How to remortgage to pay off a Help to Buy equity loan

What is the Help to Buy scheme?

The Help to Buy scheme is a government-funded initiative that aims to help first-time buyers get onto the property ladder. Equity loans form a part of the scheme, while buyers can also take advantage of a Shared Ownership initiative. Additionally, the government previously offered to boost savings by 25% in a Help to Buy ISA, although these have been closed to new accounts since November 2019.

What is a Help to Buy equity loan?

A Help to Buy equity loan is a loan from the government to help first-time buyers like you finance the purchase of your new-build home. It's essentially a way of increasing your deposit, which means you'll need to borrow less from a mortgage provider. This in turn should give you access to a better range of lower-interest mortgages. 

Of course, you will need to repay your Help to Buy equity loan as well as your mortgage. There are differences in how the two can be repaid, which we'll come onto later. Help to Buy equity loans are available to buyers in England while a similar but separate scheme is available in Wales. The information in this guide relates to England, but please call us on if you have any questions.

Am I eligible for a Help to Buy equity loan?

To be considered for a Help to Buy equity loan, you must be a first-time buyer purchasing a new-build property. This means that you and anyone that you're buying with must:

• Not currently own a home or residential land in the UK or abroad
• Not have previously owned a home or residential land in the UK or abroad
• Not have had any form of Sharia mortgage finance

Additionally, you can only apply for a Help to Buy equity loan if you reserve your property with a Help to Buy registered homebuilder.

How much can I borrow with Help to Buy?

With a Help to Buy equity loan, you can put down a deposit for as little as 5% of the value of your property and borrow a further 20% from the government. If you are in London, you can borrow as much as 40%. However, there are price caps that you need to be aware of.

For example, to be considered for an equity loan for a home in the North East of England the maximum property value is £186,100. At the other end of the scale, the maximum property value in London is £600,000. You can see a full rundown of the price caps across all English regions on the official Help to Buy equity loan page.

So, for example, let's say you were purchasing a home in Yorkshire for £200,000. A minimum deposit of 5% would be £10,000 and the maximum equity loan through the Help to Buy scheme would be 20%, or £40,000. That gives you a total deposit of £50,000, meaning you would need to take out a mortgage for the remaining £150,000 of the property's value.

When does Help to Buy end?

The government launched its help to buy scheme in 2013 which, since its inception, has helped thousands of people purchase a new home with loan repayments lower than the open market. 

In 2021 the government made some fundamental changes to the Help to Buy scheme.The new Help to Buy scheme came into effect in April 2021 and will run to March 2023. 

Whereas the previous scheme was open to anyone looking to purchase a new build home , the new Help to Buy scheme is available to first time buyers only.

Please note: applications for the previous Help to Buy equity loan scheme for 2013-2021 closed on 15 December 2020, and homebuyers have until 31 May 2021 to complete their purchases.

Is Help to Buy only for first-time buyers?

Yes, the Help to Buy equity loan scheme for 2021-2023 is open to first-time buyers only. That means you must not currently own, or have previously owned, a home or residential land in the UK or anywhere else. This also applies to anyone you are buying the property with.

Is Help to Buy only for new builds?

Yes, the Help to Buy equity loan scheme for 2021-2023 applies to new-build properties only. Furthermore, you can only apply if you reserve your new home with a builder who is Help to Buy registered.

Is Help to Buy worth it?

As a first-time buyer, a Help to Buy equity loan can boost your deposit to a level that you may have struggled to reach through your own savings. As a result, you are likely to gain access to a wider range of lower-interest mortgage rates, which is a positive. But of course, as with any financial decision, it's important that you weigh up all the pros and cons, which includes calculating how the repayments will work on your loan, and whether it might end up costing you more in the long run.

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 mortgage lender. For your equity loan, there is a £1 monthly management fee, which will be repaid via direct debit.

After five years, the interest rate on your Help to Buy loan rises to 1.75% and will then rise every year in April by any increase in the Consumer Price Index, plus 2%. That may mean a hefty rise in your repayments and it's important to note you will continue to pay interest until your equity loan is repaid in full.

How to pay off a Help to Buy equity loan

Unlike with a mortgage, you cannot repay your equity loan via monthly instalments. However, you can choose to pay it off in part (in multiples of 10%) or in full any time you wish. Repaying as quickly as possible makes a lot of sense because you can do so at any point without penalty charges.

If you sell the property before the loan has been repaid, you must give the government back their share. So, if the value of your home has risen, you'll be paying back more than the original amount you borrowed. That's because the equity loan relates to a percentage of the property's value at that time, not the initial loan figure.

Can I remortgage to pay off Help to Buy?

Some people feel uncomfortable having loans, and one of the more common questions we hear from customers is ‘Can I remortgage to pay off my Help to Buy equity loan?'

The answer is that yes you can, and there are a couple of different ways of doing this. You can switch to a better deal - either with the same lender or a new one - and use the spare cash to help pay off your equity loan. To do this, you'll need to seek permission from the Help to Buy scheme.

Another option is to remortgage so that you combine the equity loan and the property loan into one. This will typically only be an option if your property's value has risen, as the release of equity will help you to pay off the equity loan.

Paying off any debt when you have the spare cash is always a good idea, but there are a few things to consider before you remortgage to pay off your Help to Buy loan.

What do I need to know before I remortgage a Help to Buy loan?

You can remortgage to pay off a Help to Buy equity loan, but it might not always make good financial sense for everyone:

• You could face larger repayments. If you're combining the equity loan and the mortgage, you need to make sure you can still afford the repayments.
• Factor in the costs of remortgaging. You will have to pay for the valuation and the legal costs associated with the process, which will eat into the funds you have available.
• You could face penalties. If you leave a fixed-rate mortgage early to switch to a different deal, your initial lender may hit you with significant penalties.

Lending options may be limited. Some providers won't lend to you if you're switching deals and keeping your equity loan separate from the mortgage, so your choices might be restricted.Of course, the flip side to that last point is 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.

You need to ensure remortgaging is the right way forward for you financially. 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?