Should we pay off our Help to Buy (H2B) Loan as soon as we can?

SandyShores

We were off the property ladder for a while, but about 18 months ago, in our 50s purchased a new build with a 5% deposit and using Help to Buy .

We took a 5-year fix with Nationwide 1.85% and took the maximum H2B amount of £65,000.

I estimate that we now have at least 15% equity - and it looks like Nationwide will lend up to 85% of a property to existing borrowers.

Should we look at borrowing more with Nationwide to pay off H2B as soon as possible?

 

This might be useful to know:

Our wage position has improved since our purchase, so we can easily manage the extra mortgage payments.

Existing term means we will be paying into retirement for a few years, but we are planning to make overpayments to pay it off sooner..

We both have pensions and can take lump sums (total of about £25k in 2022) and further down the line to add to the overpayments but I would rather keep our pension pots if we can.

We could keep the H2B for another 3+ years interest free.

Our aim is just to have our own home and to own it outright as soon as is comfortable and to leave it as inheritance.

Thanks for any help.

getmore4less

How fast are prices going up against the extra cost of a bigger mortgage.

SandyShores

Thanks getmore4less I'll graph that out but, thinking about it, I'm sure it will point to paying it off asap.  If our circumstances were slightly different when we took out the H2B we wouldn't have used it - so that's my answer.

getmore4less

I did some numbers over 5 years for some H2B situations and the property needed to go up 40% to be worse off.

That was for people with 5% deposit and 95% rates were quite high.

Where LTV is better that rise drops

Don't forget if the property has gone up so will the H2B equity.

Also you can only redeem 50% or 100% of the H2B.

dimbo61

You have a 5 year Interest Free loan which is now 18 months old.
Why not overpay the current mortgage your paying 1.85% on ?
Check what Overpayments you are allowed to make.
YOU ! estimate that your property has gone up 10% in 18 months but the lender may disagree.

getmore4less

I estimate that we now have at least 15% equity

5% deposit + 20% H2B + 75% mortgage.

based on max H2B 20% £65k

£325,000 == £16,250 + £65,000 + £243,750

Over say 20y(might be less as 50's, max would be to 75) would pay down ~5% of the loan

amount	rate	payment	owing
£243,750.00	1.85%	£1,215.85	£228,428.98

At 5y that would be 

amount	rate	payment	owing
£243,750.00	1.85%	£1,215.85	£190,983.71

to have  15% equity now that looks a bit like

£351,500 == £52,700 + £70,300 +  £228,500

property would need to go up ~8.15% to give 15% equity. 
That's WITHOUT overpayments and the 20y full term guess.


Nationwide 85% extra borrowing rate over 3y is 1.78%(no fee)  but run it over 3y6m
 

amount	rate	payment	owing
£70,300.00	1.78%	£371.89	£58,711.46

Alternative is add the amount to the existing loan and overpay

amount	rate	payment	owing
£228,429.00	1.85%	£1,587.74	£174,860.41

at the 5y point you would owe say £175k if you let the current H2B run.

If you paid it now your debt would be £190,983.71 + £58,711.46  

That's a difference of £74,836k  that needs to be the amount to pay of the H2B 20% in 3y8m  making te property value £374,180k

estimate value now is  around £351,500 now that's a 6.5% increase over 3.5 years


What do your real numbers come out at?

SandyShores

That's great, thanks getmore4less, that's pretty much spot on.  Its difficult to say what the increase in price is - property values have supposedly risen 20% in this locality, but I understand that new builds are like new cars and lose value as well.  It will be interesting to see if any re-sales come on the market.

RelievedSheff

SandyShores said:

That's great, thanks getmore4less, that's pretty much spot on.  Its difficult to say what the increase in price is - property values have supposedly risen 20% in this locality, but I understand that new builds are like new cars and lose value as well.  It will be interesting to see if any re-sales come on the market.

We were expecting our now 3 year old "new build" to lose value in the first few years but actually resale values here are suggesting otherwise and are looking at a 20-25% increase over the almost 3 years we have been here. So it isn't unheard of for them to increase in value but a lot will depend on the area.

getmore4less

When you analyse the numbers the H2B 5y interest free makes a bigger difference when the alternative rates are a lot higher than the H2B rates.

The other big factor is the higher rate on the 75% which can be more than the 5y saving.

There was a point where 95% were not possible and when available ~4%.

This could lead to the H2B option being cheaper even with over 40% price rises.

Once you can access cheaper borrowing H2B becomes a lot less attractive with small price rise wiping out the savings.

Bigger mortgage is better than overpayment.

SandyShores

Thanks RelievedSheff, the ideal would be for the value to go down so that we owed less, but I won't be holding my breath for that.  Halifax (in the news) says our area up over 20%, but Zoopla high confidence is just under 10%, so our H2B loan would have increased £6,400 (but as our share has increased £26k, and we wouldn't have been in a position to buy otherwise, we can't grumble).

I'm going to do what getmore4less advises (thanks getmore4less your input is really helpful) and put my actual numbers into the calcs to see what it means for paying off over the term, as well as looking at what it means for monthly payments.  I don't want to overstretch us, but the aim is to pay the mortgage off as soon as we can and hopefuly before retirement.  We've got DHs DC pension pot to play with, but ideally I'd like us to keep that - but if its something we can set against the H2B loan then it might be worth considering.  Its giving us more options to consider.

SandyShores

Update, we waited until the end of the interest free period to pay off the H2B.  The new valuation at that point meant another £9k was added to our repayment figure for the H2B loan. Seems like a lot, but not as high as I expected.

Was it worth it?  We didn't pay interest on that £65k and the MSE calculator says we would have paid £5994 in interest for the five years.  So effectively that brought the difference down to just over £3k (compared to including it in the mortgage rate of 1.84%).  

We would also have had a slightly higher interest rate on the whole £309k if we'd just had our 5% deposit so potentially very little difference overall.  I also don't think we would have been able to get a big enough mortgage without H2B, and of course the payments would have been higher.  We only had about £5k to spend after moving and that included getting a patio laid, some plants, curtains, new furniture etc. so money was tight.

Luckily both our salaries increased and were able to make quite a few OPs.  So, even adding in the H2B, our re-mortgage was for a much smaller amount than we originally borrowed.  

Of course it would have been great to pay off the whole mortgage while the rates were so low, but we've fixed again (at around double our 2020 rate) and planning to make as many OPs as we can.  So all in all it was definitely worth doing.