The maths is beyond me!!

diamond007

Hi can anyone help me with this please as I can't get my head around it!?

I am currently living and work in Germany and rent out my house in the UK. The house has a value of approximately £160,000 which is what i paid for it in 2004. I am on an interest and capital repayment mortgage with approx £90,000 still to pay off. It is a flexible rate mortgage (at 4.6% and i currently pay back £850 per month plus a £500 overpayment (£1350 in total). It is a high interest rate due to the difficulty obtaining a UK mortgage when living/working in Germany.

I am looking to increase my monthly payment to £2000 with the hope of paying off most of my mortgage by the end of my contract in Germany - 3 years and 9 months to go. I am nervous that if interest rates do go up over this period then as i am on a flexible rate mortgage it will impact on this plan.

I receive a rental income on the property of £580 a month (after letting agent fees) and i have been fortunate that i have had tenants in almost all the time i have been in Germany.

The question i have is whether i am doing the right thing.....? I seem to be making no profit in terms of overall house value increase and i am paying a lot of money in interest payments each year. Would i be better off in my situation trying to sell the house and instead put the money (approx £70,000) and approx £1500 a month (to take into account loss of rental income) into the best saving accounts ISA etc?

I have no emotional attachment to the house and will need to buy a bigger house when i return to the UK anyway due to a larger family size. I am thinking of a self-build project. I am married so my wife could make use of her tax free ISA allowance etc.

Can anyone help? Am i doing the right thing continuing to pay off my mortgage or would i be better off selling and saving instead. I understand it is based on variables like future house prices and interest rates although i am assuming house prices will continue to stay relatively flat and interest rates will increase a little over the next 3-4 years.

Thanks for any advice and sorry for the length of the post. If anymore information would be helpful please let me know.

Cheers, Sam

akrot1

diamond007 wrote: »

Hi can anyone help me with this please as I can't get my head around it!?

I am currently living and work in Germany and rent out my house in the UK. The house has a value of approximately £160,000 which is what i paid for it in 2004. I am on an interest and capital repayment mortgage with approx £90,000 still to pay off. It is a flexible rate mortgage (at 4.6% and i currently pay back £850 per month plus a £500 overpayment (£1350 in total). It is a high interest rate due to the difficulty obtaining a UK mortgage when living/working in Germany.

I am looking to increase my monthly payment to £2000 with the hope of paying off most of my mortgage by the end of my contract in Germany - 3 years and 9 months to go. I am nervous that if interest rates do go up over this period then as i am on a flexible rate mortgage it will impact on this plan.

I receive a rental income on the property of £580 a month (after letting agent fees) and i have been fortunate that i have had tenants in almost all the time i have been in Germany.

The question i have is whether i am doing the right thing.....? I seem to be making no profit in terms of overall house value increase and i am paying a lot of money in interest payments each year. Would i be better off in my situation trying to sell the house and instead put the money (approx £70,000) and approx £1500 a month (to take into account loss of rental income) into the best saving accounts ISA etc?

I have no emotional attachment to the house and will need to buy a bigger house when i return to the UK anyway due to a larger family size. I am thinking of a self-build project. I am married so my wife could make use of her tax free ISA allowance etc.

Can anyone help? Am i doing the right thing continuing to pay off my mortgage or would i be better off selling and saving instead. I understand it is based on variables like future house prices and interest rates although i am assuming house prices will continue to stay relatively flat and interest rates will increase a little over the next 3-4 years.

Thanks for any advice and sorry for the length of the post. If anymore information would be helpful please let me know.

Cheers, Sam

1) if interest rates do go up then you could always sell your property? Link between interest rates rising and property prices is for you to decide but I suppose you need to have a consistent approach?
2) Given that you continue to have someone prepared to rent it, maybe you should wait until this dries up before selling it?
3) In terms of whether you chose to sell and save instead now, saving rates are particulalry low so agin if rtes rise, saving rtes will rise so you could earn more on your money then.
4) dont forget too the costs of selling can add up (EA, solicotrs etc..)

Not sure if that helps but based on your post you seemed pretty clued up and knowledgeable!

JQ.

From a tax perspective you're doing the wrong thing as you reducing the interest element of the mortgage, thereby reducing the amount you can offset against income tax.

From a personal perspective I think you're doing exactly the right thing. I would imagine owning a mortgage free house must be a very liberating experience and gives you great security. Whilst house prices fluctuate in the short term, over the long term they do appreciate and bricks and mortar remains a solid investment.

There are large costs associated with buying and selling property, which you should also take into account, should you decide to sell up. If you keep the house and pay off the mortgage, when you do eventually want to do a self-build you can always re-mortgage the house on a buy-to-let to fund the self-build, which will be far easier and cheaper than trying to raise finance on the self-build. It would also mean the rent from the BTL would essentially be paying for your self-build freeing up more money to fund the construction and possibly enabling a grander development.

