BOE Base = 2%

Dithering_Dad

smartn wrote: »

The rent is being funded directly by his capital + interest hence he ends the year with only 91.8K! It's still more than his 90K house and I'm only assuming he makes 2 percent interest!! I refer you to my original calculations :-


Option 1 - Buy 100K house, no rent to pay, house price drops 10 percent, left with an asset of 90k value.


Option 2 - Rent @ 850 per month. Invest money (even at a low 2%).

100K - 10.2k Rent + 2K interest earned = 91.8K therfore better off having rented (even with a very low interest rate on savings and ignoring maintenance).

Sorry, I missed the bit in your Option2 where he uses the capital to fund his rental. However, if he stayed in rented accomodation for 3 years during the crash..

Option 1:
Yr1 - £100k - 10% drop = £10k loss.
Yr2 - £90k - 10% drop = £9k loss.
Yr3 - £81k - 10% drop = £8.1k loss
House worth £72900 at end of yr 3.

Option 2:
Yr1 - £100k - £10200 rent = £89800 *2% = £1796 in interest.
Yr2 - £91596 - £10200 rent = £81396 *2% = £1627.92 in interest.
Yr3 - £83023.92 - £10200 rent = £72823.92 *2% = £1456.47 in interest

Buys in Yr 3: has £74280 to spend on house.

So buy living in rental accomodation, for 3 years, you save £1380.

To be honest, I'd rather be in my own home for 3 years than have a net saving of £1380

smartn

Dithering_Dad wrote: »

Sorry, I missed the bit in your Option2 where he uses the capital to fund his rental. However, if he stayed in rented accomodation for 3 years during the crash..

Option 1:
Yr1 - £100k - 10% drop = £10k loss.
Yr2 - £90k - 10% drop = £9k loss.
Yr3 - £81k - 10% drop = £8.1k loss
House worth £72900 at end of yr 3.

Option 2:
Yr1 - £100k - £10200 rent = £89800 *2% = £1796 in interest.
Yr2 - £91596 - £10200 rent = £81396 *2% = £1627.92 in interest.
Yr3 - £83023.92 - £10200 rent = £72823.92 *2% = £1456.47 in interest

Buys in Yr 3: has £74280 to spend on house.

So buy living in rental accomodation, for 3 years, you save £1380.

To be honest, I'd rather be in my own home for 3 years than have a net saving of £1380

So we are agreed that over one year if the price drops 10 percent you would be better of not buying immediately as was the original calculation. Also, I think in reality rent on a 100K house would be closer to £650 month and you should be able to return significantly more than 2% on savings both of which work massively in the renters favour.

I think for me though the interesting thing becomes if you can negotiate a good discount on the house ie 15 to 20% off asking price then I reckon the deal swings back in favour of buying not renting.

PasturesNew

Dithering_Dad wrote: »

Agree with your assessment here, but my figures were aimed primarily at PN, who is spending all of her STR interest and is losing out on any state benefits she would be entitled to without her huge STR pot. I would say that the time has arrived for PN to buy her home - the time for other STRs who aren't dipping into their STR pots is still in the future but they should keep doing calculations because eventually the right time will come for them too - not at the bottom of the market but at the point where it's more financially beneficial for them to buy than to keep renting.

I would say PN hasn't touched her STR or its interest and won't. PN is off to get a job. Not sure what sort, how much, where. Could be temping at £6/hour or proper contracting at £25-30/hour. Could be 2 miles away, or 200.

PN also doesn't know where a house will be needed.... a house is only needed when/where you have a job you are likely to keep, and in an area you want to stay in. This could be anywhere for 200 miles. Looking at Devon/Dorset now ... might move.

Dithering_Dad

smartn wrote: »

So we are agreed that over one year if the price drops 10 percent you would be better of not buying immediately as was the original calculation. Also, I think in reality rent on a 100K house would be closer to £650 month and you should be able to return significantly more than 2% on savings both of which work massively in the renters favour.

I think for me though the interesting thing becomes if you can negotiate a good discount on the house ie 15 to 20% off asking price then I reckon the deal swings back in favour of buying not renting.

Well on paper. If houses could be bought and sold so easily and without expense then it would be cost effective to STR just for a year. As you can see from my figures, the longer you do it for, the less cost effective it becomes.

If you did STR in real life, you would have factor the costs of selling and then buying again - Estate agents, solicitors, surveys, removal, mortgage arrangement fees, mortgage redemption fees, etc. etc.

Just like BTLing, I'm yet to be convinced that STRing is a viable financial option

Dithering_Dad

PasturesNew wrote: »

I would say PN hasn't touched her STR or its interest and won't. PN is off to get a job. Not sure what sort, how much, where. Could be temping at £6/hour or proper contracting at £25-30/hour. Could be 2 miles away, or 200.

PN also doesn't know where a house will be needed.... a house is only needed when/where you have a job you are likely to keep, and in an area you want to stay in. This could be anywhere for 200 miles. Looking at Devon/Dorset now ... might move.

lol, I assume by the wording that you didn't appreciate being discussed by us. Apologies for that PN.

However, I am sure you said you were living on your STR interest, and so your above statement is incorrect. I'd also suggest that as your interest rate falls you will soon have to start touching the STR capital too.

