According to a Mortgage Solutions poll, around 37 per cent said that they had seen a rise in Help to Buy customers struggling to remortgage to some extent, whilst 35 per cent said they have seen an increase to a large extent.
Approximately 29 per cent said that they had not seen a change in Help to Buy customers struggling to remortgage at the end of their interest-free period.
A report from The Telegraph found that the number of first-time buyers in arrears had doubled in the last year to 4,845 households.
The Help to Buy scheme closed for applications last year and offered first-time buyers equity loans of 20 per cent, going up to 40 per cent in London, to help them buy new build properties with a lower deposit of five per cent.
The loans were interest free for five years, but for loans taken out between 2013 to 2021, the rate was 1.75 per cent for a year which increased every year by the Retail Price Index plus one per cent. For those who bought more recently, the rate rises by the Consumer Prices Index plus two per cent.
David Hollingworth, associate director for communication at L&C Mortgages, said that the “timing could hardly be worse for those reaching the point where interest becomes chargeable”.
He said: “Mortgage rates have risen rapidly which could see the borrower moving onto a higher mortgage rate at the same time as interest on the Help to Buy loan becomes payable, albeit at a rate that will now look low at a starting rate of 1.75 per cent.”
Hollingworth noted that higher rates along with other cost of living could make it “tougher for those looking to switch”, with some having planned to repay the equity loan after interest-free period assuming that there would be enough equity to draw on.
“The equity may still be there, but the problem may now be more centred on the bigger monthly commitment on the existing borrowing. Borrowing more could be a stretch too far when affordability is inevitably becoming a bigger challenge in a higher rate environment with bigger outgoings,” he added.
He said that some would have the option to leave the equity loan in place and could be wondering if paying off the loan could be bad timing if prices fall.
“The difficult element for Help to Buy borrowers is always in determining the amount that must be repaid as it fluctuates in line with the property value.”
Hollingworth said: “It’s always dangerous to try and second guess the market but we may see more hanging onto the equity loan for longer. Managing the mortgage and understanding the options will be an important area for advisers to help their customers understand the options along with possible pros and cons.
“That will include product transfers as many Help to Buy borrowers will stick with their existing lender rather than take on the cost and time of dealing with the Help to Buy administration.”
Customers could become ‘stuck’ with current lender
Paula Higgins, chief executive of HomeOwners Alliance (HOA), said that the combination of coming off a lower fixed rate deal and paying interest rate on equity loan could be up to 40 per cent of the value of the property.
Higgins added that the trade body had heard of some lenders not offering a remortgage where the equity loan will remain in place and would require the loan to be fully repaid on completion.
“This means that these homeowners with equity loans are likely to be stuck with their existing lender and cannot shop around. Added to the nightmare is that people’s affordability may have changed dramatically since purchasing the property, so could very well fail affordability tests if they were in a position to shop around for a new deal.
“The cost of living crisis and soaring energy bills has eroded people’s wealth, resulting in a rethinking of people’s future plans. Instead of being in a position to upsize in a couple of years after buying their Help-to-Buy property, the reality is that they could very well be looking to move as they can no longer afford their home. And on top of that they need to find cash to pay off the equity loan,” she explained.
Higgins continued that the HOA had detailed advice on how to remortgage a Help to Buy property, with the top tip being to get in contact with a mortgage broker as they can lock in a deal up to six months ahead and compare deals with your existing lender and other lenders.
She added that if people were in financial hardship it was best to speak directly with their lender to explore options like extending the mortgage term.
Help to Buy customers trapped in ‘perfect storm’
Chris Exley, director at Exley Financial Planning, said, that Help to Buy customers were “trapped in a perfect storm” from rising house prices and interest rates.
He explained: “For a variety of reasons, most want to repay the Help to Buy loan as soon as they can. Some can pay cash, others can downsize, but for most of us, this means replacing the Help to Buy loan with a mortgage.
“There’s a sting in the tail. House prices have risen around 30 per cent in the last five years, which means the amount owed to Help to Buy increases by 30 per cent also.
“The result – a £50,000 interest-only equity loan at zero per cent interest is now a £65,000 interest and repayment mortgage at five per cent interest – monthly payments go from nothing to £300 minimum.”
He noted that for many repaying Help to Buy was a “non-starter”, so the remaining options were to sell up or leave it in place.
“The latter restricts remortgage opportunities, but retains an affordable ‘holding pattern’. The hope then is that a fall in house prices, and a settling of interest rates next year would make full repayment viable,” Exley explained.
Rhys Schofield, brand director at Peak Mortgages and Protection, said that extra few hundred pounds had been the “straw to break the camels’ back for many of them, leaving little option but to consolidate their other debts to make ends meet and reduce their overall outgoings.”
Samuel Ewen, managing director at Rosehill Financial Services, said that the interest-free period with Help to Buy “can make it feel like ‘Monopoly’ money, because you don’t have to pay for it right away”.
He continued that he would always discuss future implications with clients, such as rising interest rates and the amount you repay based on the future value of the property.
“More recently, where mortgage rates have risen, the starting Help to Buy interest chargeable may actually be cheaper than raising funds to pay off the loan, but the issue is that some lenders may not take on a remortgage where a Help to Buy loan remains. For those that do, we’ve found that the legal side of the process takes forever and a day,” Ewen added.
