Should our savings go towards the help-to-buy loan or overpaying a new mortgage?

Q My husband and I purchased a property in May 2018 for £600,000 using the London help-to-buy scheme. We took out the maximum help-to-buy loan of £240,000 and put in a £30,000 deposit. At the time we had a very reasonable five-year fixed-rate mortgage with an interest rate of 2.48% but are aware that – as we are nearing the end of the five-year period – we are unlikely to get such a good deal when we remortgage.

We are fortunate enough to have saved £100,000 between us and are wondering about the best strategy to keep our costs low when we remortgage, and how to split this amount between the mortgage and the help-to-buy loan repayment. Currently we are overpaying our mortgage by about £200 a month, although we can repay up to £30,000 this year without penalty.

Given that mortgage rates are so high, and that the help-to-buy interest starts at only 1.75% in the first year, I have suggested to my husband that we overpay as much of our current mortgage as we can now (£30,000), and either repay some of the help-to-buy loan (the minimum would be about £60,000 given current flat values) or put this money into overpaying the new mortgage.

Another option would be to wrap the help-to-buy loan up in a new mortgage but this doesn’t seem wise considering current interest rates. Our one hesitation is that there seem to be far fewer mortgage options if you still have an outstanding help-to-buy loan.

[Note added 5 December 2022: Calculations in this reply are being reviewed]

A I’m going to suggest to your husband that you should repay as much of the help-to-buy loan as possible. You are right that in year six of a help-to-buy loan the interest rate charged is a low 1.75% (years one to five are interest free) but from year seven, the interest rate charged on a help-to-buy loan is consumer prices index (CPI) plus two (as at April in any given year). As the April 2022 CPI rate is 7.8%, that would mean interest being charged at 9.8% from year seven, which makes the 5% to 5.5% you’d have to pay on a new five-year fixed-rate mortgage look a bargain.

The other reason for repaying the help-to-buy loan rather than the mortgage is that if house prices continue to rise, so will the amount you owe. Repayments are based on your equity loan percentage and the market value of your home at the time you want to make the repayment. So in your case, the amount you have to repay is 40% of whatever your property is worth now, which will be more than the amount you originally borrowed if prices have risen but less if they have fallen. The amount you owe on your mortgage just continues to go down.

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