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    • Googers
    • By Googers 15th Jul 17, 9:46 AM
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    Googers
    Mortgage Deposit: Use for lower LTV, or clear bank loan?
    • #1
    • 15th Jul 17, 9:46 AM
    Mortgage Deposit: Use for lower LTV, or clear bank loan? 15th Jul 17 at 9:46 AM
    Hi all,

    First post on MSE and probably won't be my last, but here goes:

    I had been discussing a mortgage application for a 40% share on a Shared Ownership property. The share is valued at £72,000, and I have a deposit of £10,800 for 15%. However, I also have a £20,000 bank loan which remains to be paid off, which is at a rate of £371/mo. The bank seemed to be on track to offering me the £61,200 I needed, but have doubled back because they are no longer including my bonuses in my affordability (can't prove them over the last 24 months because I've been with the company for 18!). Now they are offering £53,100.

    I have managed to raise the additional £8,100 needed to make up the full deposit (very generous grandparents offering a 0% loan to be repaid when I can afford to), but as a result, I now have enough money to completely clear my bank loan. HOWEVER, I would be left with no deposit.

    So my question is this: would it be better to get the mortgage using the £18,900 as a deposit, and overpay on my bank loan to clear it sooner (currently 79 months remaining...), thus resulting in a 2.34% interest mortgage, OR, would it be better to pay off the bank loan completely, resulting in no deposit (MAY be able to sweet talk my way into a 5% deposit), and get a ~4% mortgage?

    Differences in monthly payments would be:

    With deposit:
    Loan £371/mo
    Mortgage £186/mo
    Rent on remaining share £230/mo
    Money left over per month: £350

    Paying off bank loan:
    Mortgage £350/mo
    Rent on remaining share £230/mo
    Money left over per month: £550

    Now what my grandparents are offering is a zero interest loan, which can be repaid whenever I am able to. If I clear my bank loan and borrow another £3,600 from family, I could pay all family members the £11,600 in just 20 months. However, if I use the money as a deposit, it will take me closer to 4 years, but I should pay off both my family loan and bank loan in that time using overpayments. If I take this option, I would be saving ~£200/month on the mortgage.

    Anyone got any tips/advice on what to do with this situation? I feel like clearing the 12% bank loan would be better in the long run (4% mortgage rate for 5 years, would remortgage with a deposit after that term).
Page 1
    • AnotherJoe
    • By AnotherJoe 15th Jul 17, 9:51 AM
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    AnotherJoe
    • #2
    • 15th Jul 17, 9:51 AM
    • #2
    • 15th Jul 17, 9:51 AM
    Clear the bank loan. At 12% it's a no brainer
    • Googers
    • By Googers 15th Jul 17, 10:48 AM
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    Googers
    • #3
    • 15th Jul 17, 10:48 AM
    • #3
    • 15th Jul 17, 10:48 AM
    Certainly seems so. I'm also now mulling over taking out a £7500 loan when that bank loan is cleared, to get a 10% deposit and qualify for both a lower mortgage interest rate, and a lower bank loan rate (approx. 4%). It would leave me with £510/mo, which I could use to overpay the bank loan in just 15 months (less if I use my bonuses too). I could then repay my grandparents in another 15 months, and be all-debts-but-a-mortgage free in less than 3 years.

    It seems like a good option?
    • AnotherJoe
    • By AnotherJoe 15th Jul 17, 11:39 AM
    • 6,872 Posts
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    AnotherJoe
    • #4
    • 15th Jul 17, 11:39 AM
    • #4
    • 15th Jul 17, 11:39 AM
    Certainly seems so. I'm also now mulling over taking out a £7500 loan when that bank loan is cleared, to get a 10% deposit and qualify for both a lower mortgage interest rate, and a lower bank loan rate (approx. 4%). It would leave me with £510/mo, which I could use to overpay the bank loan in just 15 months (less if I use my bonuses too). I could then repay my grandparents in another 15 months, and be all-debts-but-a-mortgage free in less than 3 years.

    It seems like a good option?
    Originally posted by Googers
    No. You'd be taking a loan of 4% to pay off a loan at 2.34% or if the LTV was better , an even lower rate.

    I would say instead of that, look at increasing your SO rate, maybe to 50% which will decrease your rent, and also that gets you closer to 100% ownership instead of 50%.

    You are focussing on paying off your mortgage but seemingly (unless i misunderstand?) forgetting that you only own 40%. Also look at your pension position, many people here are obsessed with paying off their mortgage often to the detriment of a pension and their overall financial position.
    • Googers
    • By Googers 15th Jul 17, 12:05 PM
    • 4 Posts
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    Googers
    • #5
    • 15th Jul 17, 12:05 PM
    • #5
    • 15th Jul 17, 12:05 PM
    No. You'd be taking a loan of 4% to pay off a loan at 2.34% or if the LTV was better , an even lower rate.

    I would say instead of that, look at increasing your SO rate, maybe to 50% which will decrease your rent, and also that gets you closer to 100% ownership instead of 50%.

    You are focussing on paying off your mortgage but seemingly (unless i misunderstand?) forgetting that you only own 40%. Also look at your pension position, many people here are obsessed with paying off their mortgage often to the detriment of a pension and their overall financial position.
    Originally posted by AnotherJoe
    Unfortunately I don't have a deposit saved up due to the short term that I've been working for out of university, hence the current deposit I have being from the remainder of the original bank loan. So either way I'd need to borrow £3,600 at the least to get a 5% deposit if I clear the bank loan.

