It’s now been 5 years since The Government launched their Help to Buy scheme as an incentive to get more first-time buyers on the property ladder.
Since its launch in April 2013, over 100,000 households have taken advantage of the opportunity to purchase a home with just a 5% deposit.
Whilst many are enjoying the freedom that owning their first home has offered, the first wave of borrowers are now facing a problem they may not have considered.
What is the problem with Help to Buy?
Help to Buy provides borrowers with a 20% equity loan. This loan works alongside the borrower’s 5% deposit to help them put down a 25% deposit on their new home. It is interest free for the first 5 years.
For many of the early Help to Buy borrowers, this interest free period is coming to a close meaning they are faced with the unenviable task of repaying the equity loan and trying to remortgage in a higher interest environment.
Of course, borrowers could choose to sell up and use the funds to pay off the loan, but this is neither convenient nor affordable for many who may now have settled in their new home. Subsequently, remortgaging becomes the obvious alternative.
Unfortunately, borrowers are now finding the remortgaging may not even be an option under the Help to Buy scheme.
Is remortgaging simple under Help to Buy?
Data from Moneyfacts has found that there are now over 100 options for those looking for a Help to Buy mortgage. The problem is, when it comes to remortgaging, the options become sparse.
Some of the largest Help to Buy lenders such as Nationwide and Santander do not offer the option to remortgage under the Help-To-Buy scheme.
So, if the value of a property has dropped and your existing lender is unable to offer a remortgaging option, it could mean that borrowers are left paying expensive variable rates.
In addition, in year six of the equity loan the borrower is charged 1.75% of the loan’s value, monthly. This increases every year in line with the RPI, plus 1%.
So those with outstanding balances on the equity loan are getting hit with a double whammy that could leave them with a host of financial problems.
What is the solution?
It is thought that many of the larger lenders will shortly come to market with a product transfer option under the Help to Buy scheme. This should help some of the second-wave of Help to Buy borrowers who will shortly be faced with the remortgaging decision.
One final option would be to buy out the whole equity loan. By paying off the equity loan in its entirety, you are essentially turning the Help to Buy mortgage into a standard mortgage. This will help to give you access to a wider variety of mortgages as you are no longer tied to the repayments of the equity loan.
This article is not designed to spread scaremongering amongst first time buyers, but instead, inform those who may be looking into the Help to Buy scheme.
Of course, as the scheme matures, loopholes such as this one is likely to be ironed out, offering borrowers a more complete product option to get them on the property ladder.