First time buyer - To mortgage, or not to mortgage.

KingsGambit_2

Hi all, I'm new to these forums although I've found myself here in the past when web searches have pointed to useful threads on various subjects. I've been speaking to friends and family and wanted to get some tips or advice from those more knowledgable than I am on matters of mortgages and home buying.

I'm lucky to be in a unique situation. I have a large amount of capital to put down on my first home (gift from family and several years of saving!) and am most-way through the process of agreeing a mortgage. I've been house hunting for several months and of the 10-15 or so properties I've seen, I'm very tempted to put an offer on one or two of those. My original plan was to use the capital and take out the biggest/best mortgage I can (probably lifetime tracker from first direct @ 1.89% + BR) to buy around the £300-£325k area. But a conversation with a friend last weekend has left me confused and unsure as he presented me with an option I hadn't considered before.

He suggested that instead of buying a home with a mortgage, in which I would live and pay off each month from my salary, I instead buy a smaller place outright without any sort of mortage on it. Then, I could get a mortgage secured against this property to purchase a 2nd, smaller place outright which I can then let out. If such a thing is possible, it strikes me as being a great idea insofar as it would be a great financial investment that would reward me well 20 or so years from now. Instead of paying out £133k over 25 years for a £100k mortage from my salary, I might instead make £200k or more from rent in that time (assuming roughly £1k p/m rent and tennants paying rent 2/3rds of the time).

How would such a thing work? Is it as simple as I suggest above? I'm not referring to the letting/landlord/tenancy side of things, I realise that is a wholly different beast which I will tackle if and when I need to. But with regard to the broader idea of buying outright, securing a loan against the property to buy another for letting, is that feasible? I have this gut feeling that this may be one of those life decisions that will be a big regret 20 years from now if I make the wrong one and this is my singular opportunity to choose wisely. :cool:

As background, I am single and earning approx. £25k p/a at present. I was going to take a mortgage of £100-110k (with monthly payments around the £500 mark) and have about £200-240k capital. Hopefully, I will meet a nice girl in the future and with a higher joint income (and hopefully increased salary ) my needs will change. As I see it, assuming the above is realistic, achieveable and sound, my current choices are:

- Go ahead as I had originally planned. Buy a ~£300k house with a ~£100k mortgage, pay ~£500 p/m and live in a nice home. ~£9k stamp duty.
- Can always sell above later (if I meet someone for example) and use part of capital as deposit for joint home, pay off mortgage and buy smaller place outright (or with buy to let mortgage) for letting and joint home for living in.
- Alternatively, buy ~£230-260k (haggle on price obviously) home outright to live in. No stamp duty. Secure mortgage against this property to buy second, smaller property for letting.

Any info, tips or advice would be gratefully received. House hunting has been tiring work and stressful and I almost fear having to start again to look in a lower price-bracket. But I know it will be worth it when it's done so :j

BitterAndTwisted

You might be better off asking this question on the Savings and Investments forum. Oh, how I wish I had this sort of dilemma to be on the horns of. Lucky you. I suppose it's all down to how risk-averse you are.

Meatballs

KingsGambit wrote: »

Instead of paying out £133k over 25 years for a £100k mortage from my salary, I might instead make £200k or more from rent in that time (assuming roughly £1k p/m rent and tennants paying rent 2/3rds of the time).

-payments on the buy to let mortgage you have taken out.
-costs of being a landlord (insurance, maintenance, credit checks, agency fees, time off work to deal with stuff).

You need to research the market well to see if you would achieve that rent figure, and compare to mortgage repayments etc. 2/3rds covered by tenants seems like a conservative figure but I'm sure some LLs would provide more detail.

Other things to consider:
Savings rates are terrible at the moment, inflation probably means your money is losing value in the bank.

Time and effort in being a landlord and having a legal responsibility.

Interest rates are low, and may stay low for a few years. But they can only really go up in the future...

hazyjo

Also, don't forget you'd probably need a deposit for the other house - not sure if they'd just take the first house as a deposit on a mortgage, even if the first one was mortgage free. Not sure... but things to consider. Am sure someone will be able to advise.

