Tuesday, November 29, 2022

Should I pay off my Help to Buy mortgage?

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I have a Help to Buy mortgage — a £50,000 equity loan under the scheme together with a £150,000 mortgage on a property in England. Can I pay off £130,000 from the mortgage and then remortgage for the remaining balance of just £20,000, but leave my £50,000 Help to Buy loan outstanding as it’s interest free for a further four years? Is this sensible or not?

David Hollingworth, director at broker L&C Mortgages, says the Help to Buy equity loan — available in England, Scotland and Wales in various forms — has helped many people get on the ladder or make their next move to a new, possibly larger property over the years. As you live in England you will benefit from a Help to Buy equity loan of typically up to 20 per cent of the property value (or 40 per cent in London) on new-build properties, most recently only for first-time buyers. The purchase price is then made up through a minimum deposit of 5 per cent and a mortgage.

David Hollingworth, director at L&C Mortgages

As you say, the equity loan doesn’t charge any interest during the first five years. After that, a rate of 1.75 per cent is charged in year six, which then increases each year by the consumer prices index plus 2 per cent.

The Help to Buy equity loan can be repaid at any time, in part or completely, though the minimum requirement is 10 per cent of the property value, typically half of the equity loan, rather than small regular amounts.

That is in large part due to the fact that the equity loan is repayable at the same percentage of the current property value that was originally taken. Consequently, if the property has increased in value, the outstanding equity loan will also have increased. So if a £250,000 property with a 20 per cent equity loan has increased in value to £275,000, the repayable equity loan will have risen to £55,000.

If you decided to repay some or all of the equity loan there would be a need for a valuation to be undertaken to meet the requirements of the Help to Buy agent, which would incur a cost plus any administration fees. Repayment of the whole mortgage would also require the equity loan to be repaid.

So although it may look like the equity loan will be interest free for the next four years there will also be a potential additional uplift in the loan due for repayment, as a result of any change in property value.

We simply don’t know what will happen to house prices over time so you can’t be sure that repaying the mortgage and leaving the equity loan intact will ultimately be the cheaper option, despite its initially interest-free status. However, it is also worth pointing out that if the property value falls then the government shares in the downside.

Before making any overpayments on the mortgage it would be sensible to check if there are any early repayment charges (ERCs). Being only one year into the loan would usually suggest that you’re still in a current deal. Some deals can be ERC-free but it’s worth being sure as they can amount to thousands of pounds. That will also help you understand whether you need to remortgage or whether the current rate remains suitable.

When switching lender and retaining some or all of the equity loan, choice can be limited so it’s worth shopping around. Lenders can also have minimum loan amounts for remortgage deals (often £25,000) and switching to a new lender and keeping the equity loan will incur an administration fee to the Help to Buy agent as well.

Overall, only hindsight will tell if the right decision was to prioritise the mortgage overpayment, the repayment of the equity loan or a mix of the two. Even though the equity loan is initially interest free it is a loan and will ultimately be dependent on the market value or sale price of the home at the time.

How long does it take to set up a lasting power of attorney?

I have read about the backlog in applications for lasting power of attorney (LPA). I urgently need to become one for my elderly mother, who can no longer handle her financial affairs. What is the process of registering an LPA and how long does it usually take?

Ann Stanyer, partner and specialist in elderly client law at Wedlake Bell, says this is becoming a widespread problem. Lasting powers of attorneys are commonly executed when individuals are older, retired or in ill health but they are an essential document for everyone. Depending on where you live in the UK the version you make will be slightly different but it essentially provides the same powers.

Headshot of Ann Stanyer, partner at Wedlake Bell
Ann Stanyer, partner at Wedlake Bell

All LPAs must be registered before they can be used. If your mother has signed her LPA, had her signature witnessed, and a certificate provider has certified her knowledge and approval of the LPA, then the LPA has to be sent to the Office of the Public Guardian (OPG) for registration. This is where problems can start.

On June 21 the then Justice Minister provided a written parliamentary answer on about the length of time it is taking to register LPAs. The OPG has a target of registration within 40 days. At the moment the period is double that at 82 days. Furthermore, nearly all LPAs registered this year took more than 12 weeks to be registered.

The OPG has a number of reasons for this increase. It cites not only the Covid backlog but also the required statutory waiting period. This waiting period allows the OPG to carry out checks on receipt of the LPA and only then start the four-week period during which objections to the registration can be filed.

I am not sure these reasons are the whole problem: it is also a staffing issue. The OPG lost many staff during the pandemic; a combination of foreign staff returning home due to Brexit or Covid and staff simply not wanting to return to work after lockdown.

Separately, statistics show that LPA registrations are way below pre-pandemic levels — some 18.8 per cent lower. It is therefore surprising that the registration waiting period has doubled even though registrations are much lower. Something is clearly not right.

This will not reassure your mother. Unfortunately, there is no expedited registration service if decisions are urgent. Until the LPA is registered you have no authority under the LPA to take decisions as your mother’s attorney.

Provided that your mother has capacity to take decisions herself, then she must continue to do so. There is a short term measure, however, that could tied her over while registration takes place: your mother could sign a general power of attorney in your favour. This has no registration requirement and is effective immediately. However, the power will only last as long as your mother retains capacity. This is the only solution in the circumstances but will hopefully help.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Our next question

My solicitor is urging me to take my divorce dispute to arbitration rather than through the courts. This makes me worry. Will a decision reached in arbitration have anywhere near the same weight as a court judgment? She is saying it will, pretty much — and that in addition I will get resolution much more quickly than through the backlogged courts. And it will be cheaper as well. Sounds too good to be true. Is it?

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com

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