Help to Buy homeowners miss good remortgages so is a 95% deal better?

Homeowners who bought new-build homes with the Help to Buy equity scheme will miss out on the cheapest rates when the time comes to remortgage.

Though 29 lenders currently accept Help to Buy loan applications to buy a home, the picture looks very different for those whose initial deals are up and need to remortgage to avoid slipping onto higher rates.

Help to Buy homeowners remortgage with some or all of their government equity loan still in place can only choose from a restricted pool of lenders – meaning they could miss out on the cheapest rates.

Just 10 lenders are prepared to accept a remortgage application from Help to Buy borrowers looking to switch from another lender, meaning some homeowners may be better off leaving Help to Buy altogether and taking a standard 95 per cent mortgage.

This limits the options available to homeowners who are looking to reduce their monthly outgoings now that the first wave of Help to Buy borrowers have started paying back interest as their five-year interest-free periods on government equity loans end.

The Help to Buy equity scheme allowed people to buy new build homes with just a five per cent deposit, by giving them a five-year interest free loan of 20 per cent of the property’s value to add to this.

This enable them to buy with 25 per cent down, rather than 5 per cent, cutting the cost of their mortgage and encouraging banks and building societies to see them as less risky and lend to them.

The first wave of Help to Buy homeowners are reaching the end of those five-year interest free terms and must now pay interest of 1.75 per cent interest on the loan, which will gradually rise over time.

The government also owns a percentage equity stake in their home – and will want that same percentage paid back on its sale, potentially profiting from rising house prices.

Homeowners must now decide whether to keep going, pay off more of the equity loan, or jump ship entirely to a standard 95 per cent mortgage.

Nick Morrey of broker John Charcol said: ‘If the applicant is keeping the Help to Buy deposit in place then the number of lenders looking to lend in that space is reduced compared to new Help to Buy purchase mortgages. 

‘If they are looking to staircase, which means to pay back some of the Help to Buy money, a few more lenders will help – but not many.’   

When staircasing, the borrower must pay a minimum of 10 per cent of the property value off at a time – with a £200 administration charge every time they do so. They will also need to pay for an up-to-date valuation on the property.

If a borrower wants to pay off more than 10 per cent, they must do so in 10 per cent increments.

Homeowners who are looking to pay off their loan entirely may find themselves in a better position, according to Morrey.

‘If they are looking to pay back the entire Help to Buy loan then nearly every lender will accept that, since on completion the Help to Buy is removed, which means the mortgage is just a standard remortgage,’ he said.

‘It is interesting that lenders are often willing to support the government scheme at the point of purchase but more than a few are less than willing to support the same borrowers for a straight remortgage.’    

What is Help to Buy and how does it work?

Help to Buy is a government scheme offering both first-time buyers and home movers an equity loan of up to 20 per cent, or 40 per cent in London, to help them buy a new build property.

This means that buyers must put in a 5 per cent deposit, to secure a 75 per cent loan-to-value mortgage, with the equity loan making up the rest.

In London, buyers can put in a 5 per cent deposit and secure a 55 per cent loan-to-value mortgage.

The government scheme is designed to make buying more affordable as the lower the loan-to-value, the lower sum borrowed and the mortgage rates, and therefore monthly repayments should also be lower.

The catch is that after five years, you must start paying interest on the loan. 

Because it’s an equity loan, the government will also own a share of any rise in the value of your property. This means the loan grows as your property grows in value.

If the property value drops however, the size of the loan will drop with it. 

As of April this year, early adopters of Help to Buy have started making their monthly payments.

These payments are made up of 1.75 per cent interest on the loan, which rises each year by the Retail Price Index plus another 1 per cent.

Borrowers looking to pay back some of the HTB loan, or staircase, will have more options open

Is a 95 per cent mortgage a better option?  

It is possible to buy a home without raising a big deposit, if you take a 95 per cent mortgage.

With one of these deals, first-time buyers able to pass mortgage affordability tests could put down a 5 per cent deposit of £10,000 and buy a £200,000 home – and with more lenders offering these products, rates are becoming more competitive. 

You’re also not restricted to buying expensive new-builds with this type of product.

But is it cheaper in the long run to simply put down a 5 per cent deposit rather than take out a Help to Buy equity loan?

Morrey said: ‘If you bought at 95 per cent, owning the whole property, then usually after a few years the loan-to-value would drop to 90 per cent and below, at which point the products start to get cheaper and that would save you money, assuming rates don’t change.

‘Because there is no Help to Buy element at all, then your choice of product is from all lenders that offer products appropriate to your situation.’

By not taking out a Help to Buy loan you would have access to the whole market, so there is a chance that you could get a better deal down the road. In addition, while 95 per cent mortgages are more expensive, you will not be left with an outstanding equity loan at the end of your term.  

However, a 95 per cent mortgage carries its own set of risks. A 5 per cent deposit is not much of a buffer against negative equity – and if house prices fall you may end up owing more to the lender than your house is worth. 

Bigger deposits are always preferable as they usually secure lower rates for the homeowner. The lower the rate, the smaller the monthly repayment, meaning you can save yourself thousands of pounds in interest charges over the years. 

> Read our guide to 95% mortgages 

95 per cent mortgages will be more expensive but could afford you more choice down the road

I’m looking to remortgage but I have a Help to Buy loan, what should I do?  

Whenever you come to remortgage it usually pays to have a look at a few different mortgage providers to ensure you’re getting the best deal.

You can do this yourself either by going directly to each lender or you can use This is Money’s mortgage finder tool which allows you to search for the lenders that offer Help to Buy remortgages.

It is always a good idea to seek independent financial advice while making this sort of decision.

Lastly, you can find This is Money’s guide to remortgaging with a Help to Buy loan by clicking here.