The Help to Buy equity loan scheme has been a lifeline for many first-time homeowners, but what happens when it’s time to repay? One popular option is remortgaging. This guide will walk you through the process of using remortgaging to pay off your Help to Buy equity loan, either in part or in full.
Understanding Help to Buy Equity Loans
What is a Help to Buy Equity Loan?
Help to Buy equity loans are government-backed loans designed to assist first-time home buyers or those who already own but are having difficulty affording another property purchase. They come with zero interest for five years before starting to accrue at a rate.
Why Remortgage to Pay Off a Help to Buy Equity Loan?
After five years, an equity loan no longer remains interest-free; interest starts accruing at 1.75 % in year six and rises increases in line with the Retail Price Index (RPI) plus 1% each year., meaning your payments could significantly increase over time and the total sum owing may increase considerably; many homeowners use refinancing to pay off this equity loan faster.
Many people find the help to buy equity loans too restrictive. For instance, when you remortgage you will only be able to borrow more money to: Pay back your equity loan and not raise any extra to carry out home improvements etc.
How to release equity to pay off your Help to Buy debt
Once you understand what needs to be done, the process should be relatively painless. Follow the steps below to help achieve a smooth application experience.
Step 1: Seek Advice
Before you embark on the journey of remortgaging to pay off your Help to Buy equity loan, it’s crucial to arm yourself with the right information. This is a significant financial decision, and understanding the implications is key.
- Consider seeking independent financial advice from a mortgage broker to learn how to remortgage your help to buy property and to understand the potential impacts on your financial situation.
- Legal advice can also be beneficial to understand the legal aspects of remortgaging and repaying your equity loan.
Step 2: Get a Valuation
Step two of this process should involve getting an appraisal for your property. Get a survey booked here.
- Your Help to Buy equity loan payments will depend on a percentage of the value of your home rather than being fixed as one lump sum payment.
- Know the current market value of your property to establish how much is owed.
- Surveyors registered with the Royal Institution of Chartered Surveyors (RICS) can provide valuation services.
Step 3: Consult a Solicitor
Once you know how much you owe, the next step is to consult a solicitor or conveyancer.
- They will handle all the legal aspects of remortgaging and repaying your help to buy loan.
- This includes dealing with the land registry, liaising with your current lender and new mortgage lenders, and ensuring all the necessary legal paperwork is completed correctly.
Step 4: Complete the Paperwork
The next step is to complete all necessary paperwork.
- This requires filling out a Loan Redemption Form that you can obtain from the housing association that manages your Help to Buy program.
- This form will request details about your property and current mortgage, as well as your plan to repay an equity loan.
- At this stage, it will also be necessary for you to pay an administration fee.
Step 5: Receive a Redemption Letter
After you’ve submitted your Loan Redemption Form and paid the administration fee, you’ll receive a redemption letter.
- This letter will provide an estimated figure for repaying your equity loan.
- Once you receive this letter, you can finalise the terms of your new remortgage loan agreement and inform your lawyer of your intentions to repay it.
Step 6: Pay Off the Loan
The final step in the process is to pay off the loan.
- Your solicitor will handle this process.
- They will transfer the money you owe to the housing association, and your equity loan will be cleared.
- Once this is done, you’ll continue making repayments on your new mortgage.
Exploring Your Remortgage Options
Below we explore some of the options you have when paying back part or all of your equity loan.
- Option 1: Remortgage to a Higher LTV: You can take out a mortgage with a higher Loan to Value (LTV) to repay your equity loan. While you’d be taking on a larger mortgage, you may find this is more beneficial than keeping the equity loan.
- Option 2: Pay Off the Loan from Savings: If you can afford to, you can pay off your equity loan from savings. Doing this before you remortgage at a lower LTV. This means you may be able to access lower interest rates and better deals.
- Option 3: Use Money (equity) from the Property: If the value of your home has increased over time, you could use its equity to repay a loan more easily.
Remortgage to Pay Off Help to Buy – Examples
To help illustrate how remortgaging to pay off a Help to Buy equity loan scheme might work, let’s consider a few hypothetical scenarios:
- Scenario 1: John and Cassie purchased their home five years ago using a Help to Buy equity loan, with the 5-year interest-free period approaching and planning on refinancing in order to pay off the equity loan in full. Through savings accumulation and appreciation of their property, they are now in a better position than before to apply for a help to buy remortgage at a lower loan-to-value (LTV), giving access to better mortgage deals.
- Scenario 2: Sarah bought her home three years ago using the Help to Buy equity loan scheme. She’s just received a large inheritance and wants to use it to pay off her equity loan. She decides to remortgage to a new lender that allows overpayments, so she can use her inheritance to reduce her mortgage balance.
Preparing to Repay Your Help to Buy Equity Loan
As the good old saying goes; fail to prepare, prepare to fail. This is why it is vital to prepare and understand your financial options. Below we provide some helpful pointers on preparing to pay off your Help To Buy Equity Loan.
Before You Apply
Before you begin the application process to repay your Help to Buy equity loan, there are a few steps you need to take:
Obtain a Property Valuation Report
Your property valuation report from the Royal Institution of Chartered Surveyors (RICS) should provide you with an indication of how much money needs to be repaid back to them.
Clear Any Outstanding Payments or Arrears
Ensure that you have repaid any outstanding payments or arrears on your help to buy mortgage before you apply to repay your equity loan.