Anything around the £230-270k bracket is actually not a bad one to pick up a 'bargain' if you do your homework IMO as property's had to drop beneath that stamp duty threshold (I had to take a hit - even in an area that's not been that badly hit generally, things are still selling, the value of my house has gone down approximately £50k 'cos of the threshold). Suppose it depends if you buy to sell, or if you buy on potential rental income. Maybe you'll use that one purchase to 'trade up' as the years go by. Doesn't mean you have to have a whole portfolio of properties, but it might be a way of keeping money coming in, just trading that one house up to achieve a higher rental income. Might set you up for life, or might be a drain on your finances, time, emotion... depends how savvy and lucky you are, how you sit with being a landlord, and how you feel about people having two homes or making an income from property. Good and bad, and I, for one, have very mixed feelings on the matter. I don't think 'investors' have helped the market, but then the call for 'holiday/second homes' has kept some markets afloat and crippled others - like first time buyers being priced out of areas - all depends on what side of the coin you're facing. Also think sometimes certain situations make you see things differently. If we were happy where we lived, had cleared the mortgage, and came into say £200k, maybe we'd buy a flat or house and rent it out. I wish I'd hung onto some properties I owned in the past (had lovely flats in Greenwich and Blackheath, SE London) - yet, as I say, I have mixed feelings and maybe I'd not be buying what I'm buying without having used them as stepping stones. I've tried not to see my old flats/houses as 'investments', but then it's the biggest 'investment' you'll ever make in your life. Mine have always been 'homes' above all else. Never bought something with the sole intention of making money on it and moving onwards and upwards.

Don't forget too you'd still have outgoings on something you rented out. Buildings insurance, council tax - along with a whole heap of landlord stuff I don't know much about, plus you'd have to cover for times if the property stood empty, or possibly evict tenants... just look at the boards here to see what a nightmare it can be being a LL.

It is a gamble. Depends how long term you're looking. Prices are generally going down still. In two years' time, who knows where they'll be. I remember the last recession - prices even in affluent areas halved within a handful of years. We're not quite there yet, but who knows... buy, sit on it, wait for the market to pick up (could be another decade to get back to where they were - and that might not necessarily be a good thing), and either forget about it and collect the rent, or sell in several years' time and buy something that will make you more rent. Mortgage free with an income can't be bad...

Sorry, it's late and I'm rambling. Will probably be along with the delete key tomorrow lol.

Jx

Nuttyneddy

Why not just buy one property outright and live in it? That gives you tremendous security against future changes in circumstances as you will always have a roof over your head.

poppysarah

What do you want to live in?

Do you want to be messing about buying two places?

Write down the top 5 features of the house you want to live in.

nufc_fan

Firstly, you are in a very good situation to start with and if I were you I would try to speak to a professional financial advisor, we are all amatuers on here and can only offer opinions on what we would do.

You need to ask yourself a few questions.
What sort of house do you want/need to live in personally? Would a property worth 150k be suitable? Or do you want something bigger. Remember bigger property will cost more in upkeep and more to loose if house prices fall any more.

How much can you afford to pay per month,on a mortgage?

Personally I would look to buy a property for 150k-200k and perhaps something that you could do up a little, which will ultimately increase the value of the property. keep the rest of your money for the time being until you are established in your own home then consider further if you want/can afford a second buy to let.

I would post on the savings and investments forum to get some ideas of what you should be doing with your capital at the moment to get the best out of it in the short term.

But as I said, speak to a professional about your options.

Catatonia

I agree with Nutty Neddy. If you can buy your ideal home outright, then I'd just do this. What extra benefits would getting a £325k property have for you?

anselld

In terms of the practicallities, yes, you can buy a place outright to live in, raise capital by taking a residential mortgage and then use the capital to fund purchase of BTL. It is a more cost effective way to fund BTL as a residential mortgage is cheaper than BTL.

As to how good an investment that will be, who can say? Depends on how successful you are at running a letting business and what happens to house prices.

Having said all that, surely the main point is what sort of property do you actually want to live in?

hellokitty08

KingsGambit wrote: »

Hopefully, I will meet a nice girl in the future :j

Im a nice girl! lol

shortchanged_2

KingsGambit wrote: »

Hopefully, I will meet a nice girl in the future and with a higher joint income (and hopefully increased salary ) my needs will change.

Who will whittle away all your cash! :rotfl: