Pay off Help to Buy or Mortgage First?

LongoBongo · 6 July 2017 at 3:21PM

Hi, wonder if anyone here can help. I'll keep the numbers nice and round.

I bought a house last year and used a Help to Buy loan. I always knew I’d be able to pay the loan off with an expected inheritance. I now have the inheritance money.

In short, my Help to Buy Loan is £80K, my mortgage is £100K and I've just inherited £100K.

Now, ignoring early mortgage payment fees and future house price rises/falls, am I best off paying off the mortgage or paying off the HTB loan?

I'm more inclined to clear the HTB loan and knock £20K off the motgage but might I be better off clearing the mortgage in full first?

Thanks!

kingstreet · 6 July 2017 at 3:23PM

Did you get £80k loan when you bought, or is the equity loan £80k based on current value?

In addition, you can't have the equity loan if you repay the mortgage. It cannot be promoted to a first charge the HTB Agent once told me.

LongoBongo · 6 July 2017 at 3:32PM

Thanks KS. I don't think the value of the house has changed so we took out £80k on a £400k house. It's a new build so after less than a year it may have even gone down in value a bit. I'd assume it's still £400k.

Thanks

getmore4less · 6 July 2017 at 4:12PM

Now, ignoring early mortgage payment fees and future house price rises/falls, am I best off paying off the mortgage or paying off the HTB loan?

you cannot really ignore them as they are critical to the better decision.

Whats the mortgage rate.
Whats the loan rate/rent.
will the loan value inflate/deflate(ie. equity based)
who pay the fees for paying of the loan.

any ERC on the mortgage

Are there any restrictions on selling while you have the loan?
How do they change if you don't have the loan.

LongoBongo · 6 July 2017 at 4:52PM

Thanks GM4L

Mortgage 4yrs left at 2.65%
HTB loan - interest free for 4 more years
Where we are is pretty stagnant and we're on a half built site so prices very unlikely to rise whilst builders are on site for 2-3 more years.
HTB fees are, I think £12 a year for 4 more years.
ERC on mortgage is £4,650

alex_163163 · 6 July 2017 at 6:12PM

As kingstreet said above, I think I have read/ heard somewhere (could have been another thread on here!) that you cannot pay off the mortgage completely whilst still having the Help to buy equity loan against the house.
If I was in your position, id pay off the equity loan, and as much off the mortgage as you can to avoid early repayment charges.

amnblog · 6 July 2017 at 6:22PM

Surely the key point is that you currently own 80% of the property.

If you want to own 100% you should clear the equity loan.

Smart if values are rising.

Not smart if values are dropping.

SuboJvR · 6 July 2017 at 8:18PM

kingstreet wrote: »

Did you get £80k loan when you bought, or is the equity loan £80k based on current value?

In addition, you can't have the equity loan if you repay the mortgage. It cannot be promoted to a first charge the HTB Agent once told me.

Does this mean that nearing the end of the mortgage term, if you've not done anything with it, you must remortgage at that point to absorb the HTB loan, assuming you've not had the money to pay it off sooner?

I am not entirely sure what to do with mine. I think we will potentially remortgage to absorb all/some of it at the 8 year or so mark depending what happens with property values.

kingstreet · 6 July 2017 at 10:22PM

The equity loan term is the shorter of your mortgage term or 25 years.

getmore4less · 7 July 2017 at 6:24AM

LongoBongo wrote: »

Thanks GM4L

Mortgage 4yrs left at 2.65%
HTB loan - interest free for 4 more years
Where we are is pretty stagnant and we're on a half built site so prices very unlikely to rise whilst builders are on site for 2-3 more years.
HTB fees are, I think £12 a year for 4 more years.
ERC on mortgage is £4,650

First assumption will be the mortgage was a 5y fix with a full term of ?????

With a mortgage of £100k on a £400k house you should get a better rate than 2.65% problem is the ERC/fees will make it hard to find one with a low enough rate to get the payback in the 4y left.

Similar issue with paying the ERC even on some of the mortgage the payback period is 21 months
(what % is the ERC? £4650 on £100k is 4.65% on each £100 with ERC you pay £4.65 and save 22.1p per month)

The next thing is can you time the start of any rises, OK you have a builder selling stuff to give indicators, if they started putting the £400k places up at £420 and selling that's your £80k loan up to £84k.

Any early resales yet that give an indicator of new build premium

I suspect any valuations for the loan will come back at or close to purchase price unless strong indicators of drops, like the builders dropping prices.

OK you have an interest free loan but any HPI wipes that benefit out very quickly and will be even more unpredictable than interest rate.
(you need the cash ready to pounce so if you pay off a bit of the mortgage how long to restore funds)

Any payback of the mortgage over the ERC free amounts takes 21m to break even.

alternative investments that can better the payback of mortgage should be easy to find but how much of the potential HPI risk can you cover?

Come the 4 years you will be wanting to get that HTB nailed anyway as the interest kicks in at ??
(you are a bit unusual in that your mortgage rates and HTB rates will be close, many will be at higher LTV/rates so have some margin to trade off against HPI or just don't have the choice to pay it off)

Reduce the mortgage at the risk of HPI
When you look at the HTB against mortgage
over 4 years your min saving is (48-21) 27 months on £80k @ 2.65%, £4770 (some might be ERC free so save a bit more)

as the savings don't kick in for 21 months that is 21 months of uncertainty.

over the 4 years you just need 5% HPI to wipe out the savings.

In a loose way you can think of paying off the HTB a bit like a fix rate, as you fix the cost of the debt at the current value, forever not just for a few years.

The questions to ask yourself are

If you could have borrowed that £80k at your low mortgage rate would you have done?

If you could have borrowed the money and took the HTB anyway(for the cheap money) what has changed to make you think you should pay it off now?

brit1234 · 8 July 2017 at 12:16AM

Prices are falling so wouldn't it be better to pay off the mortgage first. The equity loan would reduce with the falling prices so leave you less to pay off there later.

However we don't know how long prices will fall, by how much or what new props they will put up to keep the housing bubble inflatted this time. At least they can't lower interest rates any lower.

Pay off Help to Buy or Mortgage First?

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