Advice on a Property! Stuck with it?

[marledge]

Hi All,

So after a recent company sale I was fortunate enough to have a fairly good sum thats enough to invest and enjoy, but not enough to live the highlife all through retirement (I'm 47 so probably a bit early for that).

Anyway, I lived in a 3.5 bed circa 500k property with a fixed mortgage of around 1.8pct (until 2027). It needed a bit of work doing, so we decided to buy another property (850k without mortgage), move out and get the work done on the original house before selling it and then be forced into paying an early settlement fee. It will probably cost me 12k or so to get rid and take 180k or so equity after paying it all off. So I'll be up but not ideal.

But, with such a low interest rate on the original property am i missing a trick here just for an easy life? The mortgage payment is quite high as we were personally quite highly geared until the company sold, at about 2.4k per month. If I rented it I'd probably get 1.5k pcm, maybe a little more.

The way I am thinking is probably too simple - either a) sell it and take the hit on the repayment or b) keep it, rent it, hope the housing market picks up to increase value and find a tenant to at least take away some of the mortgage cost (after tax) and bills

I dont desperately need the equity as have quite a bit invested that I could get at if i needed to, but I would just be interested to know if any of you experienced lot have a no brainer which I am quite happy to hear as a novice who has always been extremely cautious.

Sorry to prattle on

[GoSeigen]

Hi All,

So after a recent company sale I was fortunate enough to have a fairly good sum thats enough to invest and enjoy, but not enough to live the highlife all through retirement (I'm 47 so probably a bit early for that).

Anyway, I lived in a 3.5 bed circa 500k property with a fixed mortgage of around 1.8pct (until 2027). It needed a bit of work doing, so we decided to buy another property (850k without mortgage), move out and get the work done on the original house before selling it and then be forced into paying an early settlement fee. It will probably cost me 12k or so to get rid and take 180k or so equity after paying it all off. So I'll be up but not ideal.

But, with such a low interest rate on the original property am i missing a trick here just for an easy life? The mortgage payment is quite high as we were personally quite highly geared until the company sold, at about 2.4k per month. If I rented it I'd probably get 1.5k pcm, maybe a little more.

The way I am thinking is probably too simple - either a) sell it and take the hit on the repayment or b) keep it, rent it, hope the housing market picks up to increase value and find a tenant to at least take away some of the mortgage cost (after tax) and bills

I dont desperately need the equity as have quite a bit invested that I could get at if i needed to, but I would just be interested to know if any of you experienced lot have a no brainer which I am quite happy to hear as a novice who has always been extremely cautious.

Sorry to prattle on

Before you can get sensible answers I think this bit will need to be cleared up:

"The mortgage payment is quite high as we were personally quite highly geared until the company sold, at about 2.4k per month. If I rented it I'd probably get 1.5k pcm, maybe a little more."

Can you state precisely 1. the current value of the vacant property; 2. the total outstanding mortgage on that property; 3. whether it's a standard repayment mortgage; 4. the number of years term left on the mortgage.

From the figure you gave so far it looks like you'd make a loss if you rented the house even on a mortgage interest rate of 1.8% which implies an extraordinarily low gross rental yield. I can only guess the £2.4k per month quoted includes a sizeable amortization payment.

GS
{EDIT: typos. And welcome to LemonFool!}

[marledge]

Hi, thanks for the reply.

The value of the property is approx 500k with around 300k mortgage remaining over a 12 year term.

I'll never make a profit on the rental revenue unless I change the mortgage type but from an investment perspective at a low interest rate, it could make sense to take that monthly loss, pay the mortgage and hope the market takes a turn while the equity grows?

Or I change the mortgage, pay the interest and rely purely on the market for gains

Or I sell, take the equity and invest it elsewhere but pay the 12k or so penalty on the fixed low interest rate

Sorry, I've never rented a property out previously. We currently have friends living in it while they have their he renovated, covering our bills but not the mortgage while we decide what to do.

[Gerry557]

I think this is multi complex equation.

Do you want to be a BTL landlord?

If you do fine, there has been a number of changes working against landlords. Tax and legislation changes that make it much harder. Do you want the hassle. Can you do repairs yourself etc.

The fixed rate is low so I would be tempted to keep it if I could and it fits in with personal circumstances.

It sounds like you have a repayment mortgage hence the large monthly payments. Could this be made interest only. This might be better as a BTL option if you went that route. You could invest the difference for hopefully a better return and get it in tax free wrapper. You would have to plan for the cliff edge mortgage repayment.

The good news as is, would be that each month you are paying off some of your house. Assuming you survive the 12 years the rent becomes all profit. Of course rents might go up over time etc which might ease the profit shortfall.

There is the possibility that house prices might fall. Can you deal with that scenario. How do you feel being leveraged. Many say they preferred paying off mortgages even if it made them slightly worse off.

What would you do with a change in circumstances or lost your job etc.

Taking the equity might help with cashflow, lower your leverage and give you piece of mind. I would assume that you could invest that sum or add it to pensions etc to aid your future.

I have moved away from BTL as the risk v reward move much more to the risk side. Bad tenants or those that won't pay are increasing and expectations become never ending. CGT allowance are being reduced and it looks like you will need IHT planning. So I would probably try and dissuade you but I know others who still rent properties and a shortage might increase rents at a faster rate.

