How to invest to prevent the H2B hammer after 5 years

tim_london

Rocksolid said:

If you tell me more about that...

Online I see that I can repay the H2B loan ONLY after 5 years and of at least 50% of the value in one shoot, that's what I read online, this can't be changed, max the way I put the money aside for 5 years can be discussed.

50% is not entirely correct but close.  Outside London you can borrow up to 20% and you can only payback in 10% chunk of the equity, so in this case you are correct.  But in you are inside London you can borrow 40% so you can pay in 4 chunks.

Getting the mortgage:
Option 1 - Get a 25 year mortgage to minimise mortgage repayment obligation.  Overpay if you are allowed into the mortgage or alternatively put it in a low risk savings account.  Best for if you have lower disposable income and if you think you might need the money else where (things breaking, job insecurity etc).

Option 2 - Get a lower mortgage term, like 15-20 years to bump up your monthly payment obligations.  Then you don't have an issue with whether the lender allows overpayment or not.  Makes sense if you are a high earner with lots of disposable income.

Now imagine 5 years is up.  You need to pay help to buy £200 (they use a company call Target), to value your property to see how much you owe now.  Assume it is the same or gone up a bit.  

Options:

1. Remortgage with further advance.  Basically ask the bank lend back the money you've paid in enough to pay back HTB.  The remaining money left (deposit + money paid in over 5 years - money owed to HTB) is now your deposit for a new normal mortgage.  You will need a solicitor, get assessed income again.   (Best option)
2. Similar to (1) but only borrow back enough to pay back 50% of HTB.  This could be to reduce the risk of being rejected for a new mortgage because your remaining deposit is too low. 
3. Use savings instead of additional borrowing from lender.  Makes sense if you couldn't overpay into mortgage.  Similar to (1) or (2) anyway.  You need a solicitor to pay back HTB.
4. Pay the HTB interest.  It is not as bad as people think.  HTB interest is like 1.5% and rises very slowly.  Depending what the mortgage rate are in 5 years it could make sense to pay the mortgage first even if the amount you owe goes up if the house price go up (remember it also goes down if property price drops).  You will need to pay £200 every year to work out what you owe.   You can choose a new mortgage deal with the current lender (Product Transfer).  Remortgaging to someone else is possible but hard as most lender doesn't like the complexity.  Also if your circumstances change, like being made redundant, bad credit or recently became self employed then this is your only option.
5. Sell the house.  Use the money to pay back HTB and use the remaining money as a new deposit.  Again not too dissimilar to (1), but just that you want to move house.

Rocksolid

getmore4less said:

tim_london said:

Rocksolid said:

In few words, you are suggesting to overpay every month if possible, rather than investing, in the end, I'm investing against my mortgage to lower down interests every month, is it right?

Yes

I mean, I know I should, but I should just invest in a 5 years plan, what plan is good for this?

Nothing.  Because any 'no risk' saving account is likely to give you lower interest than your fixed rate mortgage.  The best 5 year fix bond I found was 1.65% AER.  

And if you are thinking about investment (equity/stock and share/mutual fund) - it is too risky.  

1. The issue with HTB/mortgage is you need to pay up at a very specific point in time. 
2. The issue with investment is that it can dip at any time (although it does always recover).

The 2 are incompatible.  Investment is a good thing, just don't use it against mortgages.

You can pay it off at any time in 1 or 2 chunks,  there is a relatively low cost after 5 years at 0% when the interest kicks in on the initial amount borrowed.

IN cases where there has been some house price inflation that interest/rent cost could be significantly lower than the mortgage rate 20% of the value in 5y
IN cases where interest rate have gone up then it could be a lot lower than current mortgage rates

if both happen lets say  20% house rise and best rate @ 75% is now  2.5%(against current 2%)  
H2B  1.75% per  £10k  is £14.58pm
buyout 2.5% now on £12k is £25pm

Once you are in a position to do the first 10% buyout it is the calculation of the costs of keeping the H2B against house price changes.


 

Can you write differently? I didn't follow you, sorry

To reply to the beginning of your message, the interest of H2B after 5 years could easily add 100 pounds more every month (considering 350k house)...

Despite it won't bring me in bankruptcy, it's still a big increase, not in percentage, but in amount.

Thrugelmir

getmore4less said:

Thrugelmir said:

You can repay the HTB loan early. As it's interest free for 5 years there's little point. Hence why spare money is better directed at the mortgage balance. 

It depends on how fast that amount is changing and the costs of borrowing the extra money.
Interest free on the 20% may not be enough to out pace the price rises of that 20%.

At the current time given the economic climate. I'd hedge on the downside rather than the upside. Recovery in any sense is going to be a long drawn out affair. 

tim_london

Rocksolid said:

To reply to the beginning of your message, the interest of H2B after 5 years could easily add 100 pounds more every month (considering 350k house)...

