What is the HTB Equity Loan Scheme?
The Help to Buy Equity Loan Scheme was first introduced in April 2013, to assist predominately first-time buyers purchase a home. The scheme allows a government loan of up to 20% towards a deposit (or 40% in London), with just 5% needed from the buyer’s own sources. The scheme is also designed to support the New Build market and development of new houses in line with Government targets to address the increasing demand for property, and as such is only available on new developments.
The scheme was revamped in April 2021 to address certain concerns. Whilst designed to assist first-time buyers, there were many developers targeting existing homeowners and pricing properties to suit those higher on the housing ladder. To address this, the scheme has now capped the maximum purchase price available, basing the maximum available by the average value of properties purchased specifically by first-time buyers in each region. Previously the highest value allowed was £600,000 for any property in England, which is now only available in London, with dramatic decreases on purchase limits further north of England (the Northeast now down to a maximum of £186,100). The scheme has also changed to only be available to first time buyers.
The first scheme which ran from April 2013 to March 2021 had just over 328,500 successful applications, an average of around 3,420 a month over this period, with equity loan value over £20 billion and purchase value of over £91 billion. The scheme was originally due to end March 2021, but with such figures and demand for its continuation the scheme has been extended (albeit limited to first-time buyers) until March 2023.
HTB Remortgage – What if I just remortgage like-for-like?
The HTB Equity loan is interest-free for the first five years, making it an attractive option when looking to purchase a new build property. The HTB Buyers Guide features helpful graphs on future interest costs due from year six of the loan and how these will increase if the loan is not redeemed. With the advice given at the time of sale, it is easy to forget this information or misplace, leaving many unsure of what their options are. The easiest course in this case is to simply do nothing and just remortgage like-for-like, but what will this mean when you come to apply with a lender and what are the likely cost increases?
Almost all High Street lenders will consider a mortgage for a HTB purchase, but confusingly not all these lenders will accept a HTB remortgage coming from a different lender. It is therefore worth discussing your options with a mortgage broker even if considering staying with your lender, as rates direct are often higher than those available to a broker. You may switch to a new lender but will have to pay HTB an administration charge of £115 to make them aware of the change.
Let us consider an example of a like-for-like remortgage staying with your existing lender.
Presuming an original purchase price of £400,000, with 20% HTB deposit of £80,000, own deposit of £20,000 and initial mortgage of £300,000 over 25 years, after a five-year deal fixed at 2.92% comes up for review the loan outstanding would be approximately £256,000.
House prices in the UK have increased an average of just over 4% a year over the past decade, so based on the original purchase price of £400,000 after five years this could be around £467,000. New build values in some reports show even higher increases, but this can vary across the UK.
Mortgage options available would then be based on 60% loan to value products, which at time of writing are currently around 2% – 2.5% (or £1,040pm – £1,080pm).
From year six the first interest payments become due for the HTB loan. This will be based on the original loan value of £80,000 and will start at 1.75% for the first year. The table below gives an indication of the costs from year six to 10:
Start of Year
HTB Loan Assistance
Estimated RPI %+1
Interest Fee %
Annual interest/management fee
Estimated monthly payment (interest fee and management fee)
6
£80,000
6%
1.75%
£1,412
£118
7
£80,000
6%
1.86%
£1,500
£125
8
£80,000
6%
1.97%
£1,588
£132
9
£80,000
6%
2.08%
£1,676
£140
10
£80,000
6%
2.21%
£1,780
£148
The above includes an annual cost of £12 for the direct debit account.
The overall interest due over the five-year remortgage is a total of £7,956, which is of course pure interest and not contributing to paying off the HTB loan. As the costs for this increase year on year it is understandable most will want to either sell the property and use the proceeds to pay off the loan when moving elsewhere or reduce it when they come to remortgage.
Remortgaging to pay off all HTB loan
When looking to remortgage and repay the HTB loan, the lender options available rise dramatically as the remortgage will in effect be a standard mortgage product once completed (i.e. no third-party interest in the property). If savings have been accrued during the time of purchasing the property to remortgaging then these made be used to reduce the HTB loan, but for this example let’s assume this will be coming purely from capital raising from the equity in the property and higher borrowing with a mortgage lender.
There will be some extra work required when remortgaging to buy out the HTB loan completely. HTB will base the loan due on the current market value, which in some cases can decrease but overall, generally increases based on market history. A RICS survey will need to be instructed to confirm the current value of the property which the homeowner will need to instruct and pay for (the value depends on the property but is typically around £300 – £400. It is worth shopping around for this as fees can significantly vary). Once this has been carried out an administration fee of £200 will be payable to HTB to process the buy out and closure of the HTB loan.
If the RICS survey is less than the lenders estimate then this can generally work in favour of the homeowner, as the amount to raise will be based on the RICS survey whilst the lender will go by their own estimate (e.g. a RICS value of £450,000 would mean repaying £90,000, but capital raising with the lender would be based on their own figure which may be £467,000 or more). For the purposes of this example, we will assume the value for the RICS survey and what the lender estimates is the same at £467,000.
Based on the previous example, after the first five years the current balance would be around £256,000. If the survey value is £467,000 then the HTB loan repayable would be £93,400. Capital raising this would therefore mean a total remortgage of £349,400.
Mortgage rates are based on loan to value, or the value of a loan as the percentage of the value of the property. In this case £349,400 would be just under 75% (74.82%), so would qualify for a 75% loan to value product, or LTV for short.
Assuming the remortgage is on a 75% LTV the rate on a five-year fixed deal would be approximately 2% – 2.25% which is still the same rates as the like-for-like option (based on the current market at time of writing). As current interest rates are no higher for this extra level of borrowing it would therefore make sense to capital raise and clear the HTB loan.
Any increase in borrowing is subject to an assessment of income and affordability just like it would have been assessed when purchasing the property. In this instance the remortgage loan is £349,400, £49,400 more than the purchase loan, so this would need to fit with a lender to ensure it was affordable. The new payments would be around £1,750pm – £1,790pm, a significant increase from the first payments, so extending the overall term back up to 25 years would decrease payments to around £1,470pm – £1,505pm. This in turn means repaying over a longer period and paying more interest overall, but with keeping this affordable and clearing the loan vs. increasing loan repayments staying on the HTB scheme it will ultimately keep the payments affordable.
Remortgaging to part pay off HTB loan
Not everyone will be in a position to buy out the HTB loan in full when they come to remortgage, particularly if using the London HTB scheme where the percentage of loan may be increased up to 40%. In this scenario “staircasing” may be an option, where the homeowner will look to buy out/capital raise a minimum of 10% of the property value towards reducing the HTB loan. The steps in this scenario are identical to buying out the loan completing as described above, but mortgage options will be more limited as the reduced HTB loan will remain in the background which some lenders will not allow.
Next Steps
If you or any friends or family currently have a HTB mortgage due to renew soon and have any questions on the options available, please let us know and we will be happy to help. You can arrange an appointment free of charge to speak with one of our expert mortgage advisers at a time that suits you.
Your home may be repossessed if you do not keep up with your mortgage payments.
This article was written by Allan Lundy