Also look at how your personal tax might be affected. Will it push you over tax brackets.

[Adamski]

Did you pay additional stamp duty of £850k x 3% = £25.5k. You'll get that back after a few weeks once sell the first property, as long as claim straight after the sale. Could factor that in to the equation.

I decided not to do btl but have an investment portfolio which looks after itself, so advantage is no work involved, but disadvantage is psychology of investing - to be patient and long-term in thinking, during (frequent) market corrections/crashes.

[GoSeigen]

Hi, thanks for the reply.

The value of the property is approx 500k with around 300k mortgage remaining over a 12 year term.

I'll never make a profit on the rental revenue unless I change the mortgage type but from an investment perspective at a low interest rate, it could make sense to take that monthly loss, pay the mortgage and hope the market takes a turn while the equity grows?

Only £450 of your monthly payment is interest, the rest is capital amortisation payments. The remaining £200k equity you hold carries an opportunity cost at the marginal rate you believe you could earn from an alternative investment. It is likely, at least initially, that you will be making a reasonable profit on renting the property. If I were you, and assuming your interest rate is fixed until the end of the 12 years, I would retain the property and keep the borrowed £150k (average over remaining lifetime of the loan, or more if you are able to move to interest-only) invested in the market. The main assumption here is that you don't think prices are likely to crash significantly by the time you need/want to sell the property. IOW I think selling now would be a call on the market's future direction.

Or I change the mortgage, pay the interest and rely purely on the market for gains

Or I sell, take the equity and invest it elsewhere but pay the 12k or so penalty on the fixed low interest rate

Sorry, I've never rented a property out previously. We currently have friends living in it while they have their he renovated, covering our bills but not the mortgage while we decide what to do.

You also have substantial tax advantages if you retain the property and rent it, versus buying a new one and renting it out because it has previously been your principal residence.

Two very important points to be careful of though:
-do the conditions of your mortgage permit you to rent the property? Don't be tempted do it on the quiet in breach of the conditions, far better to have the consent of the lender. Given your strong financial situation you might be able to negotiate special consent.
-is the property in a reasonable condition to market without further large expense? You might want to get a formal evaluation before making a decision.

GS

[makemakeolaf]

Wow, congrats on that recent company sale, that's awesome! Sounds like you've got a nice chunk of change to play with.

I totally get what you mean about not wanting to live the highlife just yet - you're only 47 after all! It's smart to think about investing and enjoying your money without going overboard.

It's cool that you're thinking about buying another property and fixing up your original house before selling it. It's always good to invest in real estate, especially if you can make a profit.

As for your original property, I totally see where you're coming from with the low interest rate and the high mortgage payment. It's a tough call, but renting it out could definitely be a good option. It's a nice way to generate some extra income, and if the housing market picks up, you could make even more money down the line.

At the end of the day, there's no right or wrong answer - it's all about what feels right for you. But as a novice, it's great that you're thinking things through and being cautious. Better safe than sorry, right?

[marledge]

Thanks all.

Yeah I've got the stamp duty rebate plugged into one of my spreadsheet options

I hear everything you guys say and it all makes sense, I think what I am struggling with is the desire to be a landlord to be honest!! Even if there is a good reason for keeping it and leaving it long term in the market.

I still have some thinking to do as all my other investments are in bonds/pensions/ISA/other scheme playing the long game. Maybe a property (albeit managing a tenant) would add that extra diversity!

Nice to have the choice I guess and I am appreciative of this.

[Lanark]

The traditional Talmud advice is to keep a third of your money in land/real-estate.

So if these two houses are about 1/3 then keep them.

[dealtn]

So after a recent company sale I was fortunate enough to have a fairly good sum thats enough to invest and enjoy, but not enough to live the highlife all through retirement (I'm 47 so probably a bit early for that).

Anyway, I lived in a 3.5 bed circa 500k property with a fixed mortgage of around 1.8pct (until 2027). It needed a bit of work doing, so we decided to buy another property (850k without mortgage), move out and get the work done on the original house before selling it and then be forced into paying an early settlement fee. It will probably cost me 12k or so to get rid and take 180k or so equity after paying it all off. So I'll be up but not ideal.

But, with such a low interest rate on the original property am i missing a trick here just for an easy life? The mortgage payment is quite high as we were personally quite highly geared until the company sold, at about 2.4k per month. If I rented it I'd probably get 1.5k pcm, maybe a little more.

The way I am thinking is probably too simple - either a) sell it and take the hit on the repayment or b) keep it, rent it, hope the housing market picks up to increase value and find a tenant to at least take away some of the mortgage cost (after tax) and bills

I dont desperately need the equity as have quite a bit invested that I could get at if i needed to, but I would just be interested to know if any of you experienced lot have a no brainer which I am quite happy to hear as a novice who has always been extremely cautious.

Sounds like you don't want to be a landlord, so don't.

Can you port the existing mortgage to your new (unmortgaged) property. Keeps the low interest rate and no early repayment fee. Then by selling the (old) house you can invest the proceeds, ideally for capital gains, but with an income in excess of the mortgage rate.