Thousands of Help to Buy mortgage borrowers ‘trapped’ due to lack of choice and high fees
THOUSANDS of first-time buyers who used the Help to Buy scheme face being trapped by a lack of choice when it comes to taking out a new deal.
The loan scheme is five years old next month, and those who were among the first to take advantage will be starting to reach the end of their first mortgage deal.
But brokers are warning that those looking to remortgage have a dramatically reduced choice of lenders when it comes to finding a new deal - and could leave them stuck and forking out for an expensive variable rate mortgage instead.
Why could Help to Buy mortgage borrowers be trapped when it comes to remortgage?
Help to Buy provides a 20 per cent equity loan – interest-free for the first five years - alongside a borrower’s 5 per cent deposit to help them put down 25 percent towards a new-build home.
Many of the first borrowers who took out five-year fixed rate mortgages are now facing the double whammy of repaying the equity loan and remortgaging in a higher interest rate environment.
One option is to sell up and use the funds to pay off the loan - but not everyone wants or can afford to move, leaving remortgaging as the only alternative.
And in some cases, borrowers may even find the lender they took out their original Help to Buy mortgage with, doesn’t offer remortgages under the scheme.
How to get help buying a house
THERE are several government schemes available to help you get on the housing ladder.
- Help to Buy loan: This scheme is for those who have a 5 per cent deposit, and is only available on new-build properties that are worth less than £600,000. The government lends you up to 20 per cent of the property value (interest-free for the first five years) which gives you access to cheaper mortgages. You will need to pay this back at the end of the mortgage or when you sell.
- Starter Homes: First-time buyers under the age of 40 can access this new scheme. You’ll get a 20 per cent discount on the market value of the property (new-build only) but you cannot sell or let the property for five years after you buy it.
- Shared ownership: This scheme is available to non-homeowners who earn £80,000 a year or less (£90,000 in London). People can buy a share of a home from a housing association and continue to rent the remainder. Buyers will need a ten per cent deposit as well as money to cover stamp duty and other fees. You’ll also need to find a mortgage lender that is willing to lend on shared ownership properties
How easy is it to remortgage under Help to Buy?
Moneyfacts data shows there are just over 100 mortgages available in England and Wales for those purchasing under the Help to Buy equity loan scheme, but the choice is very different when it comes to a remortgage.
Research by consumer watchdog Which? shows some of the biggest Help to Buy lenders such as Santander and Nationwide will offer Help to Buy mortgages for a new purchase but won’t do the same for a remortgage.
David Blake, principal mortgage adviser at Which? Mortgage Advisers, warned that some homeowners could be left trapped on a more expensive deal.
He said: "If the value of your property has dropped significantly and therefore your existing lender is unable to offer you a product transfer option because your loan to value is now too high, it could mean you get stuck on a variable rate."
Other lenders such as NatWest Bank and Yorkshire Building Society will insist on the equity loan portion being repaid as part of the remortgage.
This means taking a bigger loan and ultimately higher repayments, which a lender will need to assess that you can afford.
Alternatively, Help to Buy borrowers have the option to refinance the main mortgage with a product transfer with their existing lender and payoff the equity loan separately, or remortgage and keep the Help to Buy loan if they can find a new lender that will allow that.
Ray Boulger, of John Charcol, says just a handful of lenders will let you retain the equity loan separately.
He said: "These are Aldermore, Barclays and Halifax, as well as Leeds, Mansfield, Newbury, Newcastle and Skipton building societies.
"Lenders who don't offer remortgages to these borrowers are missing out on one of the most rapidly expanding sectors of the market."
David Hollingworth, of London&Country, added it's worth looking at deals from Leeds and Skipton as they offer cashback, which will cover some of the legal and valuation costs.
He said: "Cashback could be a useful feature, as there will be some additional legal work required because the equity loan remains in place.
"Borrowers looking to staircase toward full ownership can buy out some of the equity loan, to a minimum of 10 per cent of the property value.
"Even then some lenders that will consider like for like remortgages can’t help raise additional funds.
"For example Skipton BS and Newcastle BS will not offer options for a partial buy out of the equity loan."
More on money
"The final option of buying out the whole equity loan will help to give a much broader choice of mortgages from the wider market.
"Paying off the equity loan in entirety will mean that the mortgage remaining will simply be a standard mortgage."
To see if a Help to buy scheme is right for you, have a look at our guide here.
We pay for your stories! Do you have a story for The Sun Online Money team? Email us at [email protected] or call 0207 78 24516. Don't forget to join the for the latest bargains and money-saving advice.