Saving for Shared Equity Mortgage Pay Off

ultrasaver57

Hi

I purchased my house using a shared equity deal in 2011. As part of the deal, I in effect have a secured loan on my property for 25% of its value when I purchase it (£56k). The loan is interest free for the first five years, and bears an interest rate of 3% thereafter. The loan is repayable in 10 years from the date of purchase i.e 2021. As with all other shared equity deals, the value of loan increase with the market value of the house

My current aim is to pay the 25% of the loan off within the 5 year interest fee terms so as to:

- avoid paying interest on the loan
- limit the risk of the house price rising as much as I can

As such, I have been saving since day one of moving into the house. I currently have £23k saved and will be saving £1,200 a month. I save into two Santander 123 current accounts. Taking into account expected bonuses, I should have enough to pay the initial £56k by the fifth anniversary.

My questions are:

- Is the risk of the house price rising really worth it and should I be looking to ideally pay this off as part of the mortgage
- Am I wasting opportunities having this money sat in a bank account and should I be doing something more with it?

I have worried endlessly about this and feel I have lost all perspective so any help would be greatly appreciated.

Thanks

bigadaj

It depends on several factors.

What is your view on house prices, on the surface paying 3% on which you're also not gaining any capital growth does look like a waste.

How much of a mortgage do you gave and at what rate is it at, and what might it move to.

The options are either to hold in cash, pay down shared ownership, pay down mortgage or invest. In theory investments might get you 7-8% growth on average assuming you have at least 5 or ideally 10years, but this woudk be a higher risk option for many people.

It sounds to me as of these options you would be best continuing to save and then payoff as it is low risk and gives a reasonable outcome which is safe.

Given the fact that you're saving £10k per year the other thing that springs to mind is oension. What provision do you have and do you lay higher rate tax. If you pay hrt and or have access to salary sacrifice then that may well be a more lucrative return than all other options.

ultrasaver57

Hi Biagadaj

Many thanks for your reply

To answer your questions

- My view is that based on recent headlines house prices are set to increase significantly over the next few years. Over the past two years my house price has increased based on recent mortgage valuations from £225k to £237k. This is what has caused my worry about the risk of this shared equity deal

- My mortgage is for c. £145k at 2.3% fixed for 2 years. My options for moving the mortgage are limited given there is a second charge on the property. I am currently with Nationwide which appears to be the best deal (just about to hit 60% LTV).

- Given the timescale, I don't really want to consider investments for 5-10 years as my timescale is more 2-3 years at present

- I am a higher rate tax payer. I currently pay 4% of my salary into my employers stakeholder pension. Given my other outgoings and the amount I am saving currently, I can not afford to increase this

bigadaj wrote: »

It depends on several factors.

What is your view on house prices, on the surface paying 3% on which you're also not gaining any capital growth does look like a waste.

How much of a mortgage do you gave and at what rate is it at, and what might it move to.

The options are either to hold in cash, pay down shared ownership, pay down mortgage or invest. In theory investments might get you 7-8% growth on average assuming you have at least 5 or ideally 10years, but this woudk be a higher risk option for many people.

It sounds to me as of these options you would be best continuing to save and then payoff as it is low risk and gives a reasonable outcome which is safe.

Given the fact that you're saving £10k per year the other thing that springs to mind is oension. What provision do you have and do you lay higher rate tax. If you pay hrt and or have access to salary sacrifice then that may well be a more lucrative return than all other options.

bigadaj

Personally I can't see house prices increasing rapidly as they are currently stretched but everyone has an opinion. The government has done so much to fuel house prices from zero level base rates to funding for lending, help to buy etc that things have to level or drop at some point but that's only my opinion.

My approach given your situation would be to max the pension contribution, as £10 into your pension is only costing you £6. This is in effect an immediate 40% return, paying down the shared equity deal might be saving you what around 10%?

After that then I'd agree with you and would be saving in cash and looking to pay back the second charge, as you say it will make it easier to remortgage with more flexibility and better rates. Though to be fair that's a ridiculously low rate you've currently got, and that's my opinion for future house prices, people have short memories and when you can borrow for less than 3% now, mortgage rates at say 7% are going to be a real shock.