Provide Solicitor’s Contact Details
You need to provide the contact details of your solicitor and give them the authority to act on your behalf.
After You Apply
Once you’ve applied to repay your Help to Buy equity loan, there are several steps you need to follow:
After submitting your application, wait for confirmation from the housing association that handles your Help to Buy. They will process your application and provide you with further instructions.
Pay the Fees
When applying to repay your equity loan, an administration fee of £200 must be paid and any outstanding arrears or mortgage repayments cleared – though if this proves impossible you could still proceed if a payment plan or clearing arrears with equity loan repayment were implemented simultaneously (provided your conveyancing solicitor confirms this option is viable).
Pay the administration fee and any arrears using online bank transfer, debit/credit card payment, or cheque. For more detailed instructions on making these payments please visit the official government guidance.
Decide the Percentage of Your Equity Loan to Repay
You can repay all or some of your equity loan at any time. You can make part payments of at least 10% of the full repayment amount, based on what your home is worth at the time, to reduce how much you owe.
Legal Undertaking Agreement
You’ll receive a list of items that need to be put into a ‘legal undertaking’. This is a legal agreement formalised in paperwork. If the completion date of the undertaking is delayed by more than a week, a new repayment amount and undertaking may be needed.
Complete the Process
Your conveyancing solicitor transfers the funds to repay your equity loan. The total amount will include any interest, charges, administration fees, and arrears that you owe. Your solicitor sends you the relevant completion documents. When the funds are received, they check that the amount matches the figures on the Authority to Complete and inform your solicitor. Your solicitor will certify this and send you a ‘completion statement’ on headed paper.
Timeline of the Process
Here’s a rough timeline of the Help To Buy remortgage process:
- Week 1-2: Seek advice, get a valuation, and consult a solicitor.
- Week 3-4: Complete the paperwork and receive a redemption letter.
- Week 5-6: Agree to the terms of your new remortgage and let your solicitor know you’re ready to repay the loan.
- Week 7-8: Your solicitor transfers the money you owe, and your equity loan is cleared.
Remember, this is just a rough guide and the actual timeline may vary depending on your individual circumstances and the specific details of your existing mortgage and equity loan.
Benefits and Risks of Remortgaging
Remortgaging to pay off a Help to Buy equity loan can offer several potential benefits and risks.
- Remortgaging Could Lower Interest Rates or Monthly Payments: Remortgaging can help you secure lower interest rates or monthly payments to make your mortgage more manageable and affordable.
- Ability to Pay Off Equity Loan Faster: Securing an attractive repayment mortgage may enable you to repay your equity loan more quickly, thus decreasing the total interest charged.
- Releasing Equity for Other Uses: Remortgaging can allow you to release some of the equity built up in your home for other uses such as home improvements or debt payments.
- Increased Overall Costs: If the interest rate on your new mortgage is higher than your existing one or you extend its terms, this could result in additional payments over time.
- Potential Fees and Charges: Remortgaging could involve additional fees and charges, including valuation fees, legal fees and early repayment charges on your current mortgage – this could add significantly to its total cost.
- Risk of Losing Your Home: If your mortgage debt increases and mortgage payments become difficult to manage, the possibility of losing your home having negative equity increases drastically. Therefore, it’s essential that any new loans be affordable in terms of repayments.
Repaying your Help to Buy equity loan can be a serious financial commitment, so it’s crucial that you fully comprehend its repayment process before beginning. By following these steps, you can ensure a seamless and successful repayment experience.
Can you pay off Help to Buy with remortgage?
Yes, you can use remortgaging to pay off your Help to Buy equity loan. This involves taking out a new mortgage for a higher amount and using the extra funds to repay the equity loan. It's a popular option, especially when the no-interest period on the equity loan ends.
What happens to Help to Buy when you remortgage?
Remortgaging provides you with the option of repaying part or all of your Help to Buy equity loan using funds from your new mortgage, thereby freeing up funds to make repayments on both. You should then only need to worry about one mortgage.
How can I pay off my Help to Buy?
You can pay off your Help to Buy equity loan in several ways. These include remortgaging, using savings, or selling your home. You can also make partial repayments, known as "staircasing", to gradually reduce the amount you owe.
Can you pay off Help to Buy with equity?
Yes, if the value of your home has increased over time, the equity that has accrued can be used to pay back a Help to Buy equity loan. Remortgaging could then release these funds and use them towards paying off your loan.
How do I get rid of Help to Buy loan?
Repaying your Help to Buy loan requires paying back what you owe; this may involve refinancing, using savings, or selling the home itself; as part of this process you should follow official steps such as getting an appraisal, filling out paperwork, and paying an administration fee.
Glossary of Key Terms
- Remortgaging: Remortgaging involves switching your current mortgage loan for another deal with either your existing lender or a new mortgage lender.
- Equity Loan: With an equity loan, the mortgage lender agrees to lend you money based on your property as security for repayment. Under Help to Buy, for instance, up to 20% (or 40% in London) of the cost of buying or building your new home may be covered by government funding.
- Loan to Value Ratio (LTV): Your LTV indicates how much of a mortgage you are taking out relative to the total property value. A lower LTV means more advantageous mortgage deals can be found.
- Conveyancer: A conveyancer is a specialist lawyer who deals with the legal aspects of buying and selling property.