To Buy Outright Or Mortgage?

niceday

Good Afternoon MSEs

I'm in the enviable position of being able to afford to buy a property. Is it better to do so, given the present state of the housing market and the economic climate, or put down a minimal deposit and take out a mortgage? I've been advised to do the latter in case of redundancy as the fact that I would own my own home would reduce any income support I may receive.

Many thanks

niceday

Heth_2

I would buy outright (assuming you aren't likely to be made redundant really soon). You won't be paying rent or have a mortgage so you can save up a decent pot in case you were made redundant. I don't know much about income support but if you take out a mortgage with minimum deposit won't your savings (presumably large if you can afford to buy outright) affect it?

theJudge

If you've got more than £6000 in savings, you won't be eligible for income support. Support for your mortgage payments only kick in after 9 months.

Essentially, you have to decide where your money will work for you best. An example is shown below

Currently, the property market is going up by about 3%, whereas shares went up by around 20% in the last year. So, if you have £200,000 and pay for a house outright with all of your savings, your assets will be worth £206,000 next year. If you put £100,000 in to a house and take out a £100,000 mortgage at 5%, and put your other £100,000 in Shares, then in a years time if shares go up by 20%, your assets would be worth £215,000

The problem with this example is that it requires you to be able to predict the future. None of us can do that with any accuracy.

Taking out a mortgage in a fast moving property market is a great way to make money as you've got the advantage of the gearing effect e.g. if you take out a £180,000 mortgage on a £200,000 house and property's moving by 20% and your mortgage is 5% then you'd have £211,000 in assets after year 1. This is an increase of 100*(11000/20000)% in your original investment.

Sadly, as a homeowner, the more money that you have the less gearing that you can achieve, since lenders only lend based on multiples of your salary. e.g. if you've got £500,000 already and have a £50,000 job, a lender will probably only lend you 3.5*£50,000 = £175,000. However, if you get in to the buy-to-let market, lenders will offer you more money on multiple properties so long as you start to build up a history of being able to pay back the money.

Claire_DC

Personally i would say to buy outright, it saves money in the long run as you won't be paying ridiculous amounts of unnecessary interest on the amount.

Having a nest egg is always going to be nice, but so long as you have a roof over your head that you don't need to worry about having to pay for, you can save a little each month that would otherwise go towards mortgage repayments and build up a nest egg once again.. with the knowledge that the money you have invested in your house is a pretty safe bet investment wise.

Eyesparky

Another option would be to buy the property using an offset mortgage facility. This would allow you to offset all or part of the mortgage and mitigate against interest payments. If used sensibly this has the possibility of giving you the best of both worlds i.e. you could choose to offset the entire mortgage and pay no interest whilst still having access to the liquidity of an agreed mortgage facility should an investment with better returns arise.

The interest rates can be higher than some other mortgage types for the money you draw down, so if you chose to use the facility for a long term investment it would be wise to do your sums at this point and see if there is a better mortgage for your altered circumstances.

micheleen

I sold up in the South-East and moved to the North-West where I could buy outright, so my opinion is probably a little biased
It's a good feeling though having no mortgage or rent to pay