The RPI equity loan trap

Financially_Backwards

So I'm in the final 6 months before making a move on my first house. I have done all my reading and I see a potentially serious pitfall in the FTB-equity loan scheme. It seems to me if you don't pay it off in 6 years you could be in a dire situation. From Money Advice:


https://www.moneyadviceservice.org.uk/en/articles/help-to-buy-scheme-everything-you-need-to-know


I understand from this that in year 7 onwards you will pay interest at RPI + 1.75% + 1%. Now looking at recent trends (And ignoring the B-word) it's most likely that RPI will be between 2-5% depending on the economy. At best that means an interest rate of... 4.75%! RPI, more like RIP.



So my question is whether this is correct, and you essentially have to pay off the 20% loan as soon as possible lest you risk having a serious repayment to make.


Thoughts?

lukeman123

have a look at this from moneysaving expert it explains it better with a worked example at 6% rpi

https://www.moneysavingexpert.com/mortgages/help-to-buy-equity-loans/

kingstreet

It's 1.75% per annum, increasing by RPI + 1% per annum, so if RPI runs at 5% in year seven the rate will be 1.87%, in year eight 1.98% and so on...

As lukeman says, look at the example in the guide...

https://www.helptobuy.gov.uk/wp-content/uploads/Help-to-Buy-Buyers-Guide-Feb-2018-FINAL.pdf

sal_III

Pretty much as above, or you know, you can check your personal worked example for the first 10 years that you should have received when you took the loan.

The much bigger trap/issue that a lot of people don't realise is that first, the payments are only interests and the whole amount is due on sale of the property or in 25 years. And second that you repay % of the property value, not what you initially borrowed, which in the last couple of years is usually significantly more than any mortgage interest rate.

Silvertabby

sal_III wrote: »

Pretty much as above, or you know, you can check your personal worked example for the first 10 years that you should have received when you took the loan.

The much bigger trap/issue that a lot of people don't realise is that first, the payments are only interests and the whole amount is due on sale of the property or in 25 years. And second that you repay % of the property value, not what you initially borrowed, which in the last couple of years is usually significantly more than any mortgage interest rate.

A family member took out one of these loans a couple of years ago, with the intention to re-mortgage and pay it off at the 5 year point.

It will be interesting to see the 'complaints' in 20 years time from people who will then claim that they didn't know that (a) they were only paying the interest and (b) that they now owed X% of the current value of their property.

silvercar

Silvertabby wrote: »

A family member took out one of these loans a couple of years ago, with the intention to re-mortgage and pay it off at the 5 year point.

It will be interesting to see the 'complaints' in 20 years time from people who will then claim that they didn't know that (a) they were only paying the interest and (b) that they now owed X% of the current value of their property.

Round here (south-east, just outside London) they are virtually all flats bought by young couples in a hurry to get on the ladder. Not only are they over priced because it is only using HTB that these people can buy without a significant deposit, but they are not long term properties.

a) they are too small for families
b) these couples have moved in together due to an urgency to buy rather than any confidence that their relationship will hold out long term.

sal_III

silvercar wrote: »

Round here (south-east, just outside London) they are virtually all flats bought by young couples in a hurry to get on the ladder. Not only are they over priced because it is only using HTB that these people can buy without a significant deposit, but they are not long term properties.

a) they are too small for families
b) these couples have moved in together due to an urgency to buy rather than any confidence that their relationship will hold out long term.

Not being long term properties kinda plays nice with the HTB equity loan. If you intend to sell in the first 5 years before you paid a penny in interest rates you can just ignore the loan, just treat it as a property bought at 20% discount, that you will sell at 20% discount. Meanwhile instead of wasting money on rent you have build up some equity by repaying the mortgage for several years.

Exactly what many young couples need to "get on the ladder"

silvercar

sal_III wrote: »

Not being long term properties kinda plays nice with the HTB equity loan. If you intend to sell in the first 5 years before you paid a penny in interest rates you can just ignore the loan, just treat it as a property bought at 20% discount, that you will sell at 20% discount. Meanwhile instead of wasting money on rent you have build up some equity by repaying the mortgage for several years.

Exactly what many young couples need to "get on the ladder"

Unless too many of them come onto the market at the same time. Remember that HTB is for new build only. So when they come to sell they will be searching for a buyer who has a deposit and isn't looking for a new build or HTB deal themselves. With less buyers interested and a large number of flats on the market, the price will fall. Round my way these flats are competing with the new build flats advertised by developers and promoted by HTB....the resale value is lower.