Q My fiance and I have a joint mortgage on a new-build home in Scotland. The house cost £187,000. We took out a mortgage of £139,600, put down £10,000 as a cash deposit and got a 20% equity loan of £37,400 from the Scottish Help To Buy scheme. There is currently £138,000 outstanding on the mortgage.
As house prices in our area are steadily rising it seems to be in our best interest to pay off the equity loan as soon as possible. Would it be possible to take out another mortgage and use the £10,000 that the house has risen in value to do that?
I’m quite confused about the best course of action to take and any advice on the matter is greatly appreciated. MS
A First, you cannot remortgage or take out another loan against the value of your home without the permission of the Scottish government. If you did decide to either increase your current mortgage or remortgage with a different lender, you would be asked to provide information on why you need to increase your mortgage (or take out an additional loan) and, in the first instance, you would need to put your request to the agent administering post-sales work on the Help to Buy scheme in your area.
Second, if your lender lets you, increasing your mortgage by the £10,000 rise in your home’s value will not give you enough to repay the whole of the 20% equity loan which, assuming your home is now worth £197,000, is now £39,400. However, it would give you enough to pay off some of it.
The minimum you can pay is 5% of your home’s market value, so in your case, and again assuming it’s now worth £197,000, you could pay off £9,850 of the equity loan. You would also have to pay all the valuation and legal costs associated with repaying part of the loan. (Under the Help to Buy scheme in England, the minimum you can pay off is 10% of a property’s market value and you are also liable for valuation and legal costs.)
As house prices increase so does the amount of the Scottish government’s stake in your property – although not the actual percentage. So the more prices go up, the more you’ll have to pay back when you come to sell the property. But against this you need to balance the fact that the equity loan is interest-free, which an increase in your mortgage to raise cash to pay off the loan won’t be. It could well be that rather than increasing your mortgage, it would make more sense to put any spare cash you have towards reducing your mortgage debt rather than your equity loan.