My vote goes to carry on what you're doing, all sounds very sensible to me.

GDB2222

This is a geared investment in a house. The yield is 4.3% pa after costs, which is more than the OP could get on a savings account.(**) The mortgage interest rate is only marginally higher than the rental, so that's not a big issue at the moment.

So, the real question is whether house prices will go up or down in the next few years. Who knows? Prices are drifting downwards at the moment in nominal terms, and quite strongly downwards in real terms.

The other aspect is risk. If house prices were to take off again in the UK, at least the OP would have a toe-hold in property if he keeps his present investment. If it goes down, the property he intends buying in future will be cheaper. So, the lower risk course is to hang on to this property.



** There may be other costs the OP has not told us about, eg insurance and maintenance, but I doubt these are deal-breakers.

2sides2everystory

I am sure few people would argue right now that continuing to own property in the UK is a "must do if can do" for someone earning good money who is already mobile in Europe, even if they do plan on coming back to the UK.

If property interests you, have you looked at the property market in Germany? Are you earning in Euros? Whether you are or not you will be better placed than most to have seen the double-whammy for us stay at home Brits which is not only a 20% reduction in our property values but a 20% reduction in our currency against the Euro.

You will also be aware that the Germans are nowhere near so hung up on owning property as us post-Thatcher Brits.

I could easily see myself having done the same as you but are you really sure your particular property is worth working your socks off for? Do you expect the UK property market to improve anytime soon? I don't.

theartfullodger

As you are living & working in't Germany, unless you have paperwork agreeing otherwise from HMRC your agent should be deducting 20% (?22%??) from the rent before sending it to you...

http://www.hmrc.gov.uk/cnr/nr_landlords.htm

HMRC don't like finding out this ain't happening when it should be.. Guess you're already sorted and approved..

diamond007

GDB2222 wrote: »

This is a geared investment in a house. The yield is 4.3% pa after costs, which is more than the OP could get on a savings account.(**) The mortgage interest rate is only marginally higher than the rental, so that's not a big issue at the moment.

So, the real question is whether house prices will go up or down in the next few years. Who knows? Prices are drifting downwards at the moment in nominal terms, and quite strongly downwards in real terms.

The other aspect is risk. If house prices were to take off again in the UK, at least the OP would have a toe-hold in property if he keeps his present investment. If it goes down, the property he intends buying in future will be cheaper. So, the lower risk course is to hang on to this property.



** There may be other costs the OP has not told us about, eg insurance and maintenance, but I doubt these are deal-breakers.

Thanks for all advice. Regarding the above post can you pls explain what a 'geared investment' is and how you calculate the 4.3% yield?
Does it take into account the 'loss' through interest repayment compared against if i was just to sell up and put in savings...

What i really want is a mathematical comparison between keeping in the current situation (assuming £2000 a month repayment from this month) for the next 3 years and 9 months @ 4.6%; against saving £70,000 at a realistic interest rate (approx 3% net) with a £1500 a month top up. Assuming house prices and interest rates stay constant is it possible to calculate what would be the better option (not taking into account house selling fees etc).

Thanks again for time/advice.

Sam

PS. regarding post directly above i have informed HMRC and have exemption from income tax on rental income - my letting agent has been great throughout which i understand from friends is quite unusual!

franklee

diamond007 wrote: »

What i really want is a mathematical comparison between keeping in the current situation (assuming £2000 a month repayment from this month) for the next 3 years and 9 months @ 4.6%; against saving £70,000 at a realistic interest rate (approx 3% net) with a £1500 a month top up.

Have you had a look at the mortgage calculator?

http://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator

It also has an overpayment calculator:

http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

If you have a play with those you'd get a picture of how much you will have paid off your mortgage. You can then compare that against a straight savings account over the same period.

But you are making it simpler than it is as if you give the tenant notice you will lose the rental income. It may well be the property sits empty for some months before it sells and this could make a big difference.

GDB2222

diamond007 wrote: »

Thanks for all advice. Regarding the above post can you pls explain what a 'geared investment' is and how you calculate the 4.3% yield?
Does it take into account the 'loss' through interest repayment compared against if i was just to sell up and put in savings...

What i really want is a mathematical comparison between keeping in the current situation (assuming £2000 a month repayment from this month) for the next 3 years and 9 months @ 4.6%; against saving £70,000 at a realistic interest rate (approx 3% net) with a £1500 a month top up. Assuming house prices and interest rates stay constant is it possible to calculate what would be the better option (not taking into account house selling fees etc).

Thanks again for time/advice.

Sam

PS. regarding post directly above i have informed HMRC and have exemption from income tax on rental income - my letting agent has been great throughout which i understand from friends is quite unusual!

The yield is just the rent divided by the property value. It's geared because you have a loan outstanding against it.