A young family considers the Help to Buy: Equity Loan programme to take an equity loan of 40,000, make a deposit of 20,000 and borrow the remaining 140,000 using the ARM( will be described later). The family plans to refinance the mortgage loan once the 2-year ARM teaser rate period ends and to repay the equity loan. The home value appreciation for the next two years is expected to be 2% per annum. Based in the current example, discuss whether the family should use the equity loan scheme or use the ARM alternative which is specified as followings:

A fully amortizing adjustable-rate mortgage (ARM) for 30 years with a teaser rate of 1.5% for the first two years. For a house worth 200,000, it requires a deposit of 20,000 and the rest can be financed by a mortgage loan of 180,000. It is expected that the standard variable rate that will apply for this mortgage loan in two years is 3.5%.