Should I Upsize or Stay?

gordon_baird123

Hi,
My first post, so please be gentle! I'll use $ instead of pounds as my keyboard is not working.

I currently live in a flat with my family worth $150,000 with a mortgage of $50,000 interset only of 5% and saving $500 each month to pay off the captal.
I can afford to move, and will need to do so within 3 years as baby #2 has just arrived. Should I upsize now or in 3 years taking into account house price inflation of approx 5%?

Here are the other figures.
Potential new mortgage $200,000, again at 5% for property worth $350000.

I reckon that by saving my money and earning interest on it is more efficient that buying a bigger house with encumbent bigger mortgage interset payments, even though my current property will grow in value at a slower rate than a new bigger, more desirable house.

Am I wrong on being so averse to getting a huge mortgae?

Thank you

jamesd

With the 5% assumption each place will increase in value by 15.76% over three years. For the 150000 flat that's an increase of 23643. For the 350000 house the increase is 55168. The house increases by 31525 more than the flat.

If you save 500 a month, ignoring interest on that, you save 36x500 = 18000. This is considerably less than you make by switching to the new place now and taking three years of price growth. There's no practical interest rate that can hope to keep up with the leveraged house buy.

So, given your assumptions, your total value will be higher by switching now. You'd lose something around 12-13000 in extra house buying cost by waiting.

Your 500 a month saving is comparable to a 1.71% increase in the 350000 house price in the first year, a bit less for each successive year.

The catch? You're speculating that house prices will rise. The save and pay off mortgage choice is much more predictably sure to increase your value, just not by as much. Those predicting house price crash seem to have "within three years" as a not uncommon speculated timeframe for a 20-30% drop in value. And since you'd have gained 15.76 in value by then with your 5% increase assumption that shouldn't be too worrying.

If you're confident that you will be living in the house for many years your risk falls because you're less likely to need to sell while prices are lower than your purchase price plus lost savings value.

gordon_baird123

Thanks for your reply jamesd,
I agree with your figures howver you may have missed an important cost difference.
The interest only over 3 years on 50,000 is 7500
The interest only over 3 years on 200,000 is 30,000

So I reckon the cost of moving will be 22,500 interest. Cash I'll never see again.

The new home would, as you say increase by 32,000 more, but if I were to remain in the flat, the savings I'd be able to make of 18,000 plus the saved interest of 22,500 make the flat a better option by around 10,000.

Is this correct or am I missing something?

Thanks for your interest
Gordon

jamesd

gordon_baird123, yes, you're right, I should have included that. Sorry I gave an incorrect initial answer.

Including the interest cost I agree with your conclusion that the flat is a better option by around 10,000.

gordon_baird123

Thanks for taking the time to confirm my calculations. Now I've got to tell 'er indoors she's not getting that nice house for a while yet!