Staircasing HTB equity loan quickly to take advantage of negative equity

ikanoi

Hi, thanks for reading.

I have just submitted my HTB application as a FTB. From what I understand, to repay the loan, most people will overpay the mortgage then remortgage at the 5 year mark to pay off the equity loan. I have read a lot about the pitfalls of using HTB and the fact that new builds are often overpriced and lose value as soon as they become not new anymore. 
I was wondering if anyone has used this to their advantage and staircased 10% (or more) during the first 5 years, assuming your house value has dropped?

I'm mainly wondering how the valuation works and if it will take these new build premiums into account or is there an understanding with HTB properties that will stop them being valued lower than the purchase price within the first few years?

Also, any thoughts, comments or experience on overpaying a mortgage vs saving to pay off the equity loan outright would be appreciated.

jasdev

Isn't it the case that you must use the Help to Buy appointed valuer at a cost of £600 a time?

So it makes sense to pay off the equity loan in the fewest number of instalments possible.

I've been doing some modelling using the excellent Locostfireblade spreadsheet (he's a user here):
http://www.locostfireblade.co.uk/spreadsheet/Index.html

So you can see how paying off your mortgage as normal (e.g. mortgage 1) will fare vs. making the maximum overpayments you can (e.g. mortgage 2 on the spreadsheet) and do a like-for-like comparison of the interest saving.

My conclusion at the moment is that it's probably better to maximise overpayments on the mortgage, with the view to remortgage in year 5 by enough to completely wipe out the equity loan, but then that money is locked away from you for the five years - and I'd rather stick that money into a Stocks & Shares ISA so I can access as needed and invest to pay down a portion of the equity loan after five years.

jmaximus

I can't help I'm afraid but I was thinking the same thing our htb is £78,000 so if the price dropped 10% we could save £7,800 so the extra valuation cost would hardly have an impact also the cost of a Ric's valuation when I sold my shared ownership was less than£300 so 700 sounds steep

ikanoi

jasdev said:

Isn't it the case that you must use the Help to Buy appointed valuer at a cost of £600 a time?

So it makes sense to pay off the equity loan in the fewest number of instalments possible.

You do need a valuer that they will approve, a quick google search shows prices for a 'RICS Help to Buy Valuation' starting from £200 so it may not be as steep as you've said (where did you get £600?) and you also need a solicitor. These are the main costs which people often mention but, as the reply below you points out, these costs may well be negligible depending on the size of the loan.

Thanks for the link, I have my own excel sheet that I use to figure things out but I will give it a look!

jmaximus said:

I can't help I'm afraid but I was thinking the same thing our htb is £78,000 so if the price dropped 10% we could save £7,800 so the extra valuation cost would hardly have an impact

My thoughts exactly, ours is around £50k and a house market slump next year might actually work in our favour.

blue_max_3

I was going to buy a SO and the valuation was £500. I didn't go through with it, but this was one of the reasons!

getmore4less

The problem with a value drop is how you fund the H2B amount as your LTV also gets messed up easing into the equity you build up on the mortgage.

for each £100k
5% + 20% +75% after 5 years on a 25y term you have around £63k left on the mortgage
with flat prices you can pay it off and have £83k borrowed 83% LTV

10% drop you are at £81k  90% LTV

Remember the 10% is market value so a  20% HTB  you can  pay it off in 1 or 2 chunks for the London 40% 1-4 chunks.

ikanoi

getmore4less said:

The problem with a value drop is how you fund the H2B amount as your LTV also gets messed up easing into the equity you build up on the mortgage.

Good point, hadn't properly factored that in yet, thanks!

Thanks for the advice all, I like the idea of keeping things liquid to start so ideally I will be slightly overpaying my mortgage but keeping the bulk of my savings in cash, with a view to repay the equity loan in 2 10% chunks.