Some advice - long and a little complicated

trudie15

We have recently inherited some money from my late parents and are unsure what to do with it. Buy a buy to let property or put it into savings.

We currently have a 10 year fixed rate mortgage with 7 years remaining - 17 remaining on mortgage term, about £114,000 remaining, however to pay off would incur huge redemption penalties. So our intention is to start overpayments of £850 per month so that in 7 years the mortagage is paid off on the house that we live in.

The inheritance is 115,000 but after keeping some money aside to finish our house renovation and pay off some bills there will be £80,000 remaining.

We have seen a property on the market, and have been told by the ea that an offer of £75000 would be accepted and the rental income would be approx £450 per month - although tax to be paid at lower rate.

However if we put the money into a savings account the income would be poor but the initial invesrment would be safe.

So my question to you would be what would you do - buy a buy to let property outright and think of it as a long term investment where it doesn't matter if house prices drop in the imediate future or would you put the money into a savings account and be happy that the money is safe?

Any advice greatly received.

lyndasharp

Have you worked out how much you would be paying in interest on your mortgage over the 7 years it takes to repay, just to see if that works out more expensive than the redemption charge?

apywell

trudie15 wrote: »

We have recently inherited some money from my late parents and are unsure what to do with it. Buy a buy to let property or put it into savings.

We currently have a 10 year fixed rate mortgage with 7 years remaining - 17 remaining on mortgage term, about £114,000 remaining, however to pay off would incur huge redemption penalties. So our intention is to start overpayments of £850 per month so that in 7 years the mortagage is paid off on the house that we live in.

The inheritance is 115,000 but after keeping some money aside to finish our house renovation and pay off some bills there will be £80,000 remaining.

We have seen a property on the market, and have been told by the ea that an offer of £75000 would be accepted and the rental income would be approx £450 per month - although tax to be paid at lower rate.

However if we put the money into a savings account the income would be poor but the initial invesrment would be safe.

So my question to you would be what would you do - buy a buy to let property outright and think of it as a long term investment where it doesn't matter if house prices drop in the imediate future or would you put the money into a savings account and be happy that the money is safe?

Any advice greatly received.

Hi Trudie.......

Just thought I'd share with you that this is the same situation I'm in........ and on here looking for ideas too....

Beardmidget

If you're right, and it is indeed cheaper to keep paying your mortgage rather than pay the penalty charge (and by that I mean that the penalty charge must be higher than 7 years of interest), then I reckon the BTL property is the way to go, because at £450 pcm, you'd be making a return of 7.2% on the initial investment, which is significantly better than the return offered by any savings accounts which are not exposed to risk- i.e. you could make that from a bank but it would likely be a 'investments can go down as well as up' affair- which would be just as risky as property.

Now if it was me- I'd go BTL, and flip my mortgage onto that property so that I could offset my mortgage against the income on the BTL property and avoid a tax liability on that income, and live mortgage free myself. If, as i suspect, your mortgage is larger than the value of the property you are considering, then I would overpay on your mortgage to bring it within the range of payment within 4 years (say) and then only suffer the overpayment charge which is likely to be lower with 3 years remaining, rather than 7.

I still have my suspicions that it would be cheapest to pay the penalty charge now on your own property...

G_M

the rental income would be approx £450 per month

Is this gross or net? Does it allow for void periods (say 1 or 2 months per year with no tenant or defaulting tenants)? Does it allow for running costs (BTLs need maintenance, cleaning etc)? agents fees, insurance etc?

You need to research BTL thoroughly - start at Landlordzone and Residential Landlords Association etc

GDB2222

Out of interest, why BTL? Why not shares, unit trusts, etc etc etc? If you expect house prices to srop further, why buy a BTL now> Why not wait until prices are lower? The income you have quoted will be subject to loads and loads of expenses - check out BTL. It probably won't be nearly enough to compensate for falling house prices.

How much is the redemption penalty on the mortgage, and how does that change over time? Is there no penalty on overpayments?

zzzLazyDaisy

In my opinion paying off your mortgage should be a priority, because of the amount of interest that you have to pay, which is just dead money. Will you need to drip-feed the inheritance money into the mortgage to make the overpayments, or will the overpayments come from other income?

If you need to keep the inheritance free to make the overpayments, have a look at the Newcastle BS 5 year account, which is paying 5% fixed for 5 years. The good thing is that you can withdraw money and even close the account penalty free on 90 days' notice, so you are not locked in. See this thread....

http://forums.moneysavingexpert.com/showthread.html?t=1785113

So your money would be risk free, and every three months you could take out the next three months' overpayment money, while the rest earns a reasonable rate of interest.