    Assuming I cleared my bank loan, I could look at increasing my SO to 50%, but the rent would only go down around £20/mo, while the mortgage would go up by nearly £100/mo.

    The way I'm trying to approach this is to get onto the housing market as quickly as possible, and settle into a 5-year fixed rate product to give me some security for the duration. My salary will only increase from here as I get more qualifications and experience, so it's just this first year or two which might be a little tight. In order to get on the market quickly, I need that £7,200 (or £3,600) deposit, which will have to come from another loan. Getting it from a 4% loan is far better than putting £10,800 down from a 12% loan (the current source of most of my deposit).

    I'm focusing on paying off the loans in the first two years, and then overpaying on the 40% share mortgage for the remaining 3. That should leave me with a decent amount of capital on the property, to which point I can remortgage for the entire 100% share, less any capital I already have on the 40% share.

    I hope it makes sense - it's a rushed attempt to get on the market, which will cost me a little bit more in the short term (about £400 in interest on the £7500), but give me ample opportunity to own a house outright by age 55 if everything goes well - assuming I don't overpay on the remortgage. I do not intend to get a pension, but instead plan to overpay on this house so that I own it much sooner, then buy a second property to pay off with rental earnings. That second property then becomes either a monthly source of income, or a cash lump sum if I sell it. I don't intend to retire in England, so I would want the money as a lump sum rather than in staggered amounts.
    Last edited by Googers; 15-07-2017 at 12:08 PM.
    • AnotherJoe
    • By AnotherJoe 15th Jul 17, 12:35 PM
    • 6,872 Posts
    • 7,306 Thanks
    AnotherJoe
    • #6
    • 15th Jul 17, 12:35 PM
    • #6
    • 15th Jul 17, 12:35 PM
    Unfortunately I don't have a deposit saved up due to the short term that I've been working for out of university, hence the current deposit I have being from the remainder of the original bank loan. So either way I'd need to borrow £3,600 at the least to get a 5% deposit if I clear the bank loan.

    Assuming I cleared my bank loan, I could look at increasing my SO to 50%, but the rent would only go down around £20/mo, while the mortgage would go up by nearly £100/mo.

    The way I'm trying to approach this is to get onto the housing market as quickly as possible, and settle into a 5-year fixed rate product to give me some security for the duration. My salary will only increase from here as I get more qualifications and experience, so it's just this first year or two which might be a little tight. In order to get on the market quickly, I need that £7,200 (or £3,600) deposit, which will have to come from another loan. Getting it from a 4% loan is far better than putting £10,800 down from a 12% loan (the current source of most of my deposit).

    I'm focusing on paying off the loans in the first two years, and then overpaying on the 40% share mortgage for the remaining 3. That should leave me with a decent amount of capital on the property, to which point I can remortgage for the entire 100% share, less any capital I already have on the 40% share.

    I hope it makes sense - it's a rushed attempt to get on the market, which will cost me a little bit more in the short term (about £400 in interest on the £7500), but give me ample opportunity to own a house outright by age 55 if everything goes well - assuming I don't overpay on the remortgage. I do not intend to get a pension, but instead plan to overpay on this house so that I own it much sooner, then buy a second property to pay off with rental earnings. That second property then becomes either a monthly source of income, or a cash lump sum if I sell it. I don't intend to retire in England, so I would want the money as a lump sum rather than in staggered amounts.
    Originally posted by Googers
    Shockingly bad idea on multiple fronts. Do you often turn down free money?

    Add to that, the easy ride on BTL is over and getting worse, your whole idea is predicated on long term consistent house price rises outpacing the markets (which historically they haven't done), you are totally focused on one sector so its really high risk (you are also at the mercy of government changes affecting 100% of your investment).

    Also, the money you put into BTL comes from taxed income so if you become a high rate taxpayer each £ you put into property (which you look to leverage into profits) costs you much more than a £ you put into investments (aka pension) and then you are taxed when you take the money out at a higher rate than from a pension.

    And by overpaying on BTL you reduce any tax benefits you do get through mortgage interest relief to zero making the business proposition even worse.

    Finally, there are ways of getting your money from your pension as a lump sum without paying high amounts of tax or without doing anything dodgy (essentially take a loan out repaid by pension drawdown at rates under high tax) , but in any case why does it follow you want it as a lump sum anyway? What are you going to do with the lump sum? If you are going to invest it to give an income, guess what a pension allows you to do ?

    This looks to me like a poorly thought through scheme based on what good investments houses were ........ had you done this 30 years ago.
    • Googers
    • By Googers 15th Jul 17, 12:51 PM
    • 4 Posts
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    Googers
    • #7
    • 15th Jul 17, 12:51 PM
    • #7
    • 15th Jul 17, 12:51 PM
    Shockingly bad idea on multiple fronts. Do you often turn down free money?
    ...
    This looks to me like a poorly thought through scheme based on what good investments houses were ........ had you done this 30 years ago.
    Originally posted by AnotherJoe
    I turn down free money when I don't trust our Government and don't want to die before I reach retirement age (which for me will likely be late 70s) to be entitled to my pension.

    The long-term plan may change but the short-term remains the same - I'm trying to get onto the housing market early so that at the very least I can own a house outright at a decent age, and continue saving in the meantime.
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