Should we pay back our Help to Buy loan or focus on our mortgage and other debts first? David Hollingworth replies

I am in a dilemma about my Help to Buy loan and am hoping to get expert advice on the best choice available.

We used the Help to Buy loan to buy our house in 2020, which is around £80,000. We want to repay the Help to Buy loan but wonder if it would be better to keep it and do one of the following:

1. Pay our mortgage to save interest;

2. Repay a personal loan of around £30,000.

As much as we'd love to get rid of the Help to Buy home loan, it's difficult to decide what the best option would be.

We still have three years before the Help to Buy rate kicks in, but wouldn't it be better to pay a lower interest rate than the mortgage rate?

So there is a conflict between which one you have to pay back. Could you please share your thoughts on this?

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.

This is especially true when it comes to paying off a Help to Buy share loan, due to the inherent unknowns, because of the way it works.

It can be helpful to take things back to basics to help you make a decision, as much will ultimately depend on your priorities and needs, now and in the future.

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Help with buying mechanics

The Help to Buy share loan was available for new build homes until the scheme ended in England earlier this year (Help to Buy Wales is still available).

It aimed to support borrowers from the perspective of only requiring a small 5 percent deposit, plus promoting affordability, by providing an equity loan of up to 20 percent of the purchase price, or 40 percent in London.

The rest was financed through a standard mortgage.

As you mentioned, the equity loan is interest-free for the first five years. Thereafter, a surcharge will be charged, initially at 1.75 percent in the sixth year and then increased each year by an amount linked to inflation.

– Check how much you can borrow with our mortgage calculator

Help to Buy offered potential homeowners the opportunity to make a lower deposit, because the government loan increases their savings pot

At first glance, that rate now seems low, given the rapid rise in mortgage rates in recent years.

However, interest is not the only thing to consider when considering the final costs of the equity loan.

When repaying the equity loan, the outstanding balance is based on the then market value of the property.

If you received 20 percent of the original purchase price, you must repay 20 percent of the then value. So if the property has increased in value, so has the amount you have to repay.

> What next with the mortgage interest and should you solve this?

No like-for-like rate comparison

For example, if you bought a property for €400,000 with a 20 percent loan of €80,000, but the property is now worth, say, €450,000, then the balance to be repaid will be €90,000.

It is possible to pay off the share loan in installments of 10 percent of the value of the property, but this will incur costs in obtaining an agreed valuation and administration costs.

Because the repayable amount depends on real estate prices, it is impossible to know exactly what delaying the repayment of the equity loan could mean for the total costs.

If the value were to fall over time, so would the share loan, but if prices rise, it means the repayable amount will have also risen.

Since you can't guess what will or won't happen to prices, it is not possible to be sure whether paying off the equity loan or the mortgage/other debts will be the better way forward as it is not a comparison that look alike.

It may currently appear that home prices will stagnate or even drop a bit, which may give you time to consider your options, but there are no guarantees.

Pay off the most expensive debts first

If you prefer to pay off other debts instead of paying off the equity loan, it's important to consider whether you have other, more expensive obligations, such as the loan you mention or credit cards.

It's also important to make sure you have cash that you can easily access if needed, rather than using all your savings to pay back the mortgage or equity loan.

– How to remortgage your home, find the best deal and switch lenders

The Help to Buy share loan was available for new-build homes until the scheme ended in England earlier this year

You bought when interest rates were lower, so if you're stuck, you may also want to consider whether you can earn a higher after-tax savings rate than you would save by overpaying your mortgage.

Without a black and white answer, you may decide to balance your available resources between overpaying the mortgage or loan and setting aside a portion for 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 need to review your mortgage rate and ensure monthly payments remain affordable.

That doesn't necessarily close the door to repaying the equity loan in the future, whether you use savings or can still tap into your equity by taking out a new mortgage if necessary.