Repaying Help to Buy Equity Loan

adamcartney

Hi all -

Quick question about the H2B equity loan.

I purchased a flat last year using the H2B equity loan.

I'm currently saving in order to repay the equity loan by year 5 or shortly afterwards. As the equity loan will accrue interest charges after year 5 and repayments to the principal are linked to the value of the property, I had always assumed that it was preferable to use spare cash to repay the equity loan rather than use it to overpay on the mortgage.

However, someone recently told me that they were diverting some of the funds they had built up to repay the equity loan in order to overpay on the mortgage. Their idea was to build up equity in their property that way and also to reduce the interest repayments on the mortgage. I don't understand the rationale behind that. Given that the mortgage debt is a fixed amount and will (hopefully) decrease (in relative terms) as the value of the property increases, I would have thought you would want to repay the equity loan first. Is the idea perhaps that, if house prices are not increasing, it makes sense to overpay the mortgage first?

Confused!

Thanks

Thrugelmir

Possibly they are earning/saving more interest by repaying the mortgage than putting the money on "deposit". When the time comes to repay the H2B loan. They'll remortgage the property and use the released equity to do so.

SuboJvR

I will probably do what Thrugelmir suggests. Everyone situation is different, if our HTB loan was nearer £30k then saving up to pay it off would seem more achievable but ours will be £70k which seems a bridge too far.

We will be at 75% LTV on the mortgage when we start. My plan is to remortgage to swallow up the HTB loan when we again hit 75% even with the HTB, which should be 8 years or so in.

adamcartney

Thanks.


I would be hoping to sell up and move when the H2B starts to accrue interest (i.e. in 5 years time). So re-mortgaging on the same property doesn't sound appealing. I would prefer to maximise the amount of equity in my property at the time I sell.


So I think the question is whether I gain more equity by:


(1) overpaying the mortgage (interest rate fixed @ 2.2% for 5 years)


(2) saving/investing the cash so that I can repay a large chunk of the equity loan by year 5?


I think the answer has to be (2) given that overpaying the mortgage will only partly bring down the capital outstanding and the rest will service the interest which doesn't help me build equity.

kingstreet

What gives you a better net return?

Repaying a mortgage on which you are paying 2.2% or saving at whatever rate you can get and then maybe paying tax on the interest?

I suspect reducing the mortgage makes most sense.

Having the money in cash or having the money in equity in your home makes little difference in the scenario you describe when you can't overpay the equity loan regularly, only repay it in one or two chunks.

alex_163163

In your first post you say that you are saving to repay the equity loan near the 5 year mark or shortly afterwards, but in your later post you say you would hope to be able to sell at the 5 year mark too.

In my opinion there would be no point in repaying the H2B at say 4.5 years, then selling at 5 years. That would just incur 2 sets of solicitors fees (one for the paying back of the loan conveyancing, one for the eventual selling conveyancing).
If you do end up planning on selling at 5 years, then just sell and repay the loan as part of the same transaction.

Alternatively if you do want to stay past 5 years, then I would think it makes most sense to overpay as much as you can afford on the mortgage every month from now, then hopefully after 5 years, you will have build up enough equity to remortgage, take out some of the equity (so yes your mortgage will go up again) and pay off the H2B loan. The overpayment you pay will be paying the capital off, not the interest (I think?) so you will be building equity won't you?

SuboJvR

Remember as well that you can only pay off all or half of the HTB loan. No other increments.