Positive step for borrowers under the government’s Help to Buy scheme
The government has closed a loophole in its Help to Buy scheme, to help homeowners pay back their loan over a longer period, with immediate effect.
As of 28 August 2019, homeowners who purchased a property through the Help to Buy scheme can mortgage their property up to an increased term length of 35 years. Prior to this, those using the scheme were only able to mortgage at the maximum term length of 25 years.
The loan scheme, launched in Spring 2013, provides borrowers with a low-interest equity loan towards a new-build home with a purchase price of up to £600,000. Borrowers pay a 5% deposit, the government lends up to 20% (up to 40% in London) and a mortgage of up to 75% (55% in London) makes up the rest. No interest is payable for the first five years.
With no interest being charged on the government’s loan for the first five years, the first batch of Help to Buy borrowers began their interest payments on their loan in 2018.
Borrowers however have faced difficulty remortgaging, with lenders uncertain about how long the government’s equity loan would last. If the borrower wanted to extend their mortgage term past the original 25 years, under responsible lending rules, the lender would need to factor in the cost of the government loan, which in turn reduces the amount the borrower can potentially borrow. Additionally, the lender must assess how the borrower intended to pay back the full government loan before their mortgage finished
Faced with this, many lenders have chosen not to offer Help to Buy remortgage products or demand the Help to Buy loan is paid off in its entirety before allowing the borrower to remortgage.
This had led to borrowers, who have purchased previously through the Help to Buy Scheme, being unable remortgage. In this instance, not only is the borrower facing an increased monthly cost due to the interest payment on their Help to Buy loan, but they also face a more expensive mortgage rate, or even being offered only a variable rate.
The change made by the government makes it clear that the term of the equity loan will match that of the main mortgage. Should a borrower extend their mortgage term to 35 years, their equity loan will be extended automatically to match this. The move gives lenders certainty as to when the equity loan is to be repaid, which will typically be in line with the sale of the property.
“The move is a welcome one for the mortgage industry, and in particular, those remortgaging for the first time since taking out a mortgage through the Help to Buy Scheme”, comments Samantha Jackson, Managing Director of Cooper Associates Group. “With no ambiguity regarding the final repayment of the equity loan for lenders, I would expect to see more lenders start to move within the Help to Buy remortgage market. This increased competition for lenders will only service to improve choice for consumers. Importantly, a 25-year term is sometimes not appropriate for a first-time buyer. The option of arranging a term in line with what is truly beneficial for them, and not the lender, is significantly important”.
To assist people trying to get into the property market, the Government is lending up to 20% of a property’s value, specifically on new build homes. If you are purchasing in London and the surrounding areas, you may be entitled up to a 40% contribution from the Government. As an equity loan, the Government effectively owns that 20% – 40% share within the property, therefore if it comes to selling the property, the Government will still hold 20% – 40% of the of the property’s value at the time of the sale.
To be eligible for the scheme you must be buying a new build property as your sole residence and have a 5% deposit. With that 5% already covered, plus the Government’s 20% contribution (or more depending on your location within the UK), you will only require a mortgage for the remaining 75% or less that is outstanding. As this is lower than your typical 95% mortgage loan, it means, in theory, you should get access to cheaper rates as you could be a more conservative investment for a lender.
For example, you buy a new build property at a value of £250,000;
- A 5% deposit would amount to £12,500, which you would need to have already saved.
- The Government’s 20% contribution would equate to £50,000 towards the property.
- Therefore, you would require a 75% mortgage which comes to a total of £187,500.
If you go on to sell the property and it increased in value to £260,000, the Government would still own 20% of the property value. That means the Government would receive it’s 20% back, which under the increased property valuation, would amount to £52,000.
The 20% Government contribution is an interest-free loan for the first five years. This substantially reduces the monthly cost in the first five years, as it should give you access to cheaper mortgage interest rates as you only need to borrow 75% of the property’s worth. As mentioned, there are now fewer restrictions on obtaining a mortgage for this, which was previously capped at 25 years. 1
You pay the Government loan back when the house is sold or at the end of your mortgage term – whichever comes first. However, if you exceed the five years that are interest fee and are still living in the property, then you will need to factor in the additional cost of borrowing into your monthly payments.
Unlike the position of selling your house, whereby you pay back the government 20% of the value of your house at the time it is sold, you will pay interest on the amount originally loaned to you, regardless of any changes to the property’s value. The rates are as follows:
- Years 1-5: Interest free
- Year 6: You start to pay interest on the value of 20% of the property at the time it was purchased. It doesn’t matter if the property has risen in value, you will only pay interest on the original amount loaned to you at the time of purchase. The interest rate starts at 1.75%
- Year 7 and onwards: The rate will rise each subsequent year in line with the Retail Price Index (RPI), plus one percentage point. For example, the RPI from May 2019 was 3%, the interest rate would be at 4%, because of the additional percentage point added on. Therefore, 4% of the original 1.75% interest rate is 0.07%. Add those together and you have the revised interest rate of 1.82%. The chart below gives a broader example of how the rates rise year on year.
|Year||Estimates RPI + 1%||Interest rate %|
Please note that this is in addition to the 75% mortgage loan you have from your normal bank or mortgage provider. However, under the new changes, the Government has arranged for the interest on their loan to be factored into your monthly mortgage repayments, at the extended term length, so that the sudden rise in costs from year 6 is more manageable.
It is possible to pay the loan back early or to make a partial repayment. To do so, you either pay the full loan off, or pay a minimum 10% of the property’s current value.
Another incentive for the Government to increase the mortgage term length is to encourage more lenders to provide loans to buyers, again to get more people onto the property ladder. Already some well-known names are offering mortgages for those on the Help to Buy scheme, but the changes to scheme are designed to encourage more lenders to come on board, whilst spreading the cost of lending for homeowners.
For those buying in Scotland, there are two schemes that the Scottish Government offer; the Affordable New Build scheme, available to larger home builders, and the Smaller Developers New Build scheme, for smaller home builders. 2 For more information on the Scottish Help to Buy schemes, click here.
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