The first Help to Buy mortgages were given in 2013 and 2014, so in 2019 and 2020 many are getting to the five-year point when the government’s 20% share stops being “free”.
If you have used the Help to Buy scheme, this article looks at what your options are at five years.
And if you are thinking of buying your first home with Help to Buy, read this so you know what happens in five years time – don’t assume it will be easy!
How Help to Buy (HTB) works in the first five years
In HTB, the government provides an interest-free loan of 20% of the price of a new build home. The rest comes from a deposit from the buyer – often 5% – and a mortgage from a lender that supports the HTB scheme.
During the first five years, the buyer only has to pay their mortgage each month. No payments are made to the government’s share and no interest is added to it.
You might think this means that the amount of the government’s loan remains the same… but it was legally set up so that the government would always own 20% of the value of the property. If the property has gone up in value over the 5 years, 80% of the increase belongs to the buyer and 20% belongs to the government.
An example of Help to Buy
Suppose you bought a house worth £150,000 in 2013. The government paid for £30,000 of this, your deposit was £7,500 and you took a 30-year mortgage of £112,500.
During the next five years, the house price went up to £175,000. Of this £25,000 increase, 20% increases the amount of the property that the government owns, which goes up from £30,000 to £35,000. You have also repaid some of the capital with your repayment mortgage, so that has reduced to £100,000.
So in summary:
- the government now owns £35,000
- the mortgage is £100,000
- the equity you have has gone up to £40,000 – some of the increase comes from your mortgage repayments and the rest from the higher value of the property, less the governments extra equity.
After 5 years, interest is charged on the government’s share
The loan from the government now attracts an annual fee of 1.75% of the government’s share at the start – £30,000 in the above example. In future years, the fee will increase by RPI + 1% each year. You can think of the fee as being the interest you now need to pay on the government share.
Compared to most mortgages, that isn’t expensive at the moment! But it is an extra cost – another £525 in the first year this is charged in the example above.
At this point you have three options:
- keep the HTB loan from the government and pay the extra interest
- repay part of the HTB loan
- exit the HTB scheme by repaying the whole HTB loan.
1. Keep the Help To Buy loan
If you want to leave the government share untouched, you just start paying the new annual fee on it.
One problem you might not expect is that when you want to remortgage, it has to be with a lender offering an HTB remortgage. There aren’t very many of these… in August 2018, there were 29 lenders offering Help to Buy mortgages for a purchase, but only 10 lenders prepared to offer a remortgage at the 5 year point.
The lack of competition between lenders for Help To Buy remortgage market means that the available offers are typically at an interest rate which is a bit higher than “normal” mortgage offers.
For example in June 2018, Skipton building society was offering;
- 5 Year Fixed Rate Help to Buy Remortgage No fee at 2.69%
- 5 Year Fixed Rate Mortgage No fee for Remortgages (so not HTB) at 2.25%.
When you remortgage, the mortgage lender will now be taking into account the extra payments you have to make to the government’s share.
Two building societies that offer a lot of HTB remortgages are Leeds and Skipton. You may also be able to get an offer from Barclays, Halifax, Newcastle Building Society and Teachers Building Society. But this list changes so it’s good to speak to a broker to find out who may have the best HTB remortgage offer.
2. Repay part of the government’s share – “staircasing”
Staircasing is the name for you buying back part of the government’s share. It is explained in detail here.
Staircasing makes it sound as though you can buy the property back in several steps. But each step has to be at least 10% of the property value. As the government’s share is 20% at the start, there would normally only be one intermediate step where you buy back half and the next one you would buy back all the rest.
There has to be a formal property valuation to establish how much the government’s share is worth. You have to pay for this valuation. The government also charges a fee of £200 or £250.
Although the extra fees are annoying, buying back a half of the government’s share will mean the interest you pay to the government is less each year and you own more equity so you may be able to get a better rate for a remortgage.
For many people the most important point may be that if house prices go up in future you will be saving money by buying it back now rather than waiting. Of course if house prices go down, you will have spent more by staircasing now.
You normally have to have the extra money saved up to do this. There are very few lenders that will let you increase your mortgage to buy back part of the governement’s share.
3. Repay the whole HTB loan
Your third option is to get out of the HTB scheme by buying back the 20% of your home that the government owns.
If you can afford to do this – normally by remortgaging – then it has a lot of advantages:
- you will be getting a standard mortgage so you don’t have to go to a HTB specialist lenders.
- your mortgage will be bigger, but you may well be able to get a better interest rate as it will be a standard mortgage.
- you will save some money by not having to pay the government interest on its share.
- if your home goes up in value, you get the full benefit from it, rather than the government always getting 20% of the increase. (But if your property goes down in value, buying it back now will have cost you more money).
If the example above, the homeowner has £36,000 equity and the property is worth £170,000, so they would have just over 20% equity and should be able to get a reasonable mortgage offer if the larger mortgage is affordable for them.
If your property hasn’t gone up so much in value, or you have paid off less of the mortgage, then you may not be able to remortgage for enough to buy back the government’s 20%.
How much has your property gone up in value?
This is a key figure for you to know. If an identical home on your estate has just been sold, you could use that. Otherwise, get an estate agent round to give you an estimate.
You may be disappointed by how much your property has risen in value.
New build homes always come at a premium – people will happily pay extra to buy somewhere with all new white goods, kitchen, bathroom, carpets etc. So when any new house is sold a few years later, it will have risen less in price than the rest of the local property market has.
This is a particular problem for HTB purchases, as there is a lot of evidence that builders have hiked the prices of these new builds knowing the government is going to fund part of this. The whole HTB scheme has been dubbed “help to buy yachts for builders” because of this.
So what should you do?
If you can afford it – usually because the house has gone up enough in value – and you have a good credit record then most people will probably want to get out of the HTB scheme as soon as possible. This means you will have a much better choice of lenders and you will really own your whole house.
If you can afford to buy back half now look at staircasing, but that does restrict your remortgaging options.
If you are stuck with the government’s 20% stake now but really want to pay it off in future, you could look at overpaying your mortgage each year. This will increase the equity you have and make it easier for you to afford the bigger remortgage to buy out the government’s share in a few years.