I’m in a dilemma about my Help to Buy loan and hoping to get expert opinion on best choice available.
We used the Help to Buy loan to buy our home in 2020, which is around £80,000. We want to repay the Help to Buy loan but are wondering if it would be better to retain it and do either of the following:
1. Pay our mortgage to save interest;
2. Pay a personal loan back which is around £30,000.
Mortgage help: Our weekly Navigate the Mortgage Maze column sees broker David Hollingworth answering your questions
As much as we would love to get rid of the Help to Buy loan over the house, it’s tough to decide on what would be the best option.
We have three more years until the Help to Buy interest kicks in, but wouldn’t it be better to pay lesser interest rate than mortgage?
So conflicting between which one to repay. Could you please share your thought on it?
David Hollingworth replies: Having choices about reducing debt is a good position to be in but it can be difficult to know what the right choice is.
That’s particularly true when it comes to paying off a Help to Buy equity loan because of the inherent unknowns, due to the way it works.
It may help to strip things back to basics to help you reach a decision, as much will ultimately depend on your priorities and needs, now and in the future.
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Help to Buy Mechanics
The Help to Buy equity loan was available on newly built properties until the scheme ended in England earlier this year (Help to Buy Wales is still available).
It was designed to support borrowers from the perspective of only requiring a small deposit of 5 per cent plus aiding affordability, by providing an equity loan of up to 20 per cent of the purchase price, or 40 per cent in London.
The rest was funded through a standard mortgage.
As you mention, the equity loan is interest free for the first five years. After that it will attract a charge, initially of 1.75 per cent in year six and then lift each year by an amount that is linked to inflation.
– Check how much you can borrow with our mortgage calculator tool
Help to Buy offered prospective home owners the option of a lower deposit, as the Government loan boosts their savings pot
On the face of it, that rate now looks low given the rapid increase in mortgage rates in recent years.
However, the interest is not the only thing that you need to factor into the end cost of the equity loan.
When repaying the equity loan, the outstanding balance will be based on the market value of the property at the time.
If you took 20 per cent of the original purchase price then you’ll need to pay back 20 per cent of the value at the time, so if the property has gone up in value so will the amount you have to repay.
> What next for mortgage rates and should you fix?
Not a like-for-like rate comparison
For example, if you bought a property at £400,000 with a 20 per cent equity loan of £80,000 but the property is now worth, say, £450,000 then the repayable balance will be £90,000.
It is possible to pay off the equity loan in chunks equivalent to 10 per cent of the property value but this does come with cost to get an agreed valuation and for administration costs.
As the repayable amount is dependent on property prices, it’s impossible to know exactly what holding off from repaying the equity loan could mean for the total cost.
If the value was to fall over time so would the equity loan but if prices climb it will mean that the repayable amount will also have risen.
Since you can’t second guess what may or may not happen with prices, it’s not possible to be certain whether paying off the equity loan or the mortgage/other debts will be the better way forward, as it’s not a like for like comparison.
It may currently look as though house prices may plateau or even fall back a little which may give you time to consider the options but there’s no guarantees.
Pay off most expensive debts first
If you prefer to reduce other debts rather than pay off the equity loan, it’s important to consider whether you have any other more expensive commitments such as the loan you mention or credit cards.
It’s also important to ensure you have cash savings that you can easily access if required, rather than ploughing all your savings into repaying the mortgage or equity loan.
– How to remortgage your home, find the best deal and switching lenders
The Help to Buy equity loan was available on newly built properties until the scheme ended in England earlier this year
You bought when interest rates were lower, so if you locked into a fix you may also want to check whether you could earn a higher rate on savings after any tax than you’d save by overpaying your mortgage.
Without a black and white answer, you may decide to balance your available funds between overpaying the mortgage or loan and earmarking a proportion for the future repayment of the equity loan.
With interest rates set to remain higher than the historic lows of recent years, it’s understandable that you may want to reduce your current debt, especially if you will need to review your mortgage rate and want to ensure monthly payments remain affordable.
That doesn’t have to close the door to repaying the equity loan in future, whether from savings or you could still draw on your equity by remortgaging if required.
