Where to put the extra cash..?

cb4fwh

Hi!

Bit of background...

I am 33, and bought my first house back in 2002 with my brother for 185k. I then met the other half, and we moved into our own place in 2006 for 290k.

In the intervening period, I have renovated & built an extension on our current house, costing circa £70k. £30k of this I put on a mortgage, the remainder I put on 0% credit cards (believe it or not, at one point I had 7 cards as Santander went from offering me £70k to nothing overnight!). I am now down to one credit card with 5k on it, as I have paid off the remainder over the course of the last year. This will be paid off by February 2012.

I have two mortgages;

i) 180k @ 4.79% Santander 5 year fix due to end around July 2013. Monthly cost, £1415.00 (started 2006, original term 20 years).
ii) 28k @ 4.99% Santander 5 year fix due to end around September 2013. Monthly cost, £219.24 started 2009, original term 17 years).

Both mortgages have 15 years repayments remaining. Just to be clear, both are repayment mortgages. With a fair wind, current house value is circa 400k so approximately 50% LTV.

In an ideal world, I would like to be mortgage free by the time that I am 40.

So, this is where I want to bounce a few ideas off you guys...

As of March 2012, I will have freed up £2000 per month which was previously being spent on credit card repayments. £1000 of this I want to put into a 'war chest' (I am an independent contractor employed through my own limited company), the other £1000 I want to invest in property in some shape or form.

Options are:

i) Make monthly overpayments of £500 on each of my mortgage products. Overpayments upto £500 are penalty free with Santander, but interest on these overpayments is not recalculated until the end of the month (obviously I could time repayment accordingly to take full advantage). This would reduce the term of my 28k mortgage to circa 3 years, at which point my 180k mortgage would have switched to SVR & I can overpay £1000 per month without penalty. Doing so would decrease the term to circa 8 years.
ii) Buy a rental property, putting the entire £1000 per month towards buying a rental property around March 2013 putting down circa 25k deposit on a 100k property. This cycle could obviously continue but would mean that overpayments would be impossible unless I am fortunate enough to remain in work without significant periods on the bench, which would free up the war chest for overpayments / further rental property deposit contributions etc. I'm no expert, but I'm assuming that this would lead to Capital Gains Tax implications?
iii) Buy another house for circa £500k with scope for expansion, obviously adding circa 100k to a third mortgage. 100k @ 3.99% Santander 5 year fix. Monthly cost, £1012.00, 10 year term.

Any feedback / guidance / comments / experience appreciated.

Thanks.

abouttimetoo

Hi CB4FWH, welcome to the board and well done for the work you have done so far in reducing your borrowing, that's some speed you have been paying it back at!

I'm just giving you a shamless bump as I don't feel properly equipped to give you a response but didn't want to read and run

Can I also suggest you drop into WynnVegas's thread. Billy is now mortgage free and has plans to build a big house, however, part of the plan to help him get there is to take on a relatively large number of BTL's. He is just getting this underway and there is a lot of prompts, discussions and things to me mindful of on his thread.

One other thought which may be worth you looking into if you do decide to go down the overpayment route: have you looked into whether you can access them should an emergency or an enforced period of unemployment happen. Each mortgage provider seems to have their own T&C's whereby some of them won't give you your OP's back, some will, some will give a percentage or specific number back, some will let you suspend 'normal' payments until the OP's are 'eaten up' if you see what I mean. As I say, just a thought and worth looking into as it may give you some extra level of comfort whilst planning how to use your spare funds to maximum effect

Good luck with your plans

Regards
ATT

jimmyjones_2

Personally I would go for Option 1 assuming you dont need a bigger house, it is less risky and less hassle. Save what you cant overpay without penalty and maybe consider an offset mortgage when the fixed rates expire - you could stick your entire warchest in the offset and save yourself a load of interest.

I am a similar age and also want to be mortgage free by 40 but have a much cheaper house and a smaller mortgage. I am actually thinking of doing software contracting next year, I know what my day rate is and want a bigger slice of the pie than i get working as a permie for a consultancy .

cb4fwh

abouttimetoo wrote: »

Can I also suggest you drop into WynnVegas's thread. Billy is now mortgage free and has plans to build a big house, however, part of the plan to help him get there is to take on a relatively large number of BTL's. He is just getting this underway and there is a lot of prompts, discussions and things to me mindful of on his thread.

Ooh, sounds interesting! I'll pop over and have a read!

cb4fwh

abouttimetoo wrote: »

One other thought which may be worth you looking into if you do decide to go down the overpayment route: have you looked into whether you can access them should an emergency or an enforced period of unemployment happen./QUOTE]

I have - it's one of the questions which I have on my list to ask Santander when I give them a buzz this week...

cb4fwh

jimmyjones wrote: »

Personally I would go for Option 1 assuming you dont need a bigger house, it is less risky and less hassle. Save what you cant overpay without penalty and maybe consider an offset mortgage when the fixed rates expire - you could stick your entire warchest in the offset and save yourself a load of interest.

I am a similar age and also want to be mortgage free by 40 but have a much cheaper house and a smaller mortgage. I am actually thinking of doing software contracting next year, I know what my day rate is and want a bigger slice of the pie than i get working as a permie for a consultancy .

Mmm, an interesting dilemma. I've been unlucky over the years & never seem to get nice neighbours, which is why the desire to spend a bit more cash on a nice house on its own plot in the country is quite strong!

Re. contracting - as long as you have confidence in your own ability & are half decent at interviews, just go for it! The market out there remains pretty strong as companies that I work with aren't recruiting permies. I like being the master of my own destiny - no more performance reviews etc., and I am now in total control of achieving my aim of retiring at 55

RosieTiger

Personally I would go Option 1 as the safe route - you never know what the future holds and you have plenty time to get to Option 3.

I have an aversion to your option 2 as I see BTL as one of the causes of the over inflation in house prices. Yes, great for the those who get to take an advantage from buying with the hope of future price gain. Sadly, not so good for the kids who can't get on the housing ladder. But thats a personal opinion.

Sepa74

My initial reaction is that the focus on property risks putting too many eggs into one basket. With a limited company you can save into a stakeholder pension very tax effectively, and I would also consider filling up ISAs every year which will allow you to receive a nice stream of tax free income once you retire.

Do you have a decent emergency pot?

I would suggest talking it all through with your accountant - the limited company means there may also be potential to purchase a BTL through your company which would limit your risk if the investment went bad, and might also give you some creative options around minimising CGT.

cb4fwh

RosieTiger wrote: »

I have an aversion to your option 2 as I see BTL as one of the causes of the over inflation in house prices. Yes, great for the those who get to take an advantage from buying with the hope of future price gain. Sadly, not so good for the kids who can't get on the housing ladder. But thats a personal opinion.

I don't disagree.

cb4fwh

Sepa74 wrote: »

My initial reaction is that the focus on property risks putting too many eggs into one basket. With a limited company you can save into a stakeholder pension very tax effectively, and I would also consider filling up ISAs every year which will allow you to receive a nice stream of tax free income once you retire.

Do you have a decent emergency pot?

I would suggest talking it all through with your accountant - the limited company means there may also be potential to purchase a BTL through your company which would limit your risk if the investment went bad, and might also give you some creative options around minimising CGT.

I already save into a personal pension, with contributions which should provide retirement at 55 of £45k per year plus a tax free lump sum. I'm wary of putting more into this as I don't really want to be paying higher rate tax upon my retirement & 45k per year will be more than enough money for my retirement.

I plan to contribute the full amount into my ISA from March out of the additional 1k per month that I'm putting into my 'war chest'.

This is part of my emergency fund if you like, