When your current mortgage deal is coming to an end and a variable rate is around the corner, this is the perfect time to look at remortgaging your house. But often, there are limits to what lenders will consider, loan to value ratios that can restrict what they will offer, and you might find yourself stuck with your existing company. The good news is that if you use a mortgage broker, there are many more options and we can find a lender that will work with you on Help to Buy remortgages.
What is Help to Buy mortgages?
The Help to Buy scheme was started in 2013, the biggest government intervention in housing since the 1980s. So far, thousands of people have used it to help them get their first home or the chance to move a new, bigger property.
However, for many of these people who took their first mortgage under the scheme, things can get a little more complicated when it comes to remortgaging. Their mortgage may be ending, the fixed rate may be finishing, or they simply want to borrow more money. Their Help to Buy roots can cause problems with some lenders.
There are a few basics to look at when you consider these mortgages:
- Are you Help to Buy 1 or 2?
- What equity do you have in the property?
- Personal information such as age
- Affordability questions such as incoming and outgoings
- Credit history
- Type of property
How to remortgage Help to Buy 1 properties
When you have a Help to Buy 1 remortgage, the situation can be relatively straightforward. It depends on the age of the loan and the equity in the property but in most cases, it will be like switching any other type of mortgage to a new deal. With this type of Help to Buy mortgage, you will normally have put at least 5% deposit into the scheme and the government equity loan will be around 20%. This means you can take a mortgage for the rest.
The current mortgage could be tied for a set number of years, usually 2-5 years then after this you have options about your lender.
What to do:
- Approach the mortgage broker who will connect you with an expert
- Look at the products available
- Documents are supplied and mortgage set up
- You pay the admin fee from the Help to Buy administrators to handle the transaction at their end
- You have a valuation for the Help to Buy if this is being repaid
- The property is then revalued by the lender
- Mortgage is offered and you make the switch
Here’s an example. At the time of purchase, the property was £200K in value and you put 5% deposit then took a 20% equity loan. The mortgage was for the remaining 75% or £150K. two years later, you have paid off a further £10K and the property value is now £215K.
To remortgage in this situation, you have a value of £215K, an equity loan of £43K, a mortgage of £140K and there is £32K equity in the property. A lender with Help to Buy mortgages will consider around 65% LTV.
How to remortgage Help to Buy 2 (mortgage guarantee) properties
This part of the system was a little different. In it, the property was bought with a 95% mortgage and no equity loan. The aim was that the mortgage guaranteed protected them against loss, even repossession up to 80% of the property’s value and guaranteed it for 7 years.
Properties with 95% LTV are less attractive to lenders than those with 75 LTV but there are still companies who will consider them especially if you have been paying the mortgage for some time and therefore the equity has increased.
What happens to equity loan in Help to Buy mortgages?
Until you pay it, this equity loan will remain in place. After 5 years of ownership, you start to pay an increasing amount of interest on this loan until it is repaid. There is also a loan fee of around £115 that you have to pay if you remortgage for them to handle the transaction.
You can pay off the equity loan at a minimum of 10% of the value of the property plus the admin fee. You can also pay the whole thing off with an admin fee of £200.
In this situation, the Help to Buy scheme will require the property to be revalued at your own expense. This may result in a different valuation to your mortgage company, either positive or negative.
Remortgaging to pay off equity loans
You can also remortgage the property to pay off an equity loan if you want to have a normal mortgage and clear this extra payment.
If you pay the loan in full, then you pay the same percentage of the current property value as what you originally borrowed. If you only want to pay a portion, this must be at least 10% f the property value. How much you can pay often depends on the equity in the property and how much mortgage you can get.
Using the above example, some lenders might go up to 90% LTV and very occasionally 95% in which case the lender would need to borrow around 85% in order to clear the equity loan based on the current value of £215K.
Should you pay off the equity loan?
