Help to Buy vs full mortgage total cost comparison

Rob.C

I'm looking to purchase a new build property with a 5% deposit this year as a first time buyer, with the option of using HtB equity loan.

The property value is £340,995 and I'm able to afford a full 95% mortgage if required, but... intrigued as to how the true costs compare when taking into account saved interest fees on a smaller mortgage when opting for HtB. I.e.

If taking a full mortgage of 95%, this equates to a loan value of £323,945 with an example rate of 3.99% on 2yrs fixed.

With HtB equity, the mortgage itself (ignoring the equity loan for now, I'll come to that...) drops to 75% which is £255,746 as well as a better rate of 1.75%, 2yr fixed.

So, with HtB I have a smaller mortgage with a lower rate - equating to less overall interest paid than the full mortgage. Now... let's offset that against the 20% equity loan that is due for interest after 5 years.

Let's assume the property increases in value by 20% over 5 years purely as an example. The initial 20% equity loan of £68,199 is now £81,838, costing me £13,639 more.

Assuming I've saved more than £13,639 in overall interest on my smaller HtB mortgage value over 5 years than I would have paid on a full mortgage, I'd argue I'm quids in.

This admittedly assumes that after 5 years, it's possible to add the value of the equity loan to a new mortgage application in order to avoid paying any interest on this loan.

Whilst the overall sum owed after 5 years is likely going to be greater than if I'd simply paid into a full mortgage all along, I'm curious as to whether HtB can be used as a clever way to reduce the first 5 years of interest paid to leave me better off overall.

Appreciate thoughts and feedback

Rob.C

Making the numbers easier to work with...

Option 1
Mortgage of £323,945 @ 3.99% APR over 2 years
Monthly payment of £1545 (30 year deal)
INTEREST paid after 2 years = £15,480

Option 2:
Mortgage of £255,746 @ 1.74% APR over 2 years
Monthly payment of £1009 (25 year deal)
INTEREST paid after 2 years = £3,756
Initial HtB loan of £68,199, assuming value growth of 20% = £81,838
ADDITIONAL OWED: £13,639 after 5 years

In 2 years I therefore save £11,724 in interest
On a full mortgage I pay off £21,600
On a HtB mortgage I pay off £20,460

This almost seems a no brainer, working on a few key assumptions

kingstreet

I can think of only two lenders who will do 95% on a newbuild, with one more lending if the builder is one of its "top twenty."

Where have you got the 3.99% from?

With that kind of restricted lending pool, your comparison may not look too good against the HTB Equity loan panel, which is much larger and starts at well under 2% as you have shown.

Rob.C

Santander are offering 95% LTV on new builds at 3.99% fixed 2 years.

It seems the HtB scheme allows you to take advantage of staggering interest savings by having a lower LTV mortgage coupled with a lower interest rate, offsetting any negatives.

Thrugelmir

Rob.C wrote: »

Santander are offering 95% LTV on new builds at 3.99% fixed 2 years.

Will Santander offer you this on a HTB mortgage? The equity loan comes at a cost to the lender. Who will correspondingly recoup that cost from the borrower.

TrickyTree83

Hah, yeah I thought about doing this until I found out that the only way to pay back the equity is to pay it all back in full in one go, or to pay it back in 2 equal chunks.

Then factor in the comparably tiny amount of mortgages on offer to those already in HtB whose deals are coming to an end and you risk trapping yourself. And don't forget if your equity increases over time, so does the amount you have to pay back.

kingstreet

Rob.C wrote: »

Santander are offering 95% LTV on new builds at 3.99% fixed 2 years

Santander has given up selling HTB Mortgage Guarantee products and never allowed them on newbuilds. It has 95% products but not for newbuilds.

Santander's max LTV is 85% on newbuild houses and 80% on newbuild flats, 70% where the flat is to be let.

You may wish to check your data. Information on newbuild LTVs is not normally mentioned on the consumer websites but is available to intermediaries;-

This relates to all new build/converted properties including affordable housing such as shared ownership.

We define new build as any of the following:

Property built/converted within the last 12 months (i.e. based on the date of the completion certificate).
Property has not been previously occupied (for converted properties - that is since the conversion has been undertaken).
Property is being sold/marketed by a builder or developer.
Where the property is within a development that was once used for commercial or other use, i.e. not previously used for residential purposes.
Builders may offer sales incentives to prospective buyers to encourage them to purchase their properties. An incentive is anything the builder gives or provides to the buyer in cash or goods.

We will accept up to 5% cashback towards the purchase price (no financial limit) and builder’s payment of the applicant's legal fees and stamp duty only. Any reasonable non-cash incentives, eg white goods, carpets, curtains etc will be ignored.

Under the terms of the Help to Buy: equity loan scheme, we will not accept any builder cash incentives.

Please note, we do not accept new build applications where any part of the applicant’s deposit will be raised from an unsecured personal loan which is subsidised by a builder or developer.

We will consider an extension to the mortgage offer subject to the conditions in the 'Offer validity' section.

Standard new build LTV limits

House 85%
Flat 80%

Please be aware that all applications will be subject to additional policy including maximum income multiples.

https://www.santanderforintermediaries.co.uk/products-and-criteria/mortgage-lending-criteria/

Rob.C

Thanks for feedback - interesting RE limitations for new builds. I was using Santander's online calculator as a new buyer, but didn't see any restrictions for new builds.

Either way, this still appears to point in favour of HTB. There seems to be a little confusion flying around.

As the HTB mortgage is 75% LTV then I have been approved for a mortgage at 1.74% fixed for 2 years. My point being that, even though there will be an equity loan to pay off after 5 years - the interest saved by having a smaller LTV mortgage with a better rate over a 5 year period almost certainly looks to outweigh the outstanding equity debt at the end.

In reality, you would look to add the equity loan onto a new mortgage to consolidate everything and avoid paying any HTB interest (aside from any change in market value of course) and be done with it. They also allow staircasing payments at any time, with the restriction that it must be at least 10% of the market value of the property.