Mortgage famine hits Help to Buy owners

FIRST-TIME buyers who snapped up a home through the Government’s Help to Buy scheme could find they struggle to get the cheapest mortgage deals when their current one ends.

Tens of thousands of properties have been sold through Help to Buy since it launched two years ago.

Under the scheme, people can buy a flat or house with just a 5 pc deposit. Then, to help them reduce their mortgage costs, they take a 20 pc loan from the Government, which is initially interest-free. They then agree a mortgage for the remaining 75 pc of the property’s value.

many of the initial deals taken out by Help to Buy borrowers are coming to an end, so owners are looking for a new rate. However, some buyers are finding hidden catches that may stop them getting the best deal, and they face having to pay their lender’s more expensive variable rate once their fixed term has ended.

One of the biggest problems is the limited number of remortgage deals available for Help to Buy owners, with just five banks offering such loans. Rates are also higher than for ordinary homeowners, so though home loan costs have fallen over the past two years, Help to Buy borrowers won’t see all of those benefits. In April 2013, the average rate for a two-year fixed deal under Help to Buy was 4.07 pc, giving repayments on a typical £150,000 loan of £598 a month.

The average remortgage rate available now to Help to Buy customers is 2.98 pc. Repayments would be £532, a drop of £66.

However, the average rate for ordinary homeowners is 2.13 pc, meaning repayments on a typical loan would fall to £484.

Furt her more, Help t o Buy customers are barred from the deals that those with a 25 pc deposit can get. This is because banks and building societies don’t like taking on the risk of the 20 pc loan the borrower has from the Government.

And there is another hurdle. Help to Buy agents (middle men who oversee how the Government loans were handed out) can stop an application for remortgages.

They can also block applications f or home i mprovements, only allowing them in exceptional cases, such as for the disabled.

As a result, borrowers who want to pay off their Government loan by cashing i n on the rise i n their property’s value or because they have had a substantial pay rise and can afford a bigger mortgage, find permission is being denied.

The stumbling block is that when a borrower tries to take equity out of their home, the 20 pc stake owned by the Government has also increased in value.

Let’s assume they bought a property for £100,000 and took on a £ 20,000 Government l oan. If this home i s now worth £125,000, the Government’s stake is now worth £25,000. This larger sum would need to be paid off.

David Hollingworth, of London & Country mortgage brokers, says: ‘There’s very little on offer for people wanting to remortgage a Help to Buy property. This is an emerging market, but it’s something that needs to be thought about. Really, you want to have more options on the table.’

Leeds BS is one of the first lenders to allow Help to Buy homeowners the chance to remortgage up to 75 pc of their property value.

It has a two-year discount mortgage at 1.99 pc, a two-year fixed-rate at 2.34 pc, and a five-year fixed-rate at 2.99 pc. Alternatively, customers can pay off the Government loan and Leeds will lend up to 90 pc of the property value.

Newbury BS l ets customers remortgage up to 75 pc of the property value at a discounted rate of 2.39 pc f or three years or a fixed-rate of 3.39 pc for five years.

Halifax and Lloyds Bank offer rates from 2.49 pc, but require a borrower to have built up at least 10 pc equity to qualify for a remortgage.

TSB will also allow remortgage applications on Help to Buy properties and offers a two-year fixed-rate, depending on how much equity the borrower already has. TSB offers remortgaging customers a f ree valuation and £250 cashback to cover conveyancing costs. Barclays requires Help to Buy borrowers to have built up at least 15 pc in equity in the property they are remortgaging, and doesn’t take the Government loan into consideration. So for a property worth £100,000, with a 20 pc Government equity loan outstanding, Barclays would require borrowers to have built up a 15 pc share of the £80,000 portion of the property — which would amount to £ 12,000. For t hose remortgages, Barclays offers a two-year fixed-rate at 2.37 pc, or a five-year fix at 3.49 pc.

But remortgaging is not as simple as for other homeowners. Roger Knight, lending manager of Newbury BS, says borrowers should speak to their current lender and the Help to Buy agent before they shop around.

Even then, the agent can decline if they think the borrowers would be putting themselves in an unsustainable financial position.

Legal work fees, which are usually waived for remortgages, might not be for Help to Buy remortgages, due to the loans being more complex.