To invest or reduce mortgage term?

TinkleToes

Hello 'experts' I'm a newby in need of help, I have an 8 year plan with currently 2 options (would love to know if anyone has a better option idea)
Option A:
Use current savings of £65,000 and reduce our mortgage from £152,000 to £87,000, increase our monthly mortgage payment by £150.00 – from £970 to £1,120

This would mean instead of paying back £93,000 interest on our £152,000 mortgage which is currently over 21 years - we would only have to pay £19,000 in interest and the term would reduce to just 8 years – thus a saving of £74,000 in interest payments.

(We would however lose the interest we would have made if the £65k in savings had been left in a savings account – but this would have been lost in both option A and B.)

Option B:
Use current savings to purchase a ‘Buy to Let’ property. This would be a property valued at appx £165,000, use £60k of the savings and then £105k on a repayment mortgage over 21 years (due to age) allowing £5k for fees.
Mortgage payment would be appx £675 per month the same as the rental income (after management fees) but we would still need to cover ‘service charges’ as it would likely be a leasehold property – this could be another £50.00, we would need to allow appx £100 per month for unexpected repairs – this would make our monthly out-goings the same as option A.

We would obviously need to pay tax on the rental income but as we can claim allowances on the mortgage interest I wouldn’t expect this to be a huge amount (I am in a low tax bracket) I should mention that I own no other property – the house I live in is in my partners name so this may not even need to be a ‘Buy to let’ mortgage but a regular mortgage with permission to ‘let’.

If we tried to work this plan over 8 years – the same as option A, I have very naively worked out how much the property would be worth if it increased in value by 4% per year (is this a realistic figure do you think?) I estimate the flat to be worth £225,000 –the mortgage balance would have now reduced to appx £73,000, so if sold – the funds would be £152,000 - minus the sellers fees £7,000 and capital gains tax (not sure how much the capital gains tax would be) = £145,000.

In 8 years on option A we wouldn’t have any ‘hard cash’ but we would be mortgage free – the money saved in interest would only become hard cash by continuing to put the equivalent into the bank each month pretending we still had the mortgage for 13 more years – but on option B we could sell the flat in 8 years and have over £100,000 of ‘hard cash’ in our hands.

I know that option B is the higher risk option – the property could go decrease in value, and there could be instances where we have no tenant, but even accepting that I am seeing very little drawbacks for option B – Help - what am I missing? I would really appreciate your comments.

pioneer

Initial Comments

£74000 interest payments = £103000 ish you would have to earn to pay it off ! How many years is that ?

TinkleToes

pioneer wrote:

Initial Comments

£74000 interest payments = £103000 ish you would have to earn to pay it off ! How many years is that ?

I understand what you mean (although it took me a moment) - but could this also be applied to the £152k in profit? My brain is frozen - I think I need to eat more spinach!

pioneer

You won't be in profit but you would have settled your mortgage.

Option A is rock solid, requires little or no effort & will acheive your aim.

Option B High risk, open to all the subjective traits of the BTL, intrest rates and you are at the wrong end of the curve/goldrush.

You stand a VERY high chance of ending up working for a VERY long time.
The cost/benefit analysis doesn't stack up, does it ?

Thanks for a great post, my mind is absolutely full of fog now, I feel like i've been wacked by Mike Tyson.

Life is too short, wait for ther natural flow and the market will meet you. Just consider who talks about dot com shares these days.

My daddy always told me "Measure twice, Cut once !"

Guy_Montag

I'm quite conservative & think to the future. The way I see it, with option A in 8 years time you'll have an extra £1120 a month to spend a month! Or 13k a year, that's a lot of very nice holidays, fine wines, or a new classic car each year or two.

prudryden

I like Option A - make sure Lender takes it off the principle. Leave the maturity term the same. Lenders tend to want to decrease your years of maturity. I, personally, think that that the length of the mortgage is irrelevant.

blinko

why not switch to an offset and then you can take it in or out etc whenever and get interest tax free !!!