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MiseryChastain
Posts: 42 Forumite
Hello
I am seeking general financial advice about my current situation and have a number of questions.
The high level background is that I bought a one bedroom flat in Zone 2 in London for £485K in 2017. This was funded through a 30% Help To Buy equity loan (so £145,500), bank mortgage (£289,000) and then £50,000 cash. I currently have, from inheritance when one of my parents died and my own savings, £60,000 in cash which is simply sitting in a current account and doing nothing.
I am 27 years old and up until about a year ago had been single which was why I had bought alone. I am now thinking about the future especially as I now have a serious partner and also thinking about the fact I have the government equity loan which I would like to reduce, although there are conflicting opinions about whether it would even be worth doing so.
I am aware that if the value of my flat goes up, the 30% will attach to the current value of the property. I am also aware that any early repayment of the equity loan must amount to at least 10% of the overall value of the property and that there will be valuation and early repayment fees. I am also aware that much of the decision will depend on how the market in London performs and I am aware that economists are forecasting growth pretty much everywhere except London where it is slowing considerably.
Essentially, I want to know what the best thing to do with the £60,000 would be and whether I should use it to start reducing the help to buy equity loan. I therefore have a number of questions:
1. Should I use my savings to start to reduce the equity loan. On basic calculations, I could reduce it to 20% from 30%, however my savings would be gone and most IFAs will tell you to have 6-12 months’ salary saved for emergencies. I am fortunate in that I could get help from family if it was an emergency.
2. If my partner and I decided to buy somewhere together outside of London with say a joint mortgage, would I have to sell my flat or is there any way I could keep it, get a second mortgage and rent my flat out to pay off the first mortgage?
3. If my partner and I decided to buy somewhere together outside of London say in the next two years, would it make sense to simply not bother reducing the equity loan and sell the flat given it will be within the first five years of the equity mortgage term and so I won’t have started to pay interest on it. The downside I suppose is that the government could get a bigger chunk if the value goes up.
4. If my partner and I decided to buy somewhere together outside of London and I decided to sell my flat, could I transfer the existing mortgage to the new place or would I have to take out a new joint mortgage.
5. If my partner and I decided to buy somewhere together outside of London and I decided to sell my flat, would I have difficulty trying to find a buyer given it will only have been 2-3 years since I purchased the flat?
6. Should I concentrate on using savings and current income to pay off my mortgage and equity loan? Or would there be any sense in investing the £60K savings in say a small property outside of London where growth is much higher? I am concerned that it is just sitting there and with interest rates so low there is just no point in investing it into ISAs etc. Or would the best thing to do if I decided not to reduce the equity loan be to reduce my existing bank mortgage?
I suppose the long and short of it is that I am thinking ahead into the future and that eventually we may want to live together (my partner cannot live in my flat as it’s opposite side of London plus it’s too small for two people to live properly) but I have a flat I have purchased which ideally I’d like to keep but get rid of the government’s interest over time.
I have thought seriously about speaking to an independent financial adviser for generic life / financial planning advice as I’ve never taken out such advice before but thought it would be useful to seek the views of MSE first and see what people would suggest.
I’m only 27 and I am thinking into the future and so please be nice and any help would be greatly appreciated.
Thanks
MC
I am seeking general financial advice about my current situation and have a number of questions.
The high level background is that I bought a one bedroom flat in Zone 2 in London for £485K in 2017. This was funded through a 30% Help To Buy equity loan (so £145,500), bank mortgage (£289,000) and then £50,000 cash. I currently have, from inheritance when one of my parents died and my own savings, £60,000 in cash which is simply sitting in a current account and doing nothing.
I am 27 years old and up until about a year ago had been single which was why I had bought alone. I am now thinking about the future especially as I now have a serious partner and also thinking about the fact I have the government equity loan which I would like to reduce, although there are conflicting opinions about whether it would even be worth doing so.
I am aware that if the value of my flat goes up, the 30% will attach to the current value of the property. I am also aware that any early repayment of the equity loan must amount to at least 10% of the overall value of the property and that there will be valuation and early repayment fees. I am also aware that much of the decision will depend on how the market in London performs and I am aware that economists are forecasting growth pretty much everywhere except London where it is slowing considerably.
Essentially, I want to know what the best thing to do with the £60,000 would be and whether I should use it to start reducing the help to buy equity loan. I therefore have a number of questions:
1. Should I use my savings to start to reduce the equity loan. On basic calculations, I could reduce it to 20% from 30%, however my savings would be gone and most IFAs will tell you to have 6-12 months’ salary saved for emergencies. I am fortunate in that I could get help from family if it was an emergency.