Obviously getting a job will mean that you won't need to touch the STR at all, but then if it was so easy you could have done that when you first STR'd

smartn

Dithering_Dad wrote: »

Well on paper. If houses could be bought and sold so easily and without expense then it would be cost effective to STR just for a year. As you can see from my figures, the longer you do it for, the less cost effective it becomes.

If you did STR in real life, you would have factor the costs of selling and then buying again - Estate agents, solicitors, surveys, removal, mortgage arrangement fees, mortgage redemption fees, etc. etc.

Just like BTLing, I'm yet to be convinced that STRing is a viable financial option

I agree with you that for STR to be worthwhile it needs an almighty crash and you need to time it right (way to late now) . I also agree with you about BTL at the moment not being viable, I reckon for BTL to work you need at least a yield of 9% and I cant find much around offering that at the moment.

Dithering_Dad

smartn wrote: »

I agree with you that for STR to be worthwhile it needs an almighty crash and you need to time it right (way to late now) . I also agree with you about BTL at the moment not being viable, I reckon for BTL to work you need at least a yield of 9% and I cant find much around offering that at the moment.

There must be a calculation that STRs can make where they log how much it costs to sell, how much they pay on rent (above or below what they would have paid on the interest only part of their mortgage), how much it would cost to re-buy, how much interest they make on their STR pot and then come up with the optimum 'buying in' point into the housing market.

I do this with shares - sometimes I bail out of shares that are falling/crashing and then when they level out I calculate how much they cost to sell, how much they will cost to buy and how much they will make by the time they get back to the value I sold at. If they don't show a profit after this calculation, I don't buy back in.

Really enjoyed our discussion though. Sorry about the confusion re:rental money coming from STR capital.

PasturesNew

Dithering_Dad wrote: »

Option 1:
Yr1 - £100k - 10% drop = £10k loss.
Yr2 - £90k - 10% drop = £9k loss.
Yr3 - £81k - 10% drop = £8.1k loss
House worth £72900 at end of yr 3.

Option 2:
Yr1 - £100k - £10200 rent = £89800 *2% = £1796 in interest.
Yr2 - £91596 - £10200 rent = £81396 *2% = £1627.92 in interest.
Yr3 - £83023.92 - £10200 rent = £72823.92 *2% = £1456.47 in interest

Buys in Yr 3: has £74280 to spend on house.

So buy living in rental accomodation, for 3 years, you save £1380.

With different figures though:

Option 1:
Yr1 - £100k - 20% drop = £20k loss.
Yr2 - £80k - 10% drop = £8k loss.
Yr3 - £72k - 10% drop = £7.2k loss
House worth £65,800 at end of yr 3.

Option 2:
Yr1 - £100k - £4200 rent = £89800 *4% = £3832 in interest.
Yr2 - £99632 - £4200 rent = £95432 *4% = £3817.28 in interest.
Yr3 - £99249 - £4200 rent = £95049 *4% = £3801.97 in interest

Buys in Yr 3: has £98851 to spend on house.

So by living in rental accomodation, for 3 years, you save £33k.

LillyJ

I don't really understand the economics behind it in detail, and it's bad news for most of my family who are savers, but great news for me.

I am on a tracker, at 0.69% above the base rate.
I am keeping my mortgage at a fixed amount per month, and so I am paying it off more quickly. Think I will be overpaying by about £250 a month or something like that following this cut, which is a great thing for me.

I just spoke to the Halifax and despite the 3% floor clause, they are cutting their trackers for existing customers by the full 1%.

Just glad I didn't listen to the people on here who thought that I was silly for getting a tracker. I imagine it's rather frustrating being on a long fix at present.

Dithering_Dad

PasturesNew wrote: »

With different figures though:

Option 1:
Yr1 - £100k - 20% drop = £20k loss.
Yr2 - £80k - 10% drop = £8k loss.
Yr3 - £72k - 10% drop = £7.2k loss
House worth £65,800 at end of yr 3.

Option 2:
Yr1 - £100k - £4200 rent = £89800 *4% = £3832 in interest.
Yr2 - £xxxxx - £4200 rent = £95432 *4% = £3817.28 in interest.
Yr3 - £xxxx - £4200 rent = £95049 *4% = £3801.97 in interest

Buys in Yr 3: has £98851 to spend on house.

So by living in rental accomodation, for 3 years, you save £33k.

With even different figures though:

Option 1:
Yr1 - £100k - 40% drop = £40k loss.
Yr2 - £40k - 10% drop = £4k loss.
Yr3 - £36k - 10% drop = £3.6k loss
House worth £32,400 at end of yr 3.

Option 2:
Yr1 - £100k - £1200 rent = £98800 *10% = £Loads in interest.
Yr2 - £99632 - £1200 rent = £95432 *10% = £Load in interest.
Yr3 - £99249 - £1200 rent = £95049 *10% = £Loads in interest

Buys in Yr 3: has £Fortune to spend on house.

So by living in rental accomodation, for 3 years, you save £FORTUNE.

The figures can be adjusted to prove any point, simply because they are not real-world figures. However, if someone is STRing then they have the real-world figures (including how much it cost to buy their house originally, then sell it and then buy another one, their rent, how much their mortgage was, etc, etc.) to do the calcs correctly.

I'd recommend that STRers did these calculations to make sure they don;t STR beyond the optimum point.