FTB looking to step onto the ladder in unusual maner

ET1976

pete96 wrote: »

Can anyone with a financial brain try working out and producing and example 4-5 year forcast of two scenarios A) Staying put renting with my OTHER brother and putting £300/month into an ISA and The route of part owning my OLDEST brother's house with him and wanting to sell after 4 years.

OK, here's my layman's calculation on a 5-year projection, based on assumptions (hopefully these are reasonably realistic).

Savings:
- Assume an ISA rate of 3%
- Starting with 4.5k
- Saving £300/month
- After 5 years you will have a little under £25,000 in your savings.

Mortgage:
- Assume a 20 year repayment mortgage (as brother already owns the house, assuming less than the standard 25 year term)
- Assume £130,000 borrowed (house value = 190k, equity (brother's existing 35k plus the extra 20k you say he will put up as deposit plus your 4.5k) = approx 60k)
- Assume a fixed rate of 5% for 5 years
- Assume 50/50 mortgage payments
- After 5 years there will be approx £108k left on the mortgage
- Over the 5 years you will each have paid approx £9500 off the capital
- Therefore in terms of capital your brother will have put in approx 64.5k and you will have put in approx 14k, which makes your contributions 82% and 18% respectively

This means that if you were to sell the house at this point you would be entitled to 18% of the profit. To match what you would have saved over this period (25k), you need the house to sell for approx 247k (247 - 108 owed = profit of 139k, 18% of 139k is approx 25k). So taking into account fees for selling (and rounding the numbers), you would need the house to rise from 190k to 250k over the next five years to break even with savings.

There may be flaws in my calculations, and there's no saying what mortgage or ISA rate you would actually get, but hopefully it's a (not completely inaccurate) ballpark illustration.

kmmr

Hi pete,

sorry for delay in responding, been quite busy!

The % holding of the property is pretty complicated. I wouldn't rely on a mortgage advisor to help you work out who owns what - get a solicitor to put in writing who own what, and how it will vary over time.

You will start off with very little equity, but if you are paying 50/50 then your % holding will slowly raise over time. It's something that a mortgage advisor won't be able to help you with.

If I understand it correctly you have a £120k mortgage, that you will increase by £30kish. Then you pay £35k to the Ex, and you and your brother then own the property. So, you have equity of £5k and your brother has equity of £35k. But when you start to repay, your % will rise slowly. It is complicated, and you really need to get some good advice. Just so you can work out who owns what when you want to sell - even if things go perfectly as planned.

Please please please don't underestimate how much relationships can change over time. And there is nothing like money to ruin otherwise excellent family relationships. I speak from bitter bitter experience. And no amount of writing things down will change that, you need to realise you will probably have to do things you don't like, and accept that as a cost of the relationship. I have, in the end, basically given away all the gain on a house, as I realised it was that, or lose the relationship with my brother and his family. You will never agree on the right time to sell the place, or the right price etc... so you will need to be flexible.

I appreciate you want to buy, but the statement by Running Horse reflects my experience too. I have never known buying with a non-spouse to work out. Not saying it never does, just in my experience it never has!! The changes you go through (marriage, kids, work/unemployment etc) in 5 years are just too much, and its hard when you have to take someone else's situation into account all the time. Resentment has a great way of building when money is involved.

But, to be clear, I am not saying don't do it. I am saying if you go ahead, go in with open cynical eyes.

I'll go through some of the answers you gave:
Valuation: Nationwide valuation is ok I guess. But you should get a couple of valuations if you can. Once you get a valuation, ensure you consider how much she would really get if she sold. If the value is £190k, selling costs would have been about £4k (guesstimate, depends on estate agent fees, how much work the house may need to get it to an acceptable level), so she would have only gotten £33k. These are costs you will have to absorb when you sell, so why should she get the benefit.

Or just take the valuation and knock of 15%, as most people will offer much lower anyway - certainly if they follow the advice on this forum! Or, get ESurv to do it... they value sooo low (but that is another story)

Mortgage: If the mortgage is on 2.5% (or will be after the fix period) just leave it on that. You will never get a deal as good as that again! You can tell because Nationwide will do anything to get you off that. They may offer nice fix rates for a year, but you will find that once you go off them, you revert to a higher variable rate. There is security in a fixed rate, but at the moment I believe that that 2.5% rate is the best game in town.

So, think about all these things. If house prices go down, you could easily lose all your equity. Or they could go up and you would be quids in. Or your brother may want to buy you out at some lower price as he needs the house for his family, and he guilts you into it. Or you may. Or you may fall head over heels in love, get married, and find you can't buy a house as the other one won't sell, or your brother doesn't want to sell. Or it could go perfectly and you love living together, and are able to be flexible with each other's life changes...

Long post - I am boring myself with it - so I will stop!

pete96

well, thanks to all who have offered some constructive advice, it gave me alot to think about over the weekend. I have decided NOT to go ahead with it based on the advice given, and the comparison of the two situations over the next 5 years.

So another big thanks for preventing another mistake. Time to carry on saving hard, might even up my ISA payments given the recent rise of tax free savings allowence.

SusieT

Well done for thinking it through and deciding not to proceed, its very hard when you really want something to see that it is not a good move and accept that you need to wait longer.
If you save hard and put everything possible away you will be in a much better position when you do get your own place.

sonastin

pete96 wrote: »

1. Its like shared ownership, it could bring in problems if one of you needs money and other doesnt want to move/sell... (never mix money and family!) I dont see what the difference is whether it's my brother, girlfriend or wife? Please explain

The difference as I see it is that when you no longer want to live with a girlfriend/wife, its probably because you no longer want her as a girlfriend/wife and no longer want her in your life at all. When you no longer want to live with your brother, you probably want to keep him as a brother and want to stay on good terms with him so knowing how the financial relationship will end without ruining the whole relationship is important.

A lot of people posting here have made assumptions about the relationship between you and your brothers and only you can really understand what the issues are likely to be.

BUT from a financial point of view, buying now doesn't make sense for you, and selling now would allow your brother to clear his debts so I think you've made the right decision.

Hope it works out well for you all...

Sus1e

Just a point for anyone considering buying a house with a non-spouse - There is a legal document called a "declaration of trust" which details who put what into the house in terms of investment, under what circumstances it can be sold/modified/re-mortgaged etc.
I had one done 6 years ago and it cost £75

£75 for peace of mind, and for sorting things out while on good terms, is money well spent in my opinion and I would recommend everyone consider getting one drawn up before investing in something this big.