Only England available for now.
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Deposit
£15,000
Equity Loan
£30,000
Mortgage
£255,000
Property Value
£300,000

If you have enough deposit for a mortgage, should you still get an equity loan?

You might be able to get a better mortgage rate if your loan-to-value is lower, but the after the initial five years, and potential rise in property value (which will ) should be taken into consideration.

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Scenario 1:

Mortgage with 5% deposit.

Mortgage interest rate: 3%

Monthly mortgage payment: £1,423

After 5 years
Mortgage interest paid:£39,781
Equity loan cost:£0
Equity loan change:+£0
Total:£39,781
Scenario 2:

Mortgage with 15% deposit (10% from equity loan) and cost of equity loan.

Mortgage interest rate: 2%

Monthly mortgage payment: £1,272

After 5 years
Mortgage interest paid:£23,501
Equity loan cost:£60
Equity loan change:+£3,000
Total:£23,561

Note:

The calculations are made under the assumption that the inflation rate and mortgage rate remain constant over 5 years. Whereas, in reality they are likely to change year on year and when you remortgage.

Therefore, it is recommended that you try to make a best-guess at the average rates over the 5 year period.

No one can predict the future, and your guess is likely as good as mine.

Equity Loan Interest

Interest is only charged on the original amount you borrow and only if you don't repay it within five years.

In year six, the interest rate will be 1.75%. Every year after that, it increases in line with inflation plus 2 percentage points.

Inflation is tracked by the Consumer Price Index (CPI). If the CPI is at a constant 1%, when you add 2 percentage points to it, the underlying interest rate will increase by 3% each year.

That's 3% of 1.75% which is 0.0525%. Added to 1.75% it gives you a new interest rate of 1.8025%.

Inflation rate: %
YearInterest rateAnnual cost
10.00%£12
20.00%£12
30.00%£12
40.00%£12
50.00%£12
61.75%£537
71.79%£548
81.82%£558
91.86%£569
101.90%£581
111.93%£592
121.97%£604
132.01%£615
142.05%£628
152.09%£640
162.14%£653
172.18%£665
182.22%£679
192.27%£692
202.31%£706
212.36%£720
222.41%£734
232.45%£748
242.50%£763
252.55%£778

How the "equity" part works

The amount you pay back depends on the value of the property at the time.

If the property increases in value, then your loan amount will increase too.

On the other hand, if the property value decreases, then you will pay back less than what you borrowed.

Property value change %Loan valueDifference
-10%£27,000+£26,700
-5%£28,500+£28,200
0%£30,000+£29,700
5%£31,500+£31,200
10%£33,000+£32,700