Overpaying on mortgage vs repaying First Home Fund?

pinkcloud17

My partner and I used the Scottish Government First Home Fund to buy our house. There is no interest on this, but we took 10% of the value of our home which means that when we sell the house we need to repay 10% of the value at that time. We can also repay this in full or in part at any time. 

We are currently on a 5 year-fixed rate mortgage and this ends in 4 years. We were limited in which mortgages we could choose from because we used the First Home Fund, and we have been told this will be even more limited if we choose to remortgage at any time. We are already planning our finances to make sure we are in the best position possible for when the deal ends in 4 years time. I may be reducing to part-time work by that time, so I am thinking we would only be able to do a product transfer rather than remortgage.

We have been saving enough money so that we can pay off the First Home Fund in full just before our current fixed rate ends. The plan is that this would put us in a better position for switching products. This works out at £400 per month, assuming that the value of the house doesn't increase by much which I don't think it will, as it is a new build house and the current market price is probably lower than what we paid for it new. 

Are we doing the right thing putting aside £400 a month to pay this off even though it is no interest or would we be better off paying this towards the mortgage? 

Thrugelmir

You'd be better off paying down the existing mortgage. Then remortgaging to pay off the First Home loan. 

getmore4less

Not enough information.

Lender
How big was your deposit

What rate are you on now?
What's the best rate in regular saver(s)  (often the best option)

What will affordability look like over the next few years if you drop income.

Problem with overpaying is you become dependant on new borrowing and will get affordability checked for that even if you stay with current lender

What is affordability like now could you look at borrowing more.

if that is possible then you have the number crunch of what rate that is against price changes for your 10% interest free.

Real numbers make it easier to the number crunches as the normal payment will improve equity over the 5years.
there will be a point where reduced mortgage and savings will be around the 10%. 

pinkcloud17

getmore4less said:

Not enough information.

Lender
How big was your deposit

What rate are you on now?
What's the best rate in regular saver(s)  (often the best option)

What will affordability look like over the next few years if you drop income.

Problem with overpaying is you become dependant on new borrowing and will get affordability checked for that even if you stay with current lender

What is affordability like now could you look at borrowing more.

if that is possible then you have the number crunch of what rate that is against price changes for your 10% interest free.

Real numbers make it easier to the number crunches as the normal payment will improve equity over the 5years.
there will be a point where reduced mortgage and savings will be around the 10%. 

Thanks for your reply. Our lender is Barclays and we had a deposit of 25%. 10% was contribution from First Home Fund which we need to pay back at some point. We are currently on 5 year fixed rate of 1.67%. Our affordability right now is higher than what it was when we applied, but is likely to be worse at the time the fixed rate runs out as we are planning to have a baby within the next few years. Childcare costs for a child under 3 are so high it's barely worth working and I might go part-time at least for a couple of years. When our fixed rate ends it might land right at that time, in which case the calculators say the mortgage is unaffordable when you take into account childcare costs. We are really careful with spending though and putting aside savings of double our monthly mortgage payments right now. We have been told that if we still have First Home Fund to take into account when we want to remortgage/ transfer product, the products will be so limited we will be paying very high interest. So I'm not sure whether to just pay that off so there is more flexibility or just overpay the mortgage so our LTV will be lower, but we will then be paying higher interest than without the First Home Fund. 

getmore4less

Still a little light on the details.

if price has not moved and you can afford to buy out the loan you will still be under 75% LTV
Once at 75% the rates are good and don't drop a lot when you get to 60%
Barclays 5y rate differ by 0.1% now 

Barclays additional borrowing (rates went up 17th)  is around ~2% no fee

1.67% with 65% LTV depends on term but If I do 30y and 25
Without price movement your approximate LTV x years in will be

1 63.3% 62.9%
2 61.6% 60.1%
3 59.8% 58.5%
4 58.1% 56.3%
5 56.3% 54.1%
 
I think the current Scottish limit is £200k property so 10% max would be £20k

lets use that as an example if yours is different you can do similar calculations.

if you save  £400pm

£20k over 7y on the 7y fix 2.06%  would be £256pm using te full £400 paid off in 4y4m(£403pm) or 4y 5m (£395pm)
Over longer term say to give flexibility 25y <£100pm  as Barclays allow large overpayments ERC free