Mortgage Advice - Super newbie

Strikeman

Personal details
Renting couple currently paying £700 PCM in rent
29 and 32, no children however looing to have children in next 3 years
£50k combined annual salary
£0 debts
South East (Buckinghamshire)



My girlfriend and I are currently looking at our first house and are at the very beginning of the mortgage journey, and to be honest I know very little about them at the moment! We live near a huge new build site so we are looking at this site as a viable option (lack of deposit!)so my questions are:

1) Is the Help To Buy scheme any good? We currently have £5k of savings in the bank with little to no hope of saving up anywhere near what we need for a deposit, unless we hold of buying for another 10 years to save (£84k in wasted rent). This government scheme looks like the only way we will be able to get on the property ladder with their extra 20% equity loan, however are there any pitfalls I should be aware of? As in will I move into my house and be in negative equity from the get go??

2) I know that the first 5 years of the government equity loan are interest free, but it then starts at 1.75% thereafter and adds 1% per year + the inflation rate. Is this 0.15% per month, so for instance lets say the equity loan repayment is £100 a month/£1200 per year, does the total repayable for the year end up at £1,221 or £1452 (1.75% x 12)?

3) Each year the loan continues after the first 5 years, another 1% gets added, so does this 1% go on top of the already adjusted amount of £1,221/£1,452 or does it always revert to the original interest free amount to calculate it against? So instead of putting an additional 1% on top of the £1,221/£1452 it would actually calculate as £1,200 x 2.75%/33%

4) Same question with the mortgage, do I pay 4% for the year (0.33% per month) or 4% per month (48% over the year)

5) We currently earn £50k between us, should my mortgage value be around the £200k mark, therefore we could potentially get a Help to Build property at around the £260k mark, given that 5% is my cash deposit and 20% is my government euqity loan, leaving a mortgage of circa £200k to acquire?

6) Very rough life insurance cost for a couple our age?

Sorry these questions are a little sporadic! I think if I can get comfortable with the calculations I can then run scenario's myself, at the moment I just havent got a clue how the interest is worked out for me to forecast

Thankyou for any help you can provide

hamster2013

hi
welcome and best of luck in your purchase plans

lets deal with your questions seperately - first regarding the help to buy scheme, the goverment site explains it pretty simply
https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-equity-loans

You won’t be charged loan fees for the first 5 years of owning your home.

In the 6th year, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year. The increase is worked out by using the Retail Prices Index plus 1%.

so ...
after 5 years, you are charged a FEE, not interest, but a FEE.
this FEE is equal to 1.75% of the loans value.
so lets say you have £5k saved, therefore are looking to get a £20k Help To Buy loan and purchase a place worth £100k.

if you took a loan over 25 years, you would have to repay the government a monthly repayment of about £67
after 5 years, you would have to pay an annual fee of £350 - which basically makes your 'monthly repayment' of £96!!
and the year after, the fee of £350 would increase of 1% + RPI (last 12 months averaged at around 1.3-1.4%) = i.e an increase of 2.4% of the fee, which is £358.4 in year 7... £367 in year 8... £375.80 in year 9...etc


as for mortgage loans, the interst is calculated on a daily basis most of the time, but what you see (the 4% deals) is the annual rate for comparision basis.
if it was 44%, basically you would have to almost repay the full loan just in interst over 2 years... luckily it will not get to that unless our economy follows the footsteps of Zimbabwe


finally, life insurance cost depends on the duration of the mortgage - and the type of cover required -
i would say rough idea .... consider about £15-£30k over the term of 30 years mortgage.

Strikeman

hamster2013 wrote: »

hi
welcome and best of luck in your purchase plans

so ...
after 5 years, you are charged a FEE, not interest, but a FEE.
this FEE is equal to 1.75% of the loans value.
so lets say you have £5k saved, therefore are looking to get a £20k Help To Buy loan and purchase a place worth £100k.

if you took a loan over 25 years, you would have to repay the government a monthly repayment of about £67
after 5 years, you would have to pay an annual fee of £350 - which basically makes your 'monthly repayment' of £96!!
and the year after, the fee of £350 would increase of 1% + RPI (last 12 months averaged at around 1.3-1.4%) = i.e an increase of 2.4% of the fee, which is £358.4 in year 7... £367 in year 8... £375.80 in year 9...etc

Thankyou for your help!

So the 1.75% is always against the total value borrowed and not the adjusted value based on what remains? So I would take the 1.75% and always apply it to the original amount. Therefore the fee would creep up like this each year:

Strikeman

Actually irgnore the above its wrong and pulling from the wrong cell! Update to follow..

Strikeman

This is more like it, for calculation purposes assuming RPI stays at 1.4% each year:

amnblog

I am afraid the previous poster is a million miles away on this.

The charge for your equity loan is 1.75% in year 6 with the rate increased by a 'percentage' based on RPI +1%.

Therefore if RPI were 5% your payment would increase by 7% = 1.75% X 106%

(RPI is currently about 3%)

Here is the example given by the department of Home and Communities


Start
of year









Help to Buy
equity loan assistance









Estimated
RPI %+1









Fee
percentage









Annual fee
due









Estimated
monthly payment









1




£40,000




6%




0%




£0




£0




2




£40,000




6%




0%




£0




£0




3




£40,000




6%




0%




£0




£0




4




£40,000




6%




0%




£0




£0




5




£40,000




6%




0%




£0




£0




6




£40,000




6%




1.75%




£700




£58





7

£40,000

6%

1.86%

£744

£62

8

£40,000

6%

1.97%

£788

£66

9

£40,000

6%

2.08%

£832

£69

10

£40,000

6%

2.21%

£884

£74

Sorry - formatting not working on table - suffice to say that year 10 interest is 2.21%

Strikeman

Dammit I thought that was a little bit too good to be true! Have you got the link to that example so I can have a look?

kingstreet

Things to remember about the equity loan;-

- it's a maximum of 20%. It could be 10%, it could be nil. The HCA HomeBuy Agent works out the amount of help you need based on your income and expenditure

- you repay it as a lump sum when you sell, or as a lump sum at the end of the 25 year term - there is no monthly repayment of capital

- when you repay, you repay the portion of the property value. If you get 20% now, you repay 20% of the value of the property then

- you can "staircase" and pay the equity loan off in chunks voluntarily

- the fee payable from year six onwards starts off at 1.75% per annum and it can be paid monthly

- the fee increases by RPI + 1% pa so it would be 1.75% in year six, 1.89% in year seven, 2.0% in year eight and so on, if RPI runs at 5% per annum.

It would be a good idea to sit down with a broker and go over the costs of purchasing. You'll need 5% deposit as a minimum, plus funds to cover fees and stamp duty. On a purchase price of £250k, for example, you'll need about £4,000 to £4,500. You also need to work on how much you would feel comfortable paying each month.

Once you've done that and perhaps got a mortgage agreed in principle, you can then think about making a reservation and submitting your Res/PIF to Catalyst the HCA/HBA for your area for approval for the HTB - Equity Loan.

amnblog

http://www.homesandcommunities.co.uk/sites/default/files/our-work/help_to_buy_buyers_guide_080413.pdf

Strikeman

Based on the replies ive had another crack at this, im comfortable this is correct (based on a fictitious 5% RPI each year, but at least the calculation template is working...I think:

Strikeman

Whats surprising is the size of the charge by the end of the 25 year term. It makes up 64% of the borrowed amount!?