2. If my partner and I decided to buy somewhere together outside of London with say a joint mortgage, would I have to sell my flat or is there any way I could keep it, get a second mortgage and rent my flat out to pay off the first mortgage?
3. If my partner and I decided to buy somewhere together outside of London say in the next two years, would it make sense to simply not bother reducing the equity loan and sell the flat given it will be within the first five years of the equity mortgage term and so I won’t have started to pay interest on it. The downside I suppose is that the government could get a bigger chunk if the value goes up.
4. If my partner and I decided to buy somewhere together outside of London and I decided to sell my flat, could I transfer the existing mortgage to the new place or would I have to take out a new joint mortgage.
5. If my partner and I decided to buy somewhere together outside of London and I decided to sell my flat, would I have difficulty trying to find a buyer given it will only have been 2-3 years since I purchased the flat?
6. Should I concentrate on using savings and current income to pay off my mortgage and equity loan? Or would there be any sense in investing the £60K savings in say a small property outside of London where growth is much higher? I am concerned that it is just sitting there and with interest rates so low there is just no point in investing it into ISAs etc. Or would the best thing to do if I decided not to reduce the equity loan be to reduce my existing bank mortgage?
I suppose the long and short of it is that I am thinking ahead into the future and that eventually we may want to live together (my partner cannot live in my flat as it’s opposite side of London plus it’s too small for two people to live properly) but I have a flat I have purchased which ideally I’d like to keep but get rid of the government’s interest over time.
I have thought seriously about speaking to an independent financial adviser for generic life / financial planning advice as I’ve never taken out such advice before but thought it would be useful to seek the views of MSE first and see what people would suggest.
I’m only 27 and I am thinking into the future and so please be nice and any help would be greatly appreciated.
Thanks
MC
0
Comments
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Keep some of the £60k in a savings account in case of any major works required for the flat if you don't already have a repair/works fund.
Good luck0 -
1. If you don't plan to keep living in the flat, you will likely have to sell it (you can't rent it, see 2)). It makes no sense to repay part of the interest free equity loan now. Depending on when you plan to buy with your partner either keep your savings to be able to afford better deposit and LTV on your new home, or overpay your mortgage.
2. HTB equity loan absolutely forbids renting out the property. If you want to keep the flat and rent it out you will have to repay the equity loan and then remortgage to BTL mortgage. There is small chance to get a permission to let from your mortgage Lender, but it's only granted if you are moving for a limited time (1-2 years) due to work etc. Also if you keep the flat you won't be able to buy a new property with HTB.
3. Yes, if you plan to buy in the next 2 years, i would suggest not to repay a chunk of the equity loan. It's true you will "lose" some money if the prices go up, put if the prices stay, you will lose money on stair-casing charge, legal fees and mortgage interests (if you use the 60k to overpay the mortgage). And lastly you will lose even more money if the prices go down.
4. Some mortgages are not portable, especially given the fact yours had the equity loan factored in, on top of that this one is in your sole name. You definitely can't convert it to joint mortgage.
5. It depends on the market, who knows what will happen in the future. Being 2-3 years old is not an immediate barrier by itself.
6. You are unlikely to be able to recoup all the buying expenses with a property that costs £60k being a LL can be a nightmare. If you plan to use the £60k for a BTL mortgage deposit, this will only over-complicate your future joint purchase for minimal gain. If you are not happy with the saving deposits interests rates - overpay your mortgage.0 -
1. If you don't plan to keep living in the flat, you will likely have to sell it (you can't rent it, see 2)). It makes no sense to repay part of the interest free equity loan now. Depending on when you plan to buy with your partner either keep your savings to be able to afford better deposit and LTV on your new home, or overpay your mortgage.
2. HTB equity loan absolutely forbids renting out the property. If you want to keep the flat and rent it out you will have to repay the equity loan and then remortgage to BTL mortgage. There is small chance to get a permission to let from your mortgage Lender, but it's only granted if you are moving for a limited time (1-2 years) due to work etc. Also if you keep the flat you won't be able to buy a new property with HTB.
3. Yes, if you plan to buy in the next 2 years, i would suggest not to repay a chunk of the equity loan. It's true you will "lose" some money if the prices go up, put if the prices stay, you will lose money on stair-casing charge, legal fees and mortgage interests (if you use the 60k to overpay the mortgage). And lastly you will lose even more money if the prices go down.
