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.
Mortgage with 5% deposit.
Mortgage interest rate: 3%
Monthly mortgage payment: £1,423
| Mortgage interest paid: | £39,781 |
|---|---|
| Equity loan cost: | £0 |
| Equity loan change: | +£0 |
| Total: | £39,781 |
Mortgage with 15% deposit (10% from equity loan) and cost of equity loan.
Mortgage interest rate: 2%
Monthly mortgage payment: £1,272
| 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%.
| Year | Interest rate | Annual cost |
|---|---|---|
| 1 | 0.00% | £12 |
| 2 | 0.00% | £12 |
| 3 | 0.00% | £12 |
| 4 | 0.00% | £12 |
| 5 | 0.00% | £12 |
| 6 | 1.75% | £537 |
| 7 | 1.79% | £548 |
| 8 | 1.82% | £558 |
| 9 | 1.86% | £569 |
| 10 | 1.90% | £581 |
| 11 | 1.93% | £592 |
| 12 | 1.97% | £604 |
| 13 | 2.01% | £615 |
| 14 | 2.05% | £628 |
| 15 | 2.09% | £640 |
| 16 | 2.14% | £653 |
| 17 | 2.18% | £665 |
| 18 | 2.22% | £679 |
| 19 | 2.27% | £692 |
| 20 | 2.31% | £706 |
| 21 | 2.36% | £720 |
| 22 | 2.41% | £734 |
| 23 | 2.45% | £748 |
| 24 | 2.50% | £763 |
| 25 | 2.55% | £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 value | Difference |
|---|---|---|
| -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 |
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