The government has closed a loophole in its Help to Buy scheme, to help homeowners pay back their loan over a longer period, with immediate effect.
As of 28 August 2019, homeowners who purchased a property through the Help to Buy scheme can mortgage their property up to an increased term length of 35 years. Prior to this, those using the scheme were only able to mortgage at the maximum term length of 25 years.
The loan scheme, launched in Spring 2013, provides borrowers with a low-interest equity loan towards a new-build home with a purchase price of up to £600,000. Borrowers pay a 5% deposit, the government lends up to 20% (up to 40% in London) and a mortgage of up to 75% (55% in London) makes up the rest. No interest is payable for the first five years.
With no interest being charged on the government’s loan for the first five years, the first batch of Help to Buy borrowers began their interest payments on their loan in 2018.
Borrowers however have faced difficulty remortgaging, with lenders uncertain about how long the government’s equity loan would last. If the borrower wanted to extend their mortgage term past the original 25 years, under responsible lending rules, the lender would need to factor in the cost of the government loan, which in turn reduces the amount the borrower can potentially borrow. Additionally, the lender must assess how the borrower intended to pay back the full government loan before their mortgage finished
Faced with this, many lenders have chosen not to offer Help to Buy remortgage products or demand the Help to Buy loan is paid off in its entirety before allowing the borrower to remortgage.
This had led to borrowers, who have purchased previously through the Help to Buy Scheme, being unable remortgage. In this instance, not only is the borrower facing an increased monthly cost due to the interest payment on their Help to Buy loan, but they also face a more expensive mortgage rate, or even being offered only a variable rate.
The change made by the government makes it clear that the term of the equity loan will match that of the main mortgage. Should a borrower extend their mortgage term to 35 years, their equity loan will be extended automatically to match this. The move gives lenders certainty as to when the equity loan is to be repaid, which will typically be in line with the sale of the property.
“The move is a welcome one for the mortgage industry, and in particular, those remortgaging for the first time since taking out a mortgage through the Help to Buy Scheme”, comments Samantha Jackson, Managing Director of Cooper Associates Group. “With no ambiguity regarding the final repayment of the equity loan for lenders, I would expect to see more lenders start to move within the Help to Buy remortgage market. This increased competition for lenders will only service to improve choice for consumers. Importantly, a 25-year term is sometimes not appropriate for a first-time buyer. The option of arranging a term in line with what is truly beneficial for them, and not the lender, is significantly important”.
