My son and his partner bought a new build with Help to Buy – do they now lack the income to remortgage?

My son and his partner purchased a new build property in July 2019 for £280,000 with a mortgage through Nationwide Building Society.

This was funded by a deposit of £48,000, a mortgage of £176,000 and a 20 per cent interest-free government Help to Buy loan of £56,000.

During the pandemic, both my son and his partner lost their jobs. He retrained as a carpenter on around £26,000 a year.

However, his partner is unwell for work and receives the full Personal Independence Payment (PIP), which I believe is around £9,000 a year.

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They are now approaching the end of their five-year fixed rate mortgage agreement with Nationwide (July 2024) and I am concerned that they will no longer have enough income to renew a new mortgage agreement.

Your property is now worth approx. £350,000, your outstanding mortgage is £150,000 and your government loan will be £70,000 (20 per cent of the value of the house).

Ideally you would renew or increase your mortgage to £220,000, but with only £35,000 of joint income (I assume benefits are classed as income?), I’m worried they won’t pass an affordability test.

They also have £30,000 in rainy day savings.

Could you clarify what options are available to you and what is the best way to proceed? W.B., v.by email.

David Hollingworth replies: The Help to Buy Share Loan was a Government-backed initiative that offered a share loan of up to 20 per cent of the purchase price (40 per cent in London) for new homes.

The buyer only had to make a minimum contribution of 5 percent as a deposit and, therefore, required a mortgage equivalent to 75 percent of the value of the property.

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Capital Loan Cost

The share loan is interest-free for the first five years, which is why the next anniversary is as important as the end of the mortgage contract.

After the first five years, the loan carries interest of 1.75 percent in the sixth year, which then increases each year based on the CPI plus 2 percent.

For your child and their partner, the monthly cost will be just under £82 a month for year six.

The equity loan can be paid off at any time, but will be equal to the same percentage of the property’s current value as originally taken out.

As a result of the increase in the value of the property, the amount to be repaid will have increased if they wanted to liquidate it.

At today’s value, the capital loan would now amount to £70,000.

It is possible to pay off part of the loan against the equity rather than the entire amount, although that is a minimum of 10 percent of the value of the property, which is generally equal to half the loan.

The amount to be reimbursed must also be decided by an independent valuation and administration costs will also be paid.

Many lenders will not offer a remortgage where the equity loan will remain in place and may require the equity loan to be repaid in full upon completion.

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Affordability

As you well identify, the key challenge will be the change in personal circumstances.

A critical issue for remortgage options and whether additional funds will be raised is meeting the lender’s affordability criteria.

For this, income and expenses will be taken into account to make an individual evaluation of how much they can borrow.

Profit 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 remortgaging options and whether raising additional funds will meet the lender’s affordability criteria.

Some may include only 60 per cent, say, of a Personal Independence Payment in the affordability calculation, while others will be more generous. Others may want some clarification that the payment is guaranteed to be permanent in the future.

If your child has been self-employed as a carpenter, they will usually need to prove income through a couple of years of tax self-assessment or accounts.

Although affordability is not a single multiple for all income, borrowing enough to pay off the entire equity loan would be more than 6 times income, assuming all income is taken into account in the assessment.

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Retain capital loan

It is possible to continue without paying the principal loan. Although in recent years mortgage rates seemed favorable compared to loan interest on principal, rising interest rates have changed that.

It may be possible to switch, but the existing lender may offer a useful alternative option.

That would allow the existing mortgage to be transferred to a new deal on similar terms without further affordability or credit checks.

This will ensure that your child and their partner are not subject to the standard variable rate and can choose to fix their rate again if they prefer.

There will be the monthly cost of borrowing capital to deal with, but it will be cheaper than an equivalent mortgage rate in the current climate.

Weighing the costs: it is possible to continue without repaying the capital loan, according to Hollingworth

What we don’t know is whether the final cost of borrowing capital will rise further if the value rises, but overall market activity has slowed and indices are now recording declines.

The equity loan also participates in any downward movement in prices, so if prices fall, so would the equity loan.

The ability to repay the loan on equity may be out of reach for now, but this will hopefully give them some assurance that a deal will be available.

Nationwide will typically offer competitive terms to existing customers and will also avoid the need to seek consent from the Help to Buy administrator, which can be costly and time-consuming.

They can close a deal up to six months before the current agreement ends, so they should seek advice at that time and a broker will be able to analyze clients’ existing options, as well as other lenders.