What to do with our money? Second house or pay off mortgage

becstarr

Hi myself and my other half have recently found ourself in the unusual situation of being able to save some money - around £20k.

Currently he has a mortgage on an interest only basis which just sits there at around £156k. He pays this mortgage out of his earnings.

I have no mortgage.

The question is what do we do with our savings?? Do we pay off some of his mortgage or do we use it as a deposit on another house with a mortgage in my name covered by my earnings which we can rent out??

TightGit

Saving money , and paying on an interest only mortgage seems really silly to me. There is no better savings account than paying off your mortgage.

I suggest moving to a repayment mortgage if your able to save money and lower your savings.

A second property with 20k as a deposit and a first mortgage on an interest only basis screams no to me.

sujman

My personal choice? Pay off against the mortgage but using an offset mortgage, so that you have the £20k to hand if you really need it.

The only reason I would not invest the money in another property is purely due to my attitude to risk. I am sure many others would take the opportunity to use the £20k to better effect than simply reduce the mortgage costs.

poppysarah

Keep saving.

Take proper advice on your current mortgage situation. How will you pay it off if you don't start now?

InkZ

It depends on the interest rate on your mortgage. If the interest rate on the mortgage is higher than your savings rate, then you really should be paying off the mortgage.

If the savings rate is higher than your interest rate, then you should be keeping the money in an ISA and adding to it, and keeping it there to eventually pay off the mortgage.

Joysmum

I have to admit that the fact that you are on an interest only mortgage on your home makes me thinkthe best bet is to reduce risk and pay that off.

We gave taken equity from our home and now have a couple if buy to let's. However our mortgage is repayment and we were nearly debt free when we did this and bought properties that we could sell on for £20,000 minimum profit after the initial work was completed.

Also, don't forget you'll be in for some very lean times ahead if you did decide to go down the buy to let route. It costs money to do this in addition to the deposit. We had to find at least 25% deposit on our houses. We also had to have the money to do the properties up, get safety certs, agents fees and be able to pay mortgage on the empty property until we had a tenant in. Even then there's no guarantee they will pay so you need to buffer to be able to afford all of that until things settle down.

Things have worked for us and we got a second house but we have sacrificed a lot of weekends to overtime to minimise debt and stress. Btl property isn't the easy way forward that programmed such as 'Homes Under The Hammer' portray it to be.

princeofpounds

This is a total no-brainer, pay off your mortgage assuming you don't need a float for emergencies.

As pointed out above any return you get on savings is likely to be a) lower b) taxed and potentially c) higher risk if you try to increase the rate of return above that available to cash by using equities for example.

Buying another property will mean you are 2x exposed to property (Assuming they are the same value for simplicity) with only 20k equity. If those two properties are worth 320k combined (2 average UK properties) then price only needs to move down by 6% to totally wipe out all the equity you had saved. Prices in May were down 1.2% year-on-year according to nationwide - that would have wiped out 20% of your equity alone, even putting aside costs of buying, selling and maintaining!

Any problems with making repayments (illness, unemployment, rental voids) and you will be forced to exit, presumably with bankruptcy along the way. That is the real danger. Plus of course being in negative equity you could be forced onto higher SVRs or trapped in a property with no way to move.

Now I'm not saying that will happen. The nature of gearing (using debt to bet on house prices) is that it amplifies losses and also returns, so if prices went up you would do well. But the problem is that the bad scenario could be really bad.

Buying another property would be a massive bet on house prices, basically, is that really what you want to do?

hazyjo

Definitely pay off some of the mortgage and get off of that interest only one. Basically, your other half is paying interest to borrow money that he already has. Can't really see the logic in that... maybe keep some for a rainy day if there's not usually much cash around.

Jx