My son and his partner bought a new-build home with Help to Buy. Do they not have the income to transfer now?

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

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

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

However, his partner is too ill to work and receives full Personal Independence Allowance (PIP), which I believe amounts to around £9,000 per year.

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

Their property is now approximately £350,000, their outstanding mortgage is £150,000, and their government loan is £70,000 (20 percent of the house value).

Ideally they should extend or increase their mortgage to £220,000, but with only £35,000 joint income (I assume benefits are classed as income?) I’m worried they won’t pass the affordability test.

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

Can you please clarify what options are open to them, and how best to proceed? WB, vI email.

David Hollingworth replies: The Help to Buy equity loan was a government-backed initiative that offered an equity loan of up to 20 percent of the purchase price (40 percent in London) for new homes.

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

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Costs of a share loan

The share loan is interest-free for the first five years. That is why the upcoming anniversary is so important, as is the fact that the mortgage agreement is ending.

After the first five years, the loan is charged an interest charge of 1.75 percent in year six, which then increases every year by the CPI plus 2 percent.

For your son and partner, the monthly costs in the sixth year are slightly less than € 82 per month.

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

Due to the growth in the value of the property, the amount to be paid back will have increased if they had wanted to pay it off.

Based on today’s value, the share loan would now be £70,000.

It is possible to pay off part of the equity loan rather than the whole amount, although that is a minimum of 10 percent of the property value, which typically amounts to half of the loan.

The amount to be refunded will also have to be determined through an independent appraisal and an administration fee will also be payable.

A large proportion of lenders will not offer a remortgage where the share loan remains in place and may require the share loan to be repaid in full on completion.

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Affordability

As you rightly point out, the main challenge will be the change in personal circumstances.

A crucial point when transferring a mortgage and raising extra money is meeting the lender’s affordability criteria.

Income and expenses are taken into account, so that an individual estimate can be made of the amount they can borrow.

For many lenders, benefit income will be an accepted income, but some may only consider part of that income.

For example, some will only include 60 percent of a personal independence allowance in their 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 son has become self-employed as a carpenter, he will usually have to prove income through a few years of tax returns or invoices.

While affordability is not a one-size-fits-all income multiple, borrowing enough to pay off the entire equity loan would be more than six times income, assuming all income is included in the assessment.

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Save the share loan

It is possible to continue without repaying the share loan. Although mortgage rates have seemed favorable in recent years compared to interest costs on equity loans, rising interest rates have changed that.

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

That would allow the existing mortgage to be transferred to a new deal on a like-for-like basis, without further affordability and credit checks.

This way you can be sure that your son and his partner do not fall under the standard variable rate and can choose to re-fix their rate if they prefer.

There will be monthly costs on the equity loan, but they will be cheaper than an equivalent mortgage rate in the current climate.

What we don’t know is whether the final cost of the equity loan will rise further as the value rises, but market activity overall has slowed and the indices are now reporting declines.

The stock loan also shares in any downward price movement, so if prices fall, so will the stock loan.

The ability to pay off the equity loan may be out of reach at this point, but hopefully this will provide some reassurance that they will have a deal available to them.

Nationwide typically offers competitive terms to existing customers and also avoids the need to request permission from the Help to Buy administrator, which can incur costs and take time.

They can close a deal up to six months before the end of the current deal, so they should seek advice at that time. A broker can then look at existing customer options and other lenders.