortgage, as it will take approximately eight years to reach this same 4 percent interest rate on the Help to Buy loan, giving you eight years to save some more money for that time.
Add in the legal costs of setting all of this up, and it might make more sense to leave the equity loan be for a while and focus on the areas that are costing you the most right now.
Again, it's all dependent on your specific situation so the best thing to do is talk it over with someone who is experienced in this area - why not give Homeward Legal a call and see if our property lawyers can help?
To find out more about remortgaging a Help to Buy loan, call our expert team on . All members of our nationwide panel are also on the lenders' panels, ensuring they can work on your remortgaging conveyancing without any restrictions.