HTB equity loan vs Outright purchase

shaggyuk

Hi everyone,

Could you please help me to choose the best option from below?
Property Price: £385,000 (New build/ready to move in)
Cash deposit in hand: £38,500 (10%)
Mortgage term: 35 yrs

(1) HTB equity loan: £57,500 (15%)
Mortgage LTV : £288,750 (75%)
Interest rate: 1.65%
Monthly re-payment : £910 approx (Capital - £517 ; Interest £393 approx average)

(2) Outright purchase:
Mortgage LTV : £346,500 (90%)
Interest rate: 2.46%
Monthly re-payment: £1235 approx (Capital - £535 ; Interest £700 approx average)

some points to mention wrt my financial affordability/savings:

- willing to put a side up to £1400 a month for monthly payment + over payment i.e. approx £500 a month for option (1) OR approx £170 a month for option (2) as over payment

- Looking to pay off equity loan fully at the end of 2 yrs fixed period by re-mortgaging if option (1) was chosen

Would option (1) beat option (2) if new build property prices don't increase by more than 10% considering not much difference in capital re-payment under monthly mortgage re-payment?

Thanks in advance

getmore4less

Do the calculation you have all the data.

Work out how much mortgate is left in 2 years in both cases then what price rise wipes out the saving.

shaggyuk

getmore4less wrote: »

Do the calculation you have all the data.

Work out how much mortgate is left in 2 years in both cases then what price rise wipes out the saving.

Thanks for the prompt response.

Option (1) - I will have approx £264,900 (excluding 15% equity loan) mortgage debt left

Option (2) - I will have approx £331,000 mortgage debt left on full price.

Sorry I didn't quite understand - 'what price rise wipes out the saving'. Could you please elaborate?

Thanks.

getmore4less

You still owe 15% in 2 years add that back on as you need to borrow that to be equivilent at the end
(don't forget the cost)

Put the mortgage numbers in a calculator with the same payment you need to be fairly accurate.

jennhg88

Seems like you're banking on the fact the prices will rise enough for the remortgage to wipe out the HTB loan. Really tricky assumption to make.
Personally would not HTB if don't need to.

sal_III

jennhg88 wrote: »

Seems like you're banking on the fact the prices will rise enough for the remortgage to wipe out the HTB loan. Really tricky assumption to make.
Personally would not HTB if don't need to.

The loan is based on % of value. At 15% equity loan and 10% deposit. Until a substantial amount of mortgage is repaid (much longer than 2 years on 35 years term) there is ;itt;e chance for price rise to wipe out the equity loan.

Example:
Now - 385000 price, 38500 equity (deposit), 57500 loan
2 years in future - 462000 price (20% quite optimistic), 276347 mortgage balance, 93253 equity, 92400 equity loan.

To remortgage you have to take on 369600 mortgage at 80% LTV

HTB Equity loan is interest free for 5 years. Really no reason to repay it early than that, unless the prices are rising sharply, which is extremely unlikely scenario currently.

getmore4less

Op saves about £7k in interest over 2years taking the HTB.

How much they pay off only relevant to future LTV.

What is key is will the 15% go up by more thaN the interest saved.

getmore4less

jennhg88 wrote: »

Seems like you're banking on the fact the prices will rise enough for the remortgage to wipe out the HTB loan. Really tricky assumption to make.
Personally would not HTB if don't need to.

OP is banking on prices Not rising

shaggyuk

Spot On @getmore4less !

I am inclined towards option 1 as you pointed out potential £7k savings in interest via HTB route. Also current property market trends suggest towards decline in market price (especially new builds) for another year or so. Of course nobody can predict the future still I would be much more than happy to pay off equity loan if the valuation after 2 yrs doesn’t show more than 5 percent increase in price rather than greedily waiting for another 3 (HTB loan interest free). Sooner you get rid of HTB trap its better!

Wondering would I be better off even if the valuation stays the same (£385,000) or reduces a bit after 2 yrs?

getmore4less

The savings are two part, interest free on 57k but a lower rate on the 288k is more.

There is the risk you can't get additional borrowing in 2 years.

FatherAbraham

jennhg88 wrote: »

Seems like you're banking on the fact the prices will rise enough for the remortgage to wipe out the HTB loan. Really tricky assumption to make.
Personally would not HTB if don't need to.

The "HTB Equity Loan" isn't a loan at all.

It's a co-purchase, which is rent-free for the five years, then begins to rise.

The rent is called "interest" by the scheme, in order to mislead everyone.