Contractors’ Questions: What about my Help to Buy mortgage if Budget 2019 axes the scheme?

Contractor’s Question: What’s the position  if you’re a limited company contractor with a Help to Buy mortgage and the scheme is pulled down at Budget 2019? If the scheme is ended prematurely, what will the implications be for my Help to Buy-backed mortgage? Also, what if a loved one has an Agreement In Principle on a Help to/B property?

Expert’s Answer: The short answer regarding your home loan is that the terms you agreed to when taking the funds will remain intact.

No further loans would be approved if the current scheme ends, but any existing arrangements would continue to be repaid over time, as initially intended. Whether the government chooses to immediately replace the scheme with an alternative option remains to be seen, so your loved one may want to consider this point if they are ready to proceed with their purchase.

A question for you...

Do you have the accrued equity to clear the debt? Consolidating the Help to Buy loan by raising the funds with a contractor-friendly lender may prove to be a prudent decision. You could arrange the funds via your current lender or if your existing mortgage rate is due to expire, you could move the debt and raise the funds to clear your loan with a more competitive lender. Quite often this offers the chance to secure much lower interest rates, so it’s worth looking into.

You should note that property values have been slowing or in some cases reducing this year, so it makes sense to consider this option as a route to repaying the debt now. If a ‘no-deal’ Brexit impacts confidence in the property market any further than it has over the past three years, your available equity will also reduce (although, one plus side to a lower property value is that a reduced amount needs to be returned to the government.)

Take interest in the interest

It’s worth understanding how interest is calculated on the debt, as this may help you to make a decision. Interest is payable after five years of owning the property (so in year six), and increases steadily year-by-year. The government will use the RPI (Retail Prices Index) measure of inflation within their calculation, plus 1% until the loan is paid off.

It’s important to note that interest is only payable on the original amount taken from the government and not on any additional accrued equity. It’s also worth noting that you need to repay the government the same percentage you were lent, based on the current value of your home. So, you could pay back more than you initially took under the scheme if your property value has increased in value.

Help to Buy: charges, loan, debts

Remember, the initial charge under Help to Buy is presently 1.75% of the loan, then increases to 2.21% by year 10. Currently, several lenders can offer a two-year fixed rate product between 1.51 per cent to 1.70 per cent and a five-year fixed rates between 1.78 per cent to 2.00 per cent. You should also remember that as you are only paying the interest back after year five -- you will at some stage need to pay the debt off.

If you are choosing to repay part or all of the loan a payment can be made at any time, but the government will only accept a partial repayment if it amounts to the minimum of 10% of the property’s current value.

A safer way?

With regards to your loved one, do they need to purchase via Help to Buy? Many lenders have begun to offer 95% mortgages or variations of the 100% mortgage, such as the Family Springboard product via Barclays. These have become far safer than previous iterations, mainly due to banks reeling from impact of the last recession. If they are happy to buy an older property and a family member could support them with the required deposit, it may be a safer way to go and will involve no interest being repayable to the government. Be advised that products could be more expensive, but the additional interest owed on the Help to Buy loan will likely exceed any additional charges.

Lastly, if your relative is firm in their decision to take a Help to Buy mortgage, then it still offers the best route to securing a new build property. It would be advisable to discuss all the points above with them as they may not be fully aware of the interest and repayment process.

The expert was Simon Butler, associate director at CMME.