Soldato
- Joined
- 14 Mar 2011
- Posts
- 5,443
Hey all,
The help2buy scheme was introduced just over 5 years ago now so people are increasingly going to be hitting the end of the 5 year interest-free period on the equity loan. My wife and I are going to hit this point later in the year and since I can't find a dedicated thread for it I thought why not get one started!
Disclaimer - this isn't financial advice! More my own thinking out loud hoping that between us we can work things out together
So one obvious option would be to re-mortgage to borrow more and pay off the loan, but here's my thinking on that... using an equity loan of £60k (which I think is close to what mine is worth now) the interest/fee on the loan will be as follows (and please correct me if I'm wrong)... I'll use the current RPI figure of 3.2% for this though that will change over the years, so pinch of salt n' all that:
Year 6 - 1.75% of the £60k, which works out £87.50 pcm (or £1050 total)
Then each year that rate goes up by RPI + 1% (so 4.2% of the 1.75%)
Year 7 - 1.82% or £91.18 pcm (£1092 total)
Year 8 - 1.90% or £95.00 pcm (£1140 total)
Year 9 - 1.98% or £98.99 pcm (£1188 total)
Year 10 - 2.06% or £103.15 pcm (£1236 total)
... and so on; creeping up a bit each year. So the two factors to consider whether or not it's worthwhile to remortgage instead are:
1. How much would that extra 20% equity on the mortgage cost me per month and how would it change the rate I can get?
2. What affect will house prices changing have?
You can get an idea of the first point - for example with my own mortgage I used a calculator on Nationwide's site and it tells me the cost of pulling the whole 20% into my mortgage would probably cost about £260 pcm extra for the 25 years I have remaining (at a similar rate to what I already am on), which initially seems like a bad deal compared to the figures above.... but of course the difference is that I'd actually be paying it off instead of just paying the fee, but paying back more in the end... this all gets a bit confusing...
As a rough estimate if you gloss over the fact that the payments aren't equal like this then in my example you could think of it as paying off 1/25 of the equity loan as part of the mortgage each year meaning you're clearing the equivalent of ~£2400 per year (but paying more than that, at £260 pcm that's £3120 per year - it is a loan after all!) to eventually pay £78000 for the £60000 loan across those 25 years... So in a way it's sort of like the interest/cost of each year (though again it isn't spread equally I know) is sort of like 3120 - 2400 or £720 per year... and when you put it that way it starts to seem like re-mortgaging to eat up the equity loan isn't such a bad idea...
When time allows I'll try and calculate the above more correctly as the way the repayments are skewed probably makes it less of a "saving" than it appears above, but if anybody has already done this feel free to post your results!
As for the house prices and rates that's a lot more up in the air... if the prices go up then you've gained if you re-mortgaged and will lose out if you didn't... if they go down then the opposite. Since nobody really knows maybe it's best to try and work out the best course assuming prices stay about the same - I'm not sure!
Anyway enough rambling from me... who else is thinking about this and what horrendous mistakes have I made above?
The help2buy scheme was introduced just over 5 years ago now so people are increasingly going to be hitting the end of the 5 year interest-free period on the equity loan. My wife and I are going to hit this point later in the year and since I can't find a dedicated thread for it I thought why not get one started!
Disclaimer - this isn't financial advice! More my own thinking out loud hoping that between us we can work things out together
So one obvious option would be to re-mortgage to borrow more and pay off the loan, but here's my thinking on that... using an equity loan of £60k (which I think is close to what mine is worth now) the interest/fee on the loan will be as follows (and please correct me if I'm wrong)... I'll use the current RPI figure of 3.2% for this though that will change over the years, so pinch of salt n' all that:
Year 6 - 1.75% of the £60k, which works out £87.50 pcm (or £1050 total)
Then each year that rate goes up by RPI + 1% (so 4.2% of the 1.75%)
Year 7 - 1.82% or £91.18 pcm (£1092 total)
Year 8 - 1.90% or £95.00 pcm (£1140 total)
Year 9 - 1.98% or £98.99 pcm (£1188 total)
Year 10 - 2.06% or £103.15 pcm (£1236 total)
... and so on; creeping up a bit each year. So the two factors to consider whether or not it's worthwhile to remortgage instead are:
1. How much would that extra 20% equity on the mortgage cost me per month and how would it change the rate I can get?
2. What affect will house prices changing have?
You can get an idea of the first point - for example with my own mortgage I used a calculator on Nationwide's site and it tells me the cost of pulling the whole 20% into my mortgage would probably cost about £260 pcm extra for the 25 years I have remaining (at a similar rate to what I already am on), which initially seems like a bad deal compared to the figures above.... but of course the difference is that I'd actually be paying it off instead of just paying the fee, but paying back more in the end... this all gets a bit confusing...
As a rough estimate if you gloss over the fact that the payments aren't equal like this then in my example you could think of it as paying off 1/25 of the equity loan as part of the mortgage each year meaning you're clearing the equivalent of ~£2400 per year (but paying more than that, at £260 pcm that's £3120 per year - it is a loan after all!) to eventually pay £78000 for the £60000 loan across those 25 years... So in a way it's sort of like the interest/cost of each year (though again it isn't spread equally I know) is sort of like 3120 - 2400 or £720 per year... and when you put it that way it starts to seem like re-mortgaging to eat up the equity loan isn't such a bad idea...
When time allows I'll try and calculate the above more correctly as the way the repayments are skewed probably makes it less of a "saving" than it appears above, but if anybody has already done this feel free to post your results!
As for the house prices and rates that's a lot more up in the air... if the prices go up then you've gained if you re-mortgaged and will lose out if you didn't... if they go down then the opposite. Since nobody really knows maybe it's best to try and work out the best course assuming prices stay about the same - I'm not sure!
Anyway enough rambling from me... who else is thinking about this and what horrendous mistakes have I made above?
Some of my friends/colleagues are finding they are able to get themselves into £250k houses as couples on similar salaries to me.. Not sure where they are going to find that 20% when the time comes!