Help-to-buy’s mortgage prisoners

First-time buyers who purchased their homes using the government’s help-to-buy scheme could find themselves short of options when they decide to remortgage. Borrowers with help-to-buy equity loans cannot access the cheapest deals on the market because they are limited to specialised help-to-buy mortgages. Several prominent mortgage brokers have raised concerns about the lack of products currently available for this sector of the market.

The help-to-buy equity loan scheme launched in April 2013, offering buyers with a 5% deposit a 20% equity loan from the government if they bought a new-build property, with the remaining 75% of the purchase price funded by a help-to-buy mortgage. The first wave of these borrowers is now coming to the end of the initial fixed-rate mortgage and finding that, although about 20 lenders sell help-to-buy mortgages, only a quarter of them offer remortgage deals.

Very few lenders offer a “free legals” package for help-to-buy remortgages (whereby the provider covers your legal fees), making the transaction even more expensive. Some offer a free valuation and an element of cashback, but this is usually about £250 – far less than the cost of a help-to-buy remortgage transaction. “In a lot of cases borrowers can find themselves to be mortgage prisoners due to cost and lack of alternative choices,” says Helen Pierson of the broker Mortgage Bureau. As well as grappling with higher costs, borrowers could find that their remortgage takes longer than usual.

Financial services software firm Target is responsible for administering help-to-buy loans, but it can take up to two months for it to release documents crucial to a remortgage deal. Buyers wanting to repay some of their equity loan have experienced the worst delays.

The main hurdle here is that the equity loan provider and the mortgage lender need to value the property, says Jonathan Harris of the mortgage broker Anderson Harris. “As the equity loan is a percentage of the property value and not a fixed amount, they need to carry out their own valuations to determine how much is required to be paid back. Both valuations need to match each other and are carried out by different surveyors.”

The other option for help-to-buy borrowers looking for a better mortgage rate is to ask for a “product transfer” through their existing lender. “Most, if not all, lenders who have offered mortgages in conjunction with the help-to-buy [equity loan scheme] will offer a product transfer and so there should be no need for borrowers to revert to their lender’s standard variable rate,” says Ray Boulger of the mortgage broker John Charcol.

But borrowers who transfer products miss out on important independent advice from brokers, says Pierson. “This is usually an ‘execution-only’ transaction – ie, no advice on the suitability of the product chosen, no advice on the equity loan element and no Financial Ombudsman recourse as the sale is non-advised,” she warns.

Most help-to-buy borrowers would benefit from advice on whether to keep the loan, or repay some – or all – of it. The loan is interest-free for five years, but from year six the borrower is charged 1.75% of the loan’s value. This increases every year in line with the retail price index, plus 1%. Those who have used help-to-buy and who have since benefited from a change in circumstances may therefore decide that it is in their best interests to buy out the loan sooner rather than later.

The loan will be repayable at the same percentage of the house’s current market value as the percentage of the purchase price that was originally borrowed, typically 20%. Borrowers looking to do this should speak to their help-to-buy agent to get a more accurate idea of the amount they would need to pay.