When your Help to Buy (HTB) mortgage is due for renewal, it’s a crucial moment to evaluate
your financial situation and make informed decisions. One of the most common queries with a
help to buy remortgage is whether to buy out the government’s equity share or
continue paying interest on it. Here’s a detailed look at the factors you should consider to
make the best decision for your circumstances.
Understanding the Help to Buy Scheme
The Help to Buy scheme was introduced by the UK government to help first-time buyers and
those moving up the property ladder to purchase homes with a smaller deposit. The scheme
typically includes an equity loan of up to 20% (40% in London) of the property’s value,
which is interest-free for the first five years. After this period, you begin paying interest on
the loan.
For detailed guidance and to explore your options, you can refer to official government resources.
The GOV.UK website provides comprehensive information on managing and repaying your Help to
Buy equity loan:
Help to Buy Remortgage Options
When it’s time for your help to buy remortgage, you have two main options:
- Buying the Equity (Staircasing)
- Paying the Interest Only
1. Buying the Equity (Staircasing)
Buying the equity means repaying the government loan in part or in full, thereby increasing
your ownership stake in the property. This process is known as “staircasing.” Here are the
pros and cons of this help to buy remortgage approach:
Pros:
- Full Ownership: Once you buy out the equity, you will have full ownership of your
home, which can provide a sense of security and stability. - No Interest Payments: By paying off the equity loan, you eliminate future interest
payments, which can be financially beneficial over the long term. - Property Value Appreciation: If your property’s value has appreciated since you
bought it, staircasing now could be advantageous before the property value increases
further.
Cons:
- Large Lump Sum Required: Buying the equity requires a substantial amount of
money upfront. You might need to remortgage or use savings to cover this cost. - Potential Fees: There may be additional fees involved in the process, including
valuation fees and legal costs.
When to Consider Staircasing:
- You have sufficient savings or can obtain a favorable remortgage deal.
- Your property value has significantly increased, and you want to secure that value by
fully owning your home. - You are looking to avoid paying interest on the equity loan, which can become
increasingly expensive.
2. Paying the Interest Only
If you choose to continue paying the interest on the HTB equity loan, you retain the current
arrangement without needing to buy out the government’s share.
Pros:
- Lower Immediate Cost: Continuing to pay the interest means you don’t need a large
lump sum upfront, which can be more manageable financially in the short term. - Flexibility: This option provides more financial flexibility, allowing you to use your
money for other investments or expenses. - Potential Property Value Increase: If you anticipate that property values will rise
significantly, you might choose to hold off on buying the equity now, assuming you
can handle the increasing interest payments.
Cons:
- Ongoing Interest Payments: You will continue to incur interest costs, which will
increase annually after the initial interest-free period. - Future Costs: If property values increase, the amount needed to buy out the equity
loan will also rise, potentially making it more expensive in the long run.
When to Consider Paying Interest Only:
- You lack the funds to buy out the equity now.
- You prefer to keep your financial options open and avoid committing a large sum to
staircasing. - You expect your income to increase, allowing you to manage higher interest payments
more comfortably in the future.
Making the Decision
To make the best decision for your help to buy remortgage situation, consider the following steps:
- Assess Your Financial Situation: Review your savings, income, and current
mortgage terms. Consider speaking to a financial advisor to get a clear picture of your
finances. - Evaluate the Property Market: Understand the current and projected property
market trends. This can help you gauge whether buying the equity now or later is
more advantageous. - Consider Your Long-Term Plans: Think about your long-term housing plans. If you
plan to stay in the property for the foreseeable future, staircasing might be more
appealing.
Conclusion
The decision to buy the equity or continue paying interest on your Help to Buy remortgage is
highly personal and depends on various factors, including your financial health, property
market conditions, and long-term goals. Carefully evaluating these aspects will help you
make an informed decision that aligns with your financial well-being and home ownership
aspirations. At the moment most clients are making over payments on their current mortgage
whilst rates are higher. If mortgage is being charged at 5% but help to buy interest is 2.5%
many want to reduce the bigger debt.
