News Column

Should we use savings to pay off part of our Help to Buy loan?

August 5, 2014

Virginia Wallis, theguardian.com



Q My husband and I purchased a new-build house for 300,000 in January 2014, with a 40,000 deposit, 60,000 Help to Buy equity loan and a 200,000 mortgage with a two-year fixed rate.

Since then, we have been lucky enough to accrue somewhere close to 20,000 in savings. This is partly due to an inheritance and partly due to us putting lots away from our monthly salaries.

With today's low interest rates on savings, there's no point keeping this in the bank. So the question is: should we pay off some of the Help to Buy loan (I understand this would entail revaluing the house), or should we use it to pay off some of our mortgage? Or are we best off waiting until it's time to remortgage? And given that we're able to put so much money towards our savings, should we start increasing our monthly mortgage payments? RE

A You are right that interest rates on savings accounts are so low that,

on the face of it, using cash to pay off debt is a no-brainer because the interest you earn on savings is less than the interest you pay on a loan. However, having cash to call on in emergencies such as losing a job or having a large bill to pay is also a good idea. So before paying off any debt, I suggest that you each keep the equivalent of between three and six months' salary in a savings account. If you haven't used up this tax year's 15,000 Isa allowance, I suggest you put your savings in a cash Isa, so at least you don't have to pay tax on the interest earned.

If that leaves you with enough cash to pay into either your equity loan or your mortgage, which one you pay depends on a number of factors. Because you have a fixed-rate mortgage, I suspect that making any kind of early repayment before the two-year period is up will incur an early repayment fee. So you need to work out whether the savings you would make on your monthly mortgage repayment by paying off a lump of your mortgage would exceed any fee you may face. If it does, then paying off part of your mortgage would seem to be the way to go.

If it doesn't, you could pay off part of your equity loan. However, this will be possible only if you have enough money to be able to pay at least 10% of your house's prevailing value as determined by an independent valuation which you will have to pay for. You will also have to pay an administrative fee charged by your Post Sales Homebuy Agent, who will be able to tell you how much this will be.

Even if you can afford to pay off enough of your equity loan, it could be argued that because it doesn't cost you anything for the first five years, you should wait until the end of year five to pay any of it off. If you assume that house prices are going to remain static, there could be something in that. But the argument is flawed if you assume house prices will continue to rise, as the minimum amount you are required to pay will also go up. So if, say, your house was worth 400,000 in five years' time, the minimum you could repay would be 40,000 compared with 30,000 now (assuming it's still worth 300,000 now).

As to whether you should increase your mortgage repayments, if you can do so without penalty, it would certainly make sense.

Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com


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Source: Guardian Web


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