Pay back key worker loan VS something else?

thenap80

Hi. I would like advice please as to what to do with £60k I have in savings. About £35k is in an ISA, 10k in Premium Bonds and the rest in a current account.

I have a house in Barking & Dagenham, East London, that is worth about £220k of which I have paid the mortgage off. However, I bought the house with the help of a key worker loan in 2006. I borrowed 49k from them when buying the house for £165k.

I only pay them back if I leave my job or move home. Basically they loaned me about 30% of the house value so I would owe them 30% of the new house value if I want to pay it back - so I would owe about 60k now - which is what I have in savings!

Now I don't know whether to get the house valued and pay back the key worker loan so I am free and own my home outright. Or whether to leave the cash in ISAs or Premium bonds. Or something else completely such as buying a new property on a buy to let basis. I imagine 60k is quite a hefty deposit. What would people do in my situation?

Porcupine

What's the interest rate on the loan?

bristol_pilot

thenap80 wrote: »

I would owe them 30% of the new house value if I want to pay it back

ouch! That is a very bad deal. I'd suggest getting out of it by paying it off asap. Otherwise, as the value of your property increases you'll owe more and more on that 30% and as properties you might consider buying are also increasing in value the deal you signed up to could potentially prevent you from ever moving house.

VT82

Sounds like the question is 'will my house go up in value by more than the amount my savings will go up by due to interest over the next x years'?

With interest rates so low, and house price inflation pretty high, it suggests paying off the loan would be a good idea.

Can you pay back part of it? Maybe hold back £20k for emergencies and pay off £40k? Losing the ISA wrapper shouldn't be a big deal with the new higher allowance.

alexanderalexander

thenap80 wrote: »

Hi. I would like advice please as to what to do with £60k I have in savings. About £35k is in an ISA, 10k in Premium Bonds and the rest in a current account.

When you say you have £35k in an ISA, I take it you mean a cash ISA not a stocks and shares ISA? If so, I would agree that £60k seems too much money to hold in cash and equivalents unless you have a specific reason for doing so. You're right to be looking for other investments in this case.

On the premium bonds, read this MSE article which explains that they are generally not the best investment: http://www.moneysavingexpert.com/savings/premium-bonds

thenap80 wrote: »

Now I don't know whether to get the house valued and pay back the key worker loan so I am free and own my home outright.

What interest rate are you paying on the loan? If it's high, then you should probably pay it off with your savings. If it's low, or (if it's possible) you can mortgage the house at a low rate to pay off the key worker loan, you may end up better off keeping the debt and investing the money -- but there's more risk there of course.

thenap80 wrote: »

Or whether to leave the cash in ISAs or Premium bonds.

As I said above, definitely don't do this. No matter how low the interest rate on your loan is, it won't be lower than the premium bonds / cash ISA interest rate. If you aren't interested in investing then you should just pay off your loan.

thenap80 wrote: »

Or something else completely such as buying a new property on a buy to let basis. I imagine 60k is quite a hefty deposit.

Do you have a reason for being interested in buy to let rather than shares? (I'm not saying that BTL is necessary a bad choice, although it's certainly more work than shares -- I'm just curious as to why you haven't mentioned the possibility of equity investing in your post).

bowlhead99

VT82 wrote: »

Sounds like the question is 'will my house go up in value by more than the amount my savings will go up by due to interest over the next x years'?

With interest rates so low, and house price inflation pretty high, it suggests paying off the loan would be a good idea.

I'd agree with this - the original purpose of the loan was to help you buy a house in a way that would be affordable to you. If you now have savings to the level where you can afford to buy the rest of the house, and you are allowed to go and get a valuation and just buy them out of the loan without selling up, you will then have achieved your goal of buying the house free and clear, right? Don't try to overcomplicate this.

And definitely trying to turn yourself into a buy-to-let landlord who has never done that before, seems high risk, especially when you are doing it with borrowed funds whose cost to pay back will be going up at the same pace as any (taxable!) capital gain you are making on the value of the second house.

One thought is that once you do have a house, that you own outright, and is mortgage free, you can go back to the question of whether you think house price rises will outpace interest rates for the next x years. If you think they will, there is no harm in you taking out a mortgage to get 30, 40, 50, 60k back in your hand. You can get a very cheap fix at the moment if you have a large % of equity, which you do. By doing this you will have changed a variable interest rate on your old loan (which could be 5-10% a year depending on the housing market) for some fixed lower cost finance at maybe 3%.

Then you would be in the same situation of having 60k in cash to do with what you like (saving, investment, buy-to-let), but with a known interest rate. Downside is if house prices fall you may lose out, but if house prices continue to rise you are a winner. I'm not suggesting you do this, it is just an example of how you can convert an unknown interest rate to a known one. If you are stuck in a situation where you owe money to someone it is always worth thinking about the wide variety of refinancing options available to you.

Of course, it is not necessarily 'less risky' to have a known interest rate if previously you had an unknown one in percentage terms, that you knew was at least tied to the house price. Because the house price movement could be negative, which would be annoying with a fixed positive interest rate, having just given up a loan that would have fallen in cost with your house price.

IMHO, assuming interest rates don't rise particularly quickly over the next few years the house prices in East London are unlikely to fall, simply because there is plenty of demand and even if rates make things less affordable there are always people that need housing. There is no major shift on the cards that would stop people wanting to live near London in the next few years.

At least that's what I'm banking on, with a sizeable mortgage on an outskirts-of-London house!

thenap80

Thanks so much for all replies. I think I may just get house valued and pay what I will owe off with all my savings which should be the same roughly.

What I'll point out is that the loan of 49k did not have an interest rate. Basically what I pay back is equivalent to the percentage of the house price rise. SO if th eprice of my house was still the same as 8 years ago, I'd still owe only 49k...if house was worth less then I'd owe less back!

jamesd

You may have another option. A larger mortgage to clear the key worker loan. This could leave you free to invest the savings.

If you will not invest but will instead stick with savings and premium bonds, best to buy out the loan. However, that means that you're speculating on property prices increasing. At the moment while you're exposed to 30% of the gain, you're also protected from 30% of drops. Spend the savings to buy out and you're no longer getting that 30% drop protection.

One reason that a mortgage can be a better deal for your situation is that the amount borrowed on a mortgage is fixed, which means that over time inflation reduces the real value of the debt, since wages tend to increase at a bit over inflation, as a long term average. So repaying a mortgage tends to get more affordable over time. For example, if you're not particularly far from being 55 years old, you could use personal pension contributions to get pension tax relief then consider using the tax free lump sum to do some of the mortgage paying off, while you retain the rest to help pay for an earlier retirement than the NHS pension might allow. If the planned new pension rules come in you could also use the remaining 75% of the pension pot for this. In this way the pension tax relief combines with likely investment growth to make paying off the mortgage cheaper than buying out their share directly.