My son and his partner brought a new build property in July 2019 for £280,000 with a mortgage through Nationwide Building Society.
This was funded through a deposit of £48,000, a mortgage of £176,000, and a government 20 per cent interest-free Help to Buy loan of £56,000.
During the pandemic, both my son and his partner lost their jobs. He has retrained as a carpenter on around £26,000 per annum.
His partner however is too unwell to work, and receives full Personal Independence Payment (PIP), which I believe is around £9,000 per year.
SCROLL DOWN TO FIND OUT HOW TO ASK DAVID YOUR MORTGAGE QUESTION
Mortgage help: Our weekly Navigate the Mortgage Maze column sees broker David Hollingworth answering your questions
They are now approaching the end of their five year fixed rate mortgage deal with Nationwide (July 2024), and I am concerned they no longer have sufficient income to renew to a new mortgage deal.
Their property is now worth approx. £350,000, their outstanding mortgage is £150,000, and their government loan will be £70,000 (20 per cent of the house value).
Ideally they need to renew or increase their mortgage to £220,000, but with only £35,000 joint income (I assume benefits are classed as income?), I worry they may fail an affordability test.
They also have £30,000 in rainy day savings.
Could you please clarify what options are open to them, and how best to proceed? W.B, via email.
David Hollingworth replies: The Help to Buy equity loan was a Government backed initiative that offered an equity loan of up to 20 per cent of the purchase price (40 per cent in London) on new homes.
The buyer only had to put down a minimum 5 per cent contribution as deposit and therefore require a mortgage equivalent to 75 per cent of the property value.
Equity loan cost
The equity loan is interest free for the first five years which is why the upcoming anniversary carries such significance, as well as the fact that the mortgage deal ends.
After the first five years the loan carries an interest charge of 1.75 per cent in year six which then rises each year by CPI plus 2 per cent.
In your son’s and partner’s case the monthly cost will be just under £82 per month in the sixth year.
The equity loan can be paid off at any time but will be equivalent to the same percentage of the current property value as originally taken.
As a result of the growth in the property value the repayable amount will have increased if they wanted to pay it off.
Based on the current value the equity loan would now amount to £70,000.
It’s possible to pay off part of the equity loan rather than the whole amount, although that is a minimum of 10 per cent of the property value generally equating to half of the loan.
The amount repayable will also need to be decided through an independent valuation and administration fees are payable as well.
A good deal of lenders will not offer a remortgage where the equity loan will remain in place and may require the equity loan to be fully repaid on completion.
As you rightly identify, the key challenge will be the change in personal circumstances.
A critical issue for remortgage options and if raising additional funds will be meeting the lender’s affordability criteria.
This will take account of income and outgoings to make an individual assessment of how much they can borrow.
Benefit income will be accepted income for many lenders but some may only take a proportion of that income into account.
Critical: A major issue for remortgage options and if raising additional funds will be meeting the lender’s affordability criteria
Some may only factor in 60 per cent, say, of a Personal Independence Payment into the affordability calculation, whereas others will be more generous. Others may want some clarification that the payment is guaranteed to be permanent going forward.
If your son has gone self employed as a carpenter then he will typically need to evidence income through a couple of years of tax self assessment or accounts.
Although affordability isn’t a one size fits all income multiple, borrowing enough to pay off the entire equity loan would amount to well over 6x income, assuming that the entire income will be factored into the assessment.
Retain the equity loan
It’s possible to continue without repaying the equity loan. Although in recent years mortgage rates looked favourable compared to the interest charge on the equity loan, rising interest rates have changed that.
It may be possible to switch but the existing lender may offer a useful alternative option.
That would enable the existing mortgage to be switched onto a new deal on a like for like basis without any further affordability and credit checks.
This will ensure that your son and his partner are not subject to the standard variable rate and they could elect to fix their rate again, if that’s their preference.
There will be the monthly cost of the equity loan to contend with but that will be cheaper than an equivalent mortgage rate in the current climate.
Weighing up the costs: It’s possible to continue without repaying the equity loan, according to Hollingworth
What we don’t know is whether the ultimate cost of the equity loan will rise further if the value increases but market activity has generally slowed and the indices are now reporting drops.
The equity loan does share in any downside movement in prices as well, so if prices fall so would the equity loan.
The ability to pay off the equity loan may well be out of reach for now but hopefully this gives some reassurance that they will have a deal available to them.
Nationwide will typically offer competitive terms to existing customers and it will also avoid the need to seek consents from the Help to Buy administrator, which can carry cost and take time.
They can lock in a deal as much as six months before the end of the current deal, so should seek advice at that time and a broker will be able to look at the existing customer options as well as other lenders.
GET YOUR MORTGAGE QUESTION ANSWERED
David Hollingworth is This is Money’s mortgage expert and a broker at L&C Mortgages – one of Britain’s leading specialists.
He is ready to answer your home loan questions, whether you are buying your first home, trying to remortgage amid the rates chaos or looking to plan further ahead.
If you would like to ask him a question about mortgages, email: email@example.com with the subject line: Mortgage help
Please include as many details as possible in your question in order for him to respond in-depth.
David will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
NAVIGATE THE MORTGAGE MAZE
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.