Despite it won't bring me in bankruptcy, it's still a big increase, not in percentage, but in amount.

If you can't pay an additional £100 a month, you wouldn't have been able to get a mortgage in the first place anyway.  The affordability check always see what happens when you go back to the SVR (non promotional rate), and that could mean £200-500 pound extra in payment.

If that is really a problem though.  You can increase your mortgage terms (i.e 20 years remaining back to 25 years) to reduce your monthly payment so you can afford to pay the HTB interest.  HTB and the lender have to approve it though.

getmore4less

Rocksolid said:

getmore4less said:

tim_london said:

Rocksolid said:

In few words, you are suggesting to overpay every month if possible, rather than investing, in the end, I'm investing against my mortgage to lower down interests every month, is it right?

Yes

I mean, I know I should, but I should just invest in a 5 years plan, what plan is good for this?

Nothing.  Because any 'no risk' saving account is likely to give you lower interest than your fixed rate mortgage.  The best 5 year fix bond I found was 1.65% AER.  

And if you are thinking about investment (equity/stock and share/mutual fund) - it is too risky.  

1. The issue with HTB/mortgage is you need to pay up at a very specific point in time. 
2. The issue with investment is that it can dip at any time (although it does always recover).

The 2 are incompatible.  Investment is a good thing, just don't use it against mortgages.

You can pay it off at any time in 1 or 2 chunks,  there is a relatively low cost after 5 years at 0% when the interest kicks in on the initial amount borrowed.

IN cases where there has been some house price inflation that interest/rent cost could be significantly lower than the mortgage rate 20% of the value in 5y
IN cases where interest rate have gone up then it could be a lot lower than current mortgage rates

if both happen lets say  20% house rise and best rate @ 75% is now  2.5%(against current 2%)  
H2B  1.75% per  £10k  is £14.58pm
buyout 2.5% now on £12k is £25pm

Once you are in a position to do the first 10% buyout it is the calculation of the costs of keeping the H2B against house price changes.


 

Can you write differently? I didn't follow you, sorry

To reply to the beginning of your message, the interest of H2B after 5 years could easily add 100 pounds more every month (considering 350k house)...

Despite it won't bring me in bankruptcy, it's still a big increase, not in percentage, but in amount.

On  a £350k house the 20% H2B £70k  at 1.75% will be £102pm
Adding it to a mortgage after a 20% increase in value now £84,000 @ 2.5% a on a repayment over 25years  will be  £377pm


This is pretty basic stuff you should have already taken account of as part of the exit planing of how you get out of the H2B trap.

getmore4less

going back to the question

How to invest to prevent the H2B hammer after 5 years

On that £350k house 20% H2B £70k first 5 years  

Starting with how much you need to save  during the 5 years to pay it off at base cost(£70k) with different investment rates.
2% £1,121pm  ( this is the ~mortgage rate so you get that by overpaying)
5% £1,056pm
10% £955pm
15% £865pm
20% £784pm

Your regular mortgage payment after 5 years amount owing and amount paid off
25y £262,500 2% £1,113pm £219,900 £42,600
30y £262,500 2% £970pm  £228,900 £33,600
35y £262,500 2% £870pm £235,300 £27,200
that can offset some of the savings needed

Unless a genius investor if you want to nail that H2B loan in 5 years you are going to need to be putting ~£2pm towards this property one way(mortgage) and or savings investments

£102pm should be a piece of cake as you should have been saving/overpaying at least that from the start.

If you just did that £102 at mortgage rate ~2% you would have saved around £6,500  less than a 10% of what will be needed but at least that won't be surprise in 5 years you just stop saving and move the money to pay the H2B

if paying off the full amount is not within reach do te numbers for a plan to nail 1/2 of the H2B.

Remember to factor in your house going up/down in value  £70k/£35k could well be a very different number in 5 years

All the time you have the fall back of starting years 5 with £102pm extra for the H2B equity.

Rocksolid

getmore4less said:

going back to the question

How to invest to prevent the H2B hammer after 5 years

On that £350k house 20% H2B £70k first 5 years  

Starting with how much you need to save  during the 5 years to pay it off at base cost(£70k) with different investment rates.
2% £1,121pm  ( this is the ~mortgage rate so you get that by overpaying)
5% £1,056pm
10% £955pm
15% £865pm
20% £784pm

Your regular mortgage payment after 5 years amount owing and amount paid off
25y £262,500 2% £1,113pm £219,900 £42,600
30y £262,500 2% £970pm  £228,900 £33,600
35y £262,500 2% £870pm £235,300 £27,200
that can offset some of the savings needed

Unless a genius investor if you want to nail that H2B loan in 5 years you are going to need to be putting ~£2pm towards this property one way(mortgage) and or savings investments

£102pm should be a piece of cake as you should have been saving/overpaying at least that from the start.

