Feature: Help to Buy – payback time

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On the fifth anniversary of the Help to Buy scheme, action is needed for those facing rate hikes.

As thousands of home­owners start paying interest on Help to Buy equity loans in England and Wales, brokers are calling on lenders to boost the supply of remortgage options for this group because numerous big names do not offer anything.

April marks the fifth anniversary of the HTB loan launch yet only the first five years of borrowing are interest-free. So from this month interest begins accruing at 1.75 per cent for many, with that rate rising in future years.

Government figures show there were 2,103 completions with the aid of a HTB loan in England taken out in the second quarter of 2013, just after it launched. This is the group soon to be hit with extra fees.

There were a further 3,944 in the third quarter of 2013, and 7,976 in the fourth. In total, the loans have helped to fund the purchase of at least 145,000 properties in England over the past five years, with 80 per cent bought by first-time buyers.

The monthly interest payable will become yet another burden on often younger owners who may have already had to stretch their finances to the brink to afford the ever-increasing cost of buying a UK home.

However, the options to remortgage to help cut costs can be limited if borrowers want to keep the equity loan. This was an issue even before interest started to become payable, and with that era now upon us it brings these hurdles into sharp focus, particularly as it may spur HTB borrowers into remortgaging to cut costs.
Just a handful of lenders offer a remortgage where the equity loan can remain in place, including Barclays, Halifax, plus Leeds, Newcastle and Skipton building societies.

Not all lenders offer remortgages

In contrast, Accord, Bank of Ireland, Clydesdale, Nationwide and RBS state in their lending criteria either that they do not lend on remortgages where a HTB equity loan remains in place, or on HTB or shared equity schemes at all. Virgin Money’s criteria says HTB loans are only for homebuyers.

Consumer group Which? says of 36 lenders it surveyed in March only 19 offered any form of remortgage to borrowers with a HTB loan.

The pool of lenders is even smaller for anyone who wants to move their mortgage and also raise extra money to chip away at the equity loan, warns London & Country director David Hollingworth. Borrowers have a greater choice if they remortgage to also clear the equity loan, although Hollingworth says some restrictions may still apply.

Yet that is a stretch for many as they would probably need their house price and/or income to have grown significantly over the past few years to fulfil the necessary criteria.

The sudden burden of interest may not be enough to force such a drastic lifestyle change for many

Where it is possible, some experts believe it could be a good move. Skipton head of products Kris Brewster says: “While for some it may be better to stay with the HTB loan, interest payments will rise and, by paying off the loan early, they can lock in the full benefit of any house price growth.”

Another option for HTB borrowers is to sell their home and pay off the loan, therefore avoiding interest altogether. However, the sudden burden of interest – however difficult to swallow – may not be enough to force such a drastic lifestyle change for many.

Cherry Mortgage & Finance broker Matthew Fleming-Duffy says: “I would like to see more mortgage availability for what will rapidly become an under-served part of the
market. While options are limited at the moment, I would expect this to change over the remainder of this year as interest becomes payable.”

Trinity Financial product and communications director Aaron Strutt adds: “More lenders are needed to offer HTB remortgages and make this market more competitive.”

To highlight what is about to hit some borrowers, the interest on a £40,000 loan at 1.75 per cent is £700 a year, but on a £120,000 loan this rockets to £2,100 a year. Borrowers also pay a £12 annual fee.

“The charge should not come as a surprise,” says Hollingworth. “However, it will cause homeowners to think about whether they could be better off trying to pay down some or all of the equity loan.”

Some ‘Hexit’ deals – as they have been nicknamed after Skipton Building Society called its range just that – can represent decent value. However, as all brokers know, a good deal on paper is only a good deal if the borrower qualifies for it.

Given it can be a struggle for brokers to place some clients with a lender – particularly those with stretched affordability – the lack of choice means some borrowers will inevitably be forced to pay higher rates than if they were on the open market, as the pool of attractive deals is smaller.

For those who qualify for it, Skipton’s HTB two-year fix remortgage at 75 per cent loan-to-value came with a 2.59 per cent rate, no fee and £1,000 cashback at time of writing. Over two years on a typical £150,000 mortgage with 20 years remaining, the outlay is just over £18,200 after the cashback.

In contrast, on the open market, one of the table-topping two-year fixes from Yorkshire Building Society at 75 per cent LTV came in at a 1.34 per cent rate and
£1,700 in fees. The outlay over the same period is about £600 more.

Hollingworth says: “Skipton has recognised there will be costs to face for HTB so has good cashback to assist,” referring to the additional admin costs on HTB when remortgaging. “I think a lender identifying an issue that is coming up and being prepared to put some resource into helping customers and brokers understand the costs and options is no bad thing.”

While that deal may provide hope for some, one prominent broker worries that homeowners who face steep hikes in groundrent due to rip-off new-build leases may not be able to remortgage at all if that restriction has led to a fall in their home’s value.

John Charcol senior technical director Ray Boulger explained to Mortgage Strategy in February: “Borrowers in the worst difficulty are those caught by onerous clauses where the property value has fallen substantially because of the terms. They will be mortgage prisoners as they don’t have enough equity.”

Despite some rumours to the contrary, the government insists the HTB equity loan will continue until at least 2021.

Under the scheme in England and Wales (it works differently in Scotland), FTBs and homemovers who want to buy an eligible new-build home can get a helping hand if they have at least a 5 per cent deposit saved. The government lends the borrower up to 20 per cent of the property price – 40 per cent in London – as the loan.

As already mentioned, it is interest free for five years, with interest charged at 1.75 per cent in year six, with interest then rising each subsequent year by the Retail Prices Index inflation measure, plus 1 per cent until the loan is paid off. So if RPI is 3 per cent, the rise is 4 per cent of 1.75, making the new rate 1.82 per cent. The loan becomes payable if the borrower sells their home or after 25 years, whichever is first.

To clear the loan in full, the homeowner must repay the same percentage of the property’s value as they initially took out. So if the loan was 20 per cent of the purchase price then they must pay back 20 per cent of the value when it is paid back, which could be more or less than what they first borrowed.

The loan can be voluntarily paid back but any part-payment must be at least 10 per cent of the market value at the time.

Broker approval

The brokers whom Mortgage Strategy spoke to largely regard the scheme in England and Wales as a positive move, in that it has achieved its primary aim of giving a necessary helping hand to thousands of FTBs and movers.

“HTB has been a success,” insists Hollingworth. “Its key benefit for homebuyers has been to help make buying a home an affordable reality, where previously it would not have been.

“Others may have been able to purchase a bigger home. It has also supported the new-build market at the same time.”

Brewster adds: “The HTB scheme has made a big difference to homebuyers.”

However, amid the positive noises that it has helped some get on the property ladder when they otherwise may have been unable to, some worry the scheme could have aided house price inflation via the demand it has driven.If true, that may have kept other wannabe FTBs outside the market.

Strutt says: “It probably has helped to inflate prices in certain areas. We have seen some of the more desirable areas commanding a higher monthly service charge and ground rent.”

While it is difficult to measure the exact inflationary impact of HTB, what is clear is the inflated monthly costs thousands of borrowers now face. It remains to be seen whether more lenders offer them a helping hand.

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