My 5 year housing plan - advice please

cottonhead

Hoping to move to a larger home and have 2 plans. Would like opinions on which option to go with please.

Plan A - Have £12,000 equity if we sell current home and £15,000 savings - to move will need to use all of this for a deposit.

Plan B -My other idea is to rent a larger home for 5 years - save £400 a month and rent out our current home to stay on the proprty ladder and raise more equity. After 5 years we would have saved £24,000, still have our £15,000 savings and also have more equity in the property - about £32,000. Then could either sell our house to use the equity for a deposit to buy or keep renting it out.

I prefer plan B but my mum seems to think its best to buy straight away!
Any opinions really appreciated. Thanks in advance.

MFSaver

When you say you save £400 a month, is this savings due to a difference between your mortgage payment and the rental amount or is the amount saved irrespective of whether you stay in your old place or rent a new place? I am thinking that it is not the former since it’s clear that the rented property is larger, but please confirm this.

If the £400 is saved irrespective of whether you stay in your old place or rent a new place, the same 24k after 5 years can be used to overpay your mortgage and put you in a better LTV position, since you are likely to remortgage in 5 years.

The crucial question is "can you afford it if there is no one occupying your property for a period of time?". A few months of non-occupancy could make a big dent in your numbers.

It will help if you can provide numbers such as your present monthly payment, your present interest rate and the price of the house you want to buy, which would affect what kind of interest rate you can get.

cottonhead

Thanks for responding. The £400 a month saving is because renting would cost us £850 a month where as buying would cost £1200 a month.

We cant stay where we are and save becauae its too small, so have to either rent or buy a bigger place asap.

We could take the hit of unoccupancy for a bit should that happen.

HappyMJ

cottonhead wrote: »

Thanks for responding. The £400 a month saving is because renting would cost us £850 a month where as buying would cost £1200 a month.

We cant stay where we are and save becauae its too small, so have to either rent or buy a bigger place asap.

We could take the hit of unoccupancy for a bit should that happen.

1200 minus 850 is 400...ok..... You will also have the cost of your current mortgage to pay less the rental income you get and less any expenses you need to pay out such as buildings insurance and maintenance on the property you own. I'd go with option A and get a cheaper rate and/or longer term on the mortgage. That's too high. Normally it's cheaper to buy at the moment than rent due to the very low interest charged so I'm not sure your calculations are correct.

MFSaver

cottonhead wrote: »

Thanks for responding. The £400 a month saving is because renting would cost us £850 a month where as buying would cost £1200 a month.

Is the £1,200 just the interest? I think that, for simple comparison, you have to compare rent and interest, since the repayment portion is effectively adding to the equity of the house while both rent and interest disappear into the voide (i.e. someone else's pockets). This is of course assuming house prices stay flat.

Your present interest rate is important because if you are one of the lukcy ones paying BoE + 0.X%, option B loos attractive. Do keep in mind that you will need consent from your mortgage lender and they might impose a fee or a rate increase.

If you go for option A, would you be happy to stay in that house for more than 5 years or do you see the need to upsize in 5 years?

Also, what is the price range of the house you like to buy? The answer to this question might render all other factors moot, since you will have an idea of whether you will be able to get a mortgage with a reasonable interest rate.

Spooks123

Hi Cottonhead

I can see the issue (I think...). Basically it boils down to the fact that your deposit isn't big enough right now to unlock the lower interest rates associated with the benefits of buying over renting. BUT ALSO...The type of house you want to upgrade to is only accessible to you if you can get your hands on a 85%/90% mortgage or something... (I could be wrong of course...)

This is going to depend on your attitude to long/short term renting ie. dead money vs. opportunity to save. You're gonna have to solve that one yourself!

On the face of it, there's nothing wrong in having a 5 Year plan. (we all love it when plans come together...) BUT...seeing as you quote your Mum's influence in your decision-making...then I'd guess that depending on your age and circumstances that 5 years is a very long time to commit to renting. I'd hazard a guess that 'dead money' and 'paying landlord's mortgage' frustrations would kick in after 12 months.