If you just did that £102 at mortgage rate ~2% you would have saved around £6,500  less than a 10% of what will be needed but at least that won't be surprise in 5 years you just stop saving and move the money to pay the H2B

if paying off the full amount is not within reach do te numbers for a plan to nail 1/2 of the H2B.

Remember to factor in your house going up/down in value  £70k/£35k could well be a very different number in 5 years

All the time you have the fall back of starting years 5 with £102pm extra for the H2B equity.

Giving a quick look, without a spreadsheet, it's a bit difficult to replicate with other numbers.

Anyway, as of today I can put aside 1500 monthly only for the H2B (I already invest with another budget), that will be pay it off 100% and more.

That's why I was thinking to invest.

Obviously I don't expect to have always the same good salary in future, reason why I count to pay the H2B loan back with 300 pounds per month maximum. (from day 1 to 5 years), and I see already it takes more than 9 years ONLY FOR THE 50% OF IT...

So the idea is to take less H2B at this point, because after 5 years, the H2B interests will be summed up to the once of the mortgage... Which could be easily worst, imagine 2% mortgage + 1.75% H2B...

Therefore, is it possible to take only 15% H2B for example?

It would take anyway 8 years to pay back the H2B ONLY FOR THE 50% OF IT!

- 5% H2B seems the way, obviously the mortgage will be higher but at least I don't waste money in interests!

- Look here:

You pay no interest on the equity loan for 5 years. In year 6, the interest rate will be 1.75%. Every year after that, it increases in line with inflation plus 1%.

https://www.bankrate.com/uk/mortgages/help-to-buy-calculator/ (the best source I found)

- That is shocking!!!

From the page inserting 5% from my side, 5% H2B and house value of 350k -->

Help to Buy property location

Property value 350000

Deposit amount 5%

Equity loan as % of property value 5%

Initial mortgage interest rate

Choose one of the examples here, or enter your own rate

1.9%

2 year fixed

Your Help to Buy calculation

• Deposit

  £17,500

• Equity loan

  £17,500

• Mortgage from lender

  £315,000

To get that much mortgage, you'd need a total annual income of about:

£63,000 - £96,923

Mortgage lenders usually multiply your salary by a maximum of 5 times to decide how much they will lend you. They will also check your credit file.

How much can I borrow?

Monthly repayments

£1,320

per month

Assuming your interest rate stays at 1.9% for the full mortgage term of 25 years.

You pay no interest on the equity loan for 5 years. In year 6, the interest rate will be 1.75%. Every year after that, it increases in line with inflation plus 1%.

Year	Equity loan interest rate	Monthly payment
1 - 5	0%	£1,320
6	1.75%	£1,346
7	1.82%	£1,347
8	1.89%	£1,348
9	1.97%	£1,349
10	2.05%	£1,350

----------------------------------------------------------------------------------------------------------------------

- This table seems very wrong..............

- To note that my salary doesn't raise with the inflation! As usual, you are hired and then you keep the same salary till you don't loose patience and leave, especially for high salary  

- Should I evaluate LISA? https://www.bankrate.com/uk/mortgages/help-to-buy-calculator/#Repaying-the-equity-loan    --> Lifetime ISAs

Thanks a lot for the answers guys !!!

getmore4less

You won't get a 90% H2B mortgage at 1.9%

If you have £1,500pm  on top of the mortgage payment and other investments why are you bothering with H2B?

droiderm

I am looking ahead 5 years ahead too.  I am going to likely take 64k equity loan. We are also going to have an additional 30k savings at the beginning of the mortgage.

Sure, I could have taken less HTB, but I do think "interest free" for 5 years is quite compelling. I appreciate there is some financial  overhead with that.

I was convinced I was going to overpay 500 pm for the first 5 years. I like the security of having the 30k, slowly diminishing over the 5 year period.

After looking at overpayment calculators it looks like I would only be around 1k in the up, vs keeping the 30k until year 5.

I did expect it to be more than that, perhaps as the interest rates are so low.

So I am on the fence wether to keep the 30k as security or look at the 1k gain. 1k is 1k I guess but it's not a big of a win as I initially thought. 
 

tim_london

@Rocksolid  Your explanation and link to calculator assumes you will pay both the mortgage and HTB hammer as separate loans repayment.  Nobody does that (or at least plan to) - most HTB borrowers will want to consolidate their loans into a single mortgage again at year 5.  
Imagine you reached year 5 now, you can remortgage at 60-75% LTV (i.e with enough money to pay back HTB) at 1.2% 2 year fixed - it's a no brainer.  

@droiderm  I agree cash flow security helps, but your calculation assumes your security sits in a no-interest current account.  Why not put it in an easy access savings account that would give you at least 1% interest?  Then the offset is even smaller.