Best Strategy for paying off HTB Equity Loan

prb1984

Hi everyone, looking for advice in the following situation...
Looking into best way to pay off our HTB Equity Loan.

We have £56k equity loan when bought house 2.5 yrs ago. I'm aware this balance likely to be higher with increase in house value. The loan is still interest free for another 2.5 years and fixed rate on mortgage ends at same time so would be looking to remortgage at that point. I've heard that it's typical to remortgage and borrow extra to pay off equity loan at that point (may even be a requirement with remortgage?)

Other remaining debts:
- £7k remaining student loan. It's old plan student loan (graduated 2009) so interest is low (£15 a month) Paying £200 back each month in pay check so will be about done in about 3 years.
- £3k on 0% CC
- obviously mortgage (payment is £742 a month)

We save between 1 to 1.5k each month. Currently have a around £13k saved. 

So I'm looking at these options and wondering what you would suggest...

a) pay off student loan now and have extra £200 to save towards equity loan - doesn't really make sense other than it would feel good to get the student loan off the table.
OR
b) just keep saving and will probably have 45k saved by time remortgage comes around and then could either put towards equity loan at that point and help with borrowing less on remortgage.
OR
c) overpay on mortgage with 10k (13k minus a bit for emergency fund) and continue to overpay regularly which would knock principal mortgage down (thus knocking amount of interest paying each month) and then have more capital to play with when comes to remortgage/paying off equity loan. If house goes up in value (it should) then would have more to play with?

Of course this final option is thinking it would save on mortgage interest and we're not going to get any interest on current and ongoing savings as we can't invest it as we'll need it in 2.5 years.

What do you guys think? Am I thinking right or completely barking up the wrong tree?

Another thing I was thinking is to stop investing in my NHS pension for next few years which would give an extra £375 a month to put towards this. The NHS pension is generous - I pay 9.8% and they put in 13%. But might save more being able to pay off equity loan/house capital quicker?
Thanks

prb1984

I've just look at the MSE overpayment calculator.

If I paid off 10k in lump sum and then overpayed by £750 a month going forward (could probably do more). The difference in 3 years time would be:
without overpayment - balance £188,764
with overpayments and lump sum - balance £150,007

My balance is currently 201k so wouldn't incur any early payment penalties.

Obviously we wouldn't have much saved to put towards equity loan in2.5 years but would have more equity to play with when remortgaging?

Galloglass

Obviously we wouldn't have much saved to put towards equity loan in2.5 years but would have more equity to play with when remortgaging?

Since LTV values currently set the APR % you pay, then having the best LTV will save you more in the long run and give you access to better deals. Why not do some calculations based on hypothetical LTV ratios.

Would not starve your NHS pension though. There is always a risk that house prices may plateau and interest rates rise - the typical housing scenario over the last few decades. Pension values though (apart from notable exceptions where fingers were in the pie) have always gone up. 

It's a question of balance. You could be like quite a few where you are asset rich and cash poor. So you end up having to forgo the house to eat. Sort of self-defeating.

prb1984

Galloglass said:

Obviously we wouldn't have much saved to put towards equity loan in2.5 years but would have more equity to play with when remortgaging?

Since LTV values currently set the APR % you pay, then having the best LTV will save you more in the long run and give you access to better deals. Why not do some calculations based on hypothetical LTV ratios.

Would not starve your NHS pension though. There is always a risk that house prices may plateau and interest rates rise - the typical housing scenario over the last few decades. Pension values though (apart from notable exceptions where fingers were in the pie) have always gone up. 

Thanks, will do. The full value of the house will be around 300k (bought for 290 in 2017), so if I overpay would hopefully get close to 65% LTV (borrow 150000 plus 50000ish for equity loan). It's just scary not having the 50-60k in hand when the interest starts on the equity loan. But even if we didn't pay any of the equity loan off at that point, the interest would only be £90 a month so wouldn't be a desperate situation, and I'm sure we could remortgage to help pay half or full amount of equity loan off.

Mr87

What are you getting on your savings in interest? Is it more or less than the rate you have on your mortgage? If it's less, this suggests overpaying your mortgage is your best bet. When it comes to remortgaging, whether equity comes from cash in bank or the value of your house relative to outstanding mortgage, it simply makes no difference, so do what makes you best off financially. When you get to the point of remortgaging, you can take the decision whether it's best to remortgage the full amount required to pay off the EL. Isn't the starting rate 1.75%? That's probably better than the rate you've currently got on your mortgage. But you might get a better rate than that when you come to remortgage in which case you'd want to do that. 

prb1984

Of course, that makes a lot of sense Mr87.
I imagine when time comes to remortgage, fear may influence me to just pay off the HTB equity loan by borrowing extra regardless of interest rates, because the above calculations don't take into account the increase in value of the HTB loan when house value increases. I know techinically the whole house value would be going up so I could just remortgage at a later date and not lose anything. But if I pay it off as soon as, then any ongoing house value rises would be all ours, as opposed to 80% ours and 20% the governments. Hope that makes sense.
Oh and to answer your question regarding savings interest - hardly anything - as I want to be able to access it in the next few years. So I guess put it on the balance of the house is what I'll do. Just have to work out how to overpay for Leeds Building Society and how to ensure it goes off capital of house. Thanks

Mr87

prb1984 said:

Of course, that makes a lot of sense Mr87.
I imagine when time comes to remortgage, fear may influence me to just pay off the HTB equity loan by borrowing extra regardless of interest rates, because the above calculations don't take into account the increase in value of the HTB loan when house value increases. I know techinically the whole house value would be going up so I could just remortgage at a later date and not lose anything. But if I pay it off as soon as, then any ongoing house value rises would be all ours, as opposed to 80% ours and 20% the governments. Hope that makes sense.
Oh and to answer your question regarding savings interest - hardly anything - as I want to be able to access it in the next few years. So I guess put it on the balance of the house is what I'll do. Just have to work out how to overpay for Leeds Building Society and how to ensure it goes off capital of house. Thanks

Yes I appreciate wanting to bank any house price gains yourself so the decision to pay off the EL is more than just what the rate of interest is. You could ask the advice of an IFA approx six months before your current deal comes to an end and they will advise you on options. Find a fee free IFA if you can. 

When you overpay your mortgage, all the overpayment pays off the principle. You've already covered interest in your normal mortgage payment. So it's just a matter of finding out the overpayment arrangements from Leeds. 

Whilst doing all this, set aside an emergency fund, and also make sure you have the cash to pay off your CC when the 0% comes to an end. Don't worry about the student loan too much - it sounds like you're better off chipping away at the mortgage.