4. Some mortgages are not portable, especially given the fact yours had the equity loan factored in, on top of that this one is in your sole name. You definitely can convert it to joint mortgage.
5. It depends on the market, who knows what will happen in the future. Being 2-3 years old is not an immediate barrier by itself.
6. You are unlikely to be able to recoup all the buying expenses with a property that costs £60k being a LL can be a nightmare. If you plan to use the £60k for a BTL mortgage deposit, this will only over-complicate your future joint purchase for minimal gain. If you are not happy with the saving deposits interests rates - overpay your mortgage.
Thanks for taking the time to respond to this. Can I clarify in response (4) whether you meant 'cannot convert' rather than 'can'?
It seems your overall advice would be (assuming house prices in London stay relatively stable or decrease) to (a) absolutely not repay any of the equity loan now or in the future (b) sell in a couple of years and hope that the price increased slightly but didn't soar entirely; (c) redeem the equity loan and mortgage through sale proceeds; (d) take out a new mortgage with my partner on the new home (which would be without the equity loan anyway as we would be able to afford a bigger mortgage based on joint income); (e) apply cash savings element for deposit on new home?
So effectively don't bother paying off the equity loan or the traditional mortgage while I own this flat?
I feel like in some ways the whole thing has been slightly pointless then - if prices go up, potentially I will make some money even if the government gets a bigger slice, and I suppose I'll have avoided renting for a few years and contributed to my own mortgage, is that one way of looking at it?0 -
Yeah can't rather than can in 4) (edited my post now).MiseryChastain wrote: »Thanks for taking the time to respond to this. Can I clarify in response (4) whether you meant 'cannot convert' rather than 'can'?
It seems your overall advice would be (assuming house prices in London stay relatively stable or decrease) to (a) absolutely not repay any of the equity loan now or in the future (b) sell in a couple of years and hope that the price increased slightly but didn't soar entirely; (c) redeem the equity loan and mortgage through sale proceeds; (d) take out a new mortgage with my partner on the new home (which would be without the equity loan anyway as we would be able to afford a bigger mortgage based on joint income); (e) apply cash savings element for deposit on new home?
So effectively don't bother paying off the equity loan or the traditional mortgage while I own this flat?
I feel like in some ways the whole thing has been slightly pointless then - if prices go up, potentially I will make some money even if the government gets a bigger slice, and I suppose I'll have avoided renting for a few years and contributed to my own mortgage, is that one way of looking at it?
You can use 20-40k of your savings to overpay the mortgage meanwhile. effectively getting 1.5-2% (depending on your mortgage rate) interests rated on them, you won't get better savings rates.
The whole thing was not pointless, especially if you couldn't have afforded to buy the place without HTB. You didn't pay interests and you didn't share the risk of price collapse on 30% of the equity. Consider it as if you had a free upgrade from £340k flat to £485k flat. You paid for a £340k flat and when you sell you will get paid as for £340k flat, but meanwhile for 4-5 years you lived in a £485k flat. At least that's how I treat it in my case.0 -
Yeah can't rather than can in 4) (edited my post now).
You can use 20-40k of your savings to overpay the mortgage meanwhile. effectively getting 1.5-2% (depending on your mortgage rate) interests rated on them, you won't get better savings rates.
The whole thing was not pointless, especially if you couldn't have afforded to buy the place without HTB. You didn't pay interests and you didn't share the risk of price collapse on 30% of the equity. Consider it as if you had a free upgrade from £340k flat to £485k flat. You paid for a £340k flat and when you sell you will get paid as for £340k flat, but meanwhile for 4-5 years you lived in a £485k flat. At least that's how I treat it in my case.
Thank you. So you would suggest that I speak to Nationwide (the traditional mortgage provider) and see if I can pay off some of the mortgage?
Interesting analogy you use. And presumably I could still make some money if the price of the flat goes up (once the equity loan has been redeemed).0 -
I'm with Nationwide too and there is no ERC for up to 10% of the mortgage each year. Call them and check if my assumption is correct.
If I were you and was looking to sell the place in the next couple of years, before the interest free 5 years have expired I wouldn't bother with equity loan repayments. You will only benefit financially from that if the prices increase significantly in the next 2-3 years, which is the least likely scenario for London IMHO. If the official numbers are to be believed there is even a slight dip especially for flats:
http://landregistry.data.gov.uk/app/ukhpi/browse?from=2017-06-01&location=http%3A%2F%2Flandregistry.data.gov.uk%2Fid%2Fregion%2Flondon&to=2018-06-010
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