Purchasing a second home when first home was bought with an equity mortgage

WisdomJackPowers

Hello

I'm seeking advice regarding the possibility of purchasing a second home when my current home was purchased using an equity mortgage much like the help to buy scheme.

In 2016 I purchased a London flat using a scheme similar to Help to Buy, where the local authority offered an equity loan of 30% of the property value. For this I had to contribute 5% of the total property value as a deposit and obtain a mortgage for the remaining balance.

I could now look at remortgaging when the fixed term is up this year. If the property has increased in value then there maybe an opportunity to release the value increase, as equity, from my mortgage with the bank covering the 70%. Whilst then retaining the 30% equity loan, as it is, since the interest payments are relatively low. I could then use the released equity to fund another investment. There are obvious questions such as; would the equity released cover the deposit for the second property; would I be considered for a second mortgage, etc, but I'm not really after advice about affordability for me - I can work that out. What I'm really after is advice on two questions:

1. If you have purchased your first property on the help to buy scheme (or in this case any scheme that provides an equity mortgage in addition to that of a typical mortgage provider), can you later purchase a second property before you repay the help to buy loan? What's to stop somebody receiving inheritance, for example, and then using that to purchase a second home before paying off the equity mortgage. I'm assuming, that if it is restricted, it would be captured in the Equity Mortgage contract. Any pointers to the kind of clauses that capture this would be awesome (I understand that I should appoint a solicitor to confirm this in respect of contract between me and the lender).

2. Is it actually possible to release equity on the 70% mortgage as a cash lump sum from a property purchased with the help to buy scheme (or same as above) at all? Would my current mortgage lender for the 70% allow it?

I'm not trying the fiddle the system. When I bought in 2016 I was a single buyer on £32k salary, and it was my only way onto the London housing market. But I've since received pay rises and the value increase on my property. Whilst the morally expected thing to do may well be 'pay off the equity loan first' I'd like to know if I am actually contractually obliged to do so. Using the value increase to fund a good yielding buy-to-let property would pay much better each month than the saving offered from paying off the equity loan.

Many thanks

J

Thrugelmir

WisdomJackPowers wrote: »

2. Is it actually possible to release equity on the 70% mortgage as a cash lump sum from a property purchased with the help to buy scheme (or same as above) at all? Would my current mortgage lender for the 70% allow it?

Simple straightforward answer is no.

With regards to 1. What do you intend doing with the first property?

WisdomJackPowers

thanks for the reply Thrugelmir.

Would you be able to expand on your answer please? (I'm not being combative but interested to know more about the rules).

Regarding question 1. The intention would be to keep the first property. To revalue and remortgage it with the existing conditions - a 70% mortgage and retain the 30% equity loan and subsequent repayments.

Thanks

Jack

nubbins

I hope its no to both questions

Thrugelmir

WisdomJackPowers wrote: »

Would you be able to expand on your answer please? (I'm not being combative but interested to know more about the rules).

Read your contracts. They'll contain everthing you need to know. Both the lender and the local authority will be very specific.

kingstreet

The answers are no and no.

You an neither buy another property when you own a property subject to an HTB equity loan, nor can you remortgage or get a further advance to capital raise on a property subject to an HTB loan.

Pay off the HTB loan, then you can do what you want.

You can find details here, the website of the post-sales HTB Agent;-

http://www.myfirsthome.org.uk/

aneary

HTB schemes are not there so people can buy multiple properties just one for use as a home.

WisdomJackPowers

Thanks Thrugelmir and all for your replies.

The first thing that I did was check my contract, albeit only the equity mortgage contract with the local authority. There are clauses stating that, at the point I bought, it could be my only home (obviously this is because of what the scheme is for - those stepping onto the housing ladder - which I was). What I cant see is an explicit clause in this agreement that restricts the purchase of a second home afterwards. Theres a bunch of sections on 'Redemption' and I'd assume it would be tied into this. Admittedly this could also be down to my lack of experience in reading contracts and misinterpretation - if I explored this further I'd put the contract under the nose of an expert.

Can I own a Help to Buy home and buy a second home?
No. If you can afford to purchase another home you will have to repay the Help to Buy: Equity Loan. The property purchased must be your only residence. Help to Buy is not available to assist buy-to-let investors or those who will own any property other than their Help to Buy property after completing their purchase. You cannot rent out your existing home and buy a second home through Help to Buy. Applicants who make fraudulent claims for Help to Buy assistance will be liable to criminal prosecution. Fraudulent claims will always require immediate repayment of the equity loan. source: https://www.helptobuy.gov.uk/equity-loan/faq/

Seems pretty clear in the above on the website but bear in mind that I'm not actually on the help-to-buy scheme - its a similar scheme which likely uses the same framework. I just can't find the contractual mechanism in my agreement that enforces it, and a lot of the spiel, both online and in the contract, pertains to not using help-to-buy schemes AFTER you are a homeowner... but maybe its the same thing?!

As you suggest, the restriction may be covered in the agreement with the lending bank for the 70%, so I will check that contract.

This leads me onto another question:

Assuming the second home idea is a no go... If I decide to remortgage my help to buy home do I then have two options for how to use my equity gained from value increase? Can I use the value increase to either; A. pay off the local authority equity loan and have full control of the property, or B. contribute the increased equity to my remortgage deposit and reduce the monthly premiums that I pay to the bank?

It could provide a bigger saving pcm to reduce my mortgage with the bank if their rates are higher than the local authority. I will have to consider the trade off against the benefits of paying off the local authority too.

Thanks for your help - it's helping an informed decision

WisdomJackPowers

Thanks @kingstreet. Your link leading to the below is really useful. I assume that my agreement will be similar, but will check.

http://www.myfirsthome.org.uk/iwantto/remortgage/

kingstreet

As the homepages states;-

This is to assist you if you have already bought your home through Help to Buy, FirstBuy, HomeBuy Direct, First Time Buyers Initiative, Armed Forces Home Ownership Scheme, or London Wide Initiative.

If not, you'll need to contact your individual provider.

Finally, yes you can remortgage to redeem the equity loan. You will typically need to have equity of 10% to 15% of the property value above the amount you'll need in total as no lender offers a 100% remortgage for debt consolidation.

WisdomJackPowers

Thanks kingstreet, it is a different provider.

Any advice on option B?

... or B. contribute the increased equity to my remortgage deposit and reduce the monthly premiums that I pay to the bank?

Not redeem the equity loan, keep it but instead use the increased value to make a bigger deposit for the 70% mortgage...

Are my options the same as what's talked about here https://www.theguardian.com/money/2014/aug/07/savings-pay-help-to-buy-loan-virginia-wallis but using the property value increase equity rather than the savings that I don't have!