'Help to buy' Equity loan - Poison chalice?

Celtikah

Me and my fiance are planning on moving home Early next year, and are weighing up our options. We are getting very confused about which options will be best for us.

One scheme we cannot seem to get our heads around, is what the 'True' cost of these Equity loans for first-time buyers truly seem to be.

We estimate we will have a 5% deposit saved, and are looking for a home around £250,000 and plan to pay it off over 40 years for a more manageable monthly repayment.
Looking around, mortgage lenders seem to be offering a 95% mortgage at around 3.8%, with monthly repayments of around £950

However, if we made full use of the 20% offered by the government (which, unless we are mistaken, would effectively reduce our mortgage to a 75% at about 1.5%) would give monthly repayments of £520

Naturally, the government equity loan seems like an obvious winner - but we are having real difficulty on working out exactly what the government loan will actually cost us. Could the equity loan prove to be a poison chalice that spirals out of control when interest begins to kick in? What is the 'True' cost of this loan?

Any help is appreciated, i have tried doing homework on the subject, but a lot of the information is making very little sense to me.

Pixie5740

With HTB EL you need an exit plan. Some people have found it difficult to remortgage with HTB EL when their initial deal finishes so get stuck on their lender's SVR. You could use HTB EL and then overpay your mortgage to build up equity so that further down the line you could remortgage and pay off your EL.

On the other hand, if house prices were to fall you wouldn't take the full hit, only 80% of it.

Celtikah

Thanks for the help Pixie

If we were to (for some reason) stay in that house for say 20 years or so - what would our monthly payments approximately be each month on that loan? I can't work out the calculation - or if it rapidly rises each month?

Pixie5740

No one can really work that out because the interest rate is the Retail Prices Index + 1% and we don't know what the RPI will be for the next 20 years.

You'll pay nothing in the first 5 years and then in year 6 you'll pay 1.75% of £50k which is £875 a year + £1 a month management fee so £887 for the year which works out as £73.92 a month.

There's an illustration on page 18 of the HTB EL guide which uses a RPI of 5% but it could be more than that or it could be less.

https://www.helptobuy.gov.uk/wp-content/uploads/Help-to-Buy-Buyers-Guide-Feb-160216.pdf

D_M_E

From your figures, a loan (mortgage) with no HTB would cost you £950.

A mortgage with HTB would cost you £420.

I am no expert, but if it were me, I would take the HTB loan and put £400 a month in a savings account and that would or should give enough cash to pay off the HTB when it falls due for payment.

I would also get written agreement from the fiance that that is what the saved cash is to be used for should the relationship break down before or after redemption of the HTB

iantojones40

A more accurate title for HTB loans should be "Help Builders To Sell Overpriced Newbuilds" ... admittedly that's not quite as catchy.

brit1234

Yes it is a scheme designed for builders to inflate prices higher for their benefit. Wouldn't touch with a barge poll. Have you considered hove you are going to pay the equity loan back after 5 years, remember you will then have to start paying interest on that after then?

Also who talked you into getting a 40 year mortgage, that would set alarm bells off. 40 year mortgages are the lenders way of getting round interest only mortgage ban? Its going to store a lot of trouble for buyers in the future and make them pay back far more interest.

Can't you buy with a 25 year mortgage, you see to be stretching yourself to the very limit on so many levels.

Have you considered saving a bigger deposit and enjoying the price falls post brexit and all the stamp duty/buy to let changes?