Those who have taken advantage of the Government’s Help to Buy Equity Loan scheme will find their five year fixed rate mortgages are coming to an end – and could save money by acting now.
Over 120,000 have used the scheme which enables buyers to purchase a property with a 5% deposit and 75% mortgage (or 55% in London). The remaining 20% of the purchase price (or up to 40% in London) is funded by the Government by way of an interest-free five year loan.
The interest rate for your mortgage which will typically have been fixed at a low rate for the initial 5 year period falls back to the lender’s standard variable rate (SVR) unless you arrange a new deal. Whilst borrowers might have been enjoying low rates of around 1.75% on a five year fixed deal, they could end up paying 3.75% – 4.5% on an SVR.
For most borrowers, re-mortgaging will usually be the best option. However, brokers have warned that the range of remortgage products available is limited and there can be hefty charges involved, trapping some borrowers into accepting the lender’s SVRs. There are around 20 lenders who offer initial Help to Buy mortgages, with 150 products on offer. However, just over a quarter offer remortgage products, giving borrowers a choice of around 20 products.
Borrowers need to act fast – it can take typically between eight and ten weeks to arrange the new mortgage and in the meantime, they are likely to be charged SVR rates.
Borrowers also need to consider what to do with the equity loan and it is worth speaking to a mortgage broker on this point, particularly if your home has gone up in value since your purchase. In the sixth year, if you haven’t paid back the equity loan, the Government will charge a fee of 1.75% of the loan’s value. Each year thereafter, the fee will increase according to the Retail Prices Index plus 1%. The loan has to be paid back either as a lump sum after 25 years or in payments of 10% minimum. Each time you make a repayment your home has to be revalued at the cost of £200 payable to the Homes and Communities Agency.
However, thanks to rising house prices, some borrowers will have built up sufficient equity to remortgage covering both the original mortgage and repayment of the equity loan. In this case, given that the Government’s interest in your house is a fixed percentage, paying off both together could not only save interest but also ensure you benefit fully from future rises in your home’s value. On the flip side, if your home’s value has fallen, it may be advantageous to keep the loan going.
Have you purchased your property with a Help to Buy Equity Loan? Are you looking for advice on what to do next?