HTB Equity Loan vs Mortgage Repayment

Makkusu

Hi,

Theoretically speaking if at the end of the 5 year interest-free term with the governments Help to Buy Equity Scheme there is potential to repay the 20% loan in full...

Is it then generally advisable to repay the loan in full, or be overpaying towards your mortgage for the 5 years and then sell/re-mortgage before year 6?

Understandably I may be missing some huge variables but any input is much appreciated!

A bit of background, we're considering a £165k mortgage on a £225k property, which equates to a £45k HTB equity loan. We can have this sat in savings by the end of year 5. Mortgage with Nationwide offers a 10% overpayment allowance.

Thanks!

stator

I don't have any numbers but you'd probably be better off paying off the equity loan so you can remortgage onto a lower LTV mortgage.

Makkusu

The equity loan already goes towards the ltv so paying it off would only rid you of the interest payable on the equity loan.

Therefore the ltv remains the same at around 70-75% if repaid.

Teaandtoast0124

Yeh your right. I have taken a HTB equity loan with nationwide. And im just going to over pay my mortgage

kingstreet

The perfect outcome would be achieved by saving enough to repay the full 20% at the end of year five before the interest starts, possibly earlier if the property value actually fell so it was less than what was borrowed originally.

Don't forget, the fees start at 1.75%; lower than many mortgage rates might be in the future and even with an inflation rate of 5%, will go to 1.87% in year seven, 2.0% in year eight and so on.

Overpaying the mortgage would be a good idea, but as you have no guarantee you will be mortgageworthy and able to remortgage when you would like to, there are several considerations to be given to how to manage this situation.

Teaandtoast0124

Thanks for that kingstreet.

Makkusu

Hi, thanks for the input and advice.

I've done a few calculations using various tools, websites and spreadsheets. From what I can see it's more beneficial to overpay the mortgage, sell the property in 5 years time (if I don't want to pay any equity loan interest), and purchase a lesser value property at 50% ltv after 5 years time. Maths are as follows:

Finance details
£165,000 mortgage
2.84% 5 year fixed rate
£15,000 deposit
£45,000 equity scheme loan
£750 spare in savings pcm

Option A
Overpay mortgage repayments by £750 per month, at month 60 this leaves me:
- £15k initial deposit
- £72.5k capital paid
- £92.5k balance on mortgage left
Overall this equates to £87.5k equity and £92.5k mortgage left to pay.

Upon selling the property I repay the government back their 20% of £45k, hypothetically speaking if property value doesn't shift I'm at no loss/gain here and am still left with the above, looking to move into a £180k property + any rise in equity + any additional savings.

Option B
Put £750 per month into savings with the idea of repaying the £45k equity loan by end of year 5, at month 60 this leaves me:
- £15k deposit
- £24.2k capital paid
- £140.8k mortgage balance
- £45k purchased equity from help to buy
Overall this equates to £84.2k equity and £140.8k mortgage left to pay.

I have the option to stay in the current property, or, move to a £225k property + any rise in equity + any additional savings. Risk here is if property value increases, I may not be able to pay off the full £45k.

Conclusion
In hope of becoming mortgage free, and reducing lifetime interest paid on mortgages, option A looks far more sensible does it not?

Any input here is valued as I only hear repaying the equity loan during the 5 years as the best idea, when it seems otherwise based on the above.

Thanks.

Edit: The benefit here is I'm given access to a much lower mortgage rate for 5 years, thus increasing capital repayments/reducing lifetime interest, at the expense of having to move property in 5 years time which has its associated costs.

Is my understanding correct? If so, I'm not sure why this scheme is so frowned upon?

Makkusu

Does anyone know if the above theory is correct or am I missing something significant?