You don’t have to clear the equity loan if you are remortgaging your property. In fact, in the first five years, it can be beneficial not to do this. in year six and onwards, the rate of interest is only 1.75% although it does increase from there. So if you are offered a remortgage rate that is higher than this, it might be better to leave the equity loan as it is.
If you decide to leave the equity loan as it is, you will need to make sure that lenders are aware you have this. Some lenders may not consider you due to this, but a mortgage broker will have plenty of option. It will be factored questions around affordability as well.
As your equity loan becomes more expensive, then it could be cheaper to take a remortgage with a lower interest rate and pay off the equity loan.
The loan rate remains at zero for the first five years then starts to increase to 1.75%. After this, the rate is calculated based on the Retail Price Index and this means in the last five years it has increased to 1.86%, 1.97%, 2.08% and 2.21%.
Help to Buy and affordability
Mortgage companies will consider the Help to Buy equity loan when looking at your affordability. You need to show you can afford to pay the mortgage and the loan. Affordability works out how much you have coming in, your expenses and how much this leaves to pay a mortgage. Each lender can work this out differently.
If you are not paying off the equity loan, you will need to consider the interest payments as part of your expenses. Lenders generally use 3-4 times your income but there are some who would go as high as six times your income. They also have different ways to look at extra income such as bonuses or overtime.
Here are two examples:
Lender one considers 50% of your bonus and 4 times your income:
- £30K x 50% = £15K
- £50K + £15K = £65K
- £65K x 4 = £260K maximum loan
Lender two considers all of your bonus and 5 times your income:
- £30K x 100% = £30K
- £50K + £30K = £80K
- £80K x 5 = £400K maximum loan
In these examples, none of your details has changed, it is simply down to the companies and their own rules. That’s why working with a broker to look at a number of different lenders is important.
Mortgage lenders are much better with people who are self-employed than in past times and some can get mortgages when they have been in business for a year or less. How you draw your income is also a consideration when you are self-employed – if you have a salary and dividends or profit retained in the business.
For example, if you are a company director and the sole shareholder in the company. It has an annual profit of $150K but you just take a salary of £10K and a dividend of £40K. one lender might look at these and up to 5 times your income which would mean:
- £10,000 + £40,000 = £50,000 x 5 = £250,000
On the other hand, another might look at the profit left in the business and therefore 5 times this figure would mean:
- £150,000 x 5 = £750,000
Again, your circumstances haven’t changed but the lender’s criteria are different, and this means you can borrow more from one than the other.
Being a contractor
As with being self-employed, being a contractor means you can get a mortgage easier than in past times. They tend to look at the day rate that you earn to establish an annual figure and base this on a working year of 46 weeks to allow for holidays and breaks between jobs.
If you earn £600 a day, this would work out as a £3000 weekly rate. This would be times 46 to give an annual income of £138,000.
Other situations to consider
You do need to be at least 18 to get a mortgage in general but more companies will offer mortgages into retirement ages than before. Some lenders don’t even have a maximum age now but instead looks at the affordability.
If you have bad credit, this can limit the lenders involved but those who do accept people with bad credit, many will go up to 90% LTV. There are two main factors – what type of problems you have had and when they happened. The older and less serious the problems, the more lender will consider you.
Late payment and arrears
Late payments and arrears can be recorded on both secured and unsecured debts. Anything not brought up to date within one month is considered arrears. Most high street lenders need 12 months without arrears to consider you, but other lenders are less strict.
A default is a missed payment but there are still lenders who will consider you if you have these, even within the last 3-6 months and even if they have not been paid off.
If you have a CCJ (County Court Judgement) then you may be able to be a mortgage even if they are within the last 3-6 months and have not been satisfied, depending on the lender.
IVAs and Bankruptcy
With these situations, you can get a high LTV mortgage if you are in an IVA or have been discharged bankruptcy within the last 12 months.
Debt management plans
If you have opted for a debt management plan to pay off your debts, then are lots of lenders who will consider you even while still paying for it as long as the payments have been made regular.