Plan A is sound on four conditions: 1. You get a good deal to insure yourself against drops in house prices. 2. You can handle seeing your hard earned savings ''zeroed''. 3. You tighten your belts and stash a little away each month 4. You can bear taking your Mum's advice...

Cheers

cottonhead

Thanks all for your opinions. Here are a few figures to explain it all better. We are currently paying £580 a month mortgage for a 1 bed massionette and are looking to buy / rent a 3 bed in the region of £210,000. The bank tells us we would be paying around £1200 a month mortgage . A similar house to rent in this area is only £850 a month so we figured if we rent for 5 years we could save up the difference each month and also hold onto our 1 bed and rent it out to get some equity there. Just figure if we buy now then we would have to surrender our 1 bed house and use up all our savings and equity on the deposit where as if we buy in 5 years we could hold onto our 1 bed as an investment and still have some savings left. Looking at the longterm outcome I guess. I know I mentioned my mums opinion I am actually 32 and married with a child but old fashioned when it comes to listening to the folks I guess !

HappyMJ

I wouldn't even consider buying that place at the moment sell your current home and rent for a while saving the difference. Get a bigger deposit and buy cheaper and the mortgage repayment will be much lower. It'll take a long time for the £850 to exceed £1200. If you buy you'll be responsible for repairs, maintenance and insurance on top too.

P.s you should be able to borrow £189,000 for about £1,000 per month @ 4% discount rate over 25 years. Chelsea BS is offering 4.09% fixed for 5 years 10% deposit and if your family can help the Market Harborough offers 3.99%.

Save a little more 15% deposit and you can get 3.79% from northern rock at £924 per month on £178,500 borrowed.

cottonhead

We thought that if we rented a larger house there is no need to sell our current one. We will rent it out to someone else to keep the mortage going so we can get equity from it once we do sell it in 5 years.

Basically I see it as

Buy now = a larger house having put a deposit of £20,000 down and having no savings left and having sold our exisitng home

or

Buy in 5 years = a larger house, some savings left over and the possibility of keeping our first home as an investment

I kind of convinced myself that the 5 year plan is best but my folks are making me have doubts!

HappyMJ

cottonhead wrote: »

We thought that if we rented a larger house there is no need to sell our current one. We will rent it out to someone else to keep the mortage going so we can get equity from it once we do sell it in 5 years.

Basically I see it as

Buy now = a larger house having put a deposit of £20,000 down and having no savings left and having sold our exisitng home

or

Buy in 5 years = a larger house, some savings left over and the possibility of keeping our first home as an investment

I kind of convinced myself that the 5 year plan is best but my folks are making me have doubts!

You really need to get a bigger deposit. Can your family lend it to you? You aren't far off another £5,000 to £10,000 will be enough. You probably won't be given permission to rent your house out. At least not cheaply. Have you asked about that yet? You will probably need to remortgage onto a buy to let product costing more than you are paying now. What is the rental that you would get for your 1 bed flat. What are the other costs? Is there any profit in it? Is it worth the hassle? It's doubtful property prices will increase by much over the next 5 years. You will acheive more profit by selling and investing the equity in cash deposits at the bank.

cottonhead

Yes need a bigger deposit ideally, but also want to hold onto our home and rent it out. I think thats partly sentimental - I dont want to sell it! We can rent it for £570. I wouldnt ask my parents for more money as they helped us so much the first time and to be honest since we have been here we supidly havent saved a penny. Its only because of a recent small inheritence we have about £15,000. The sale of this place would net us only about another £8,000 so by the time we pay the moving costs etc its cutting it fine.....
If I am honest I also like the idea of having spare cash to save up rather than spening it all each month on the mortgage and in the near future we are due some more money from the inheritence once the rest of the estate is sold. We do need to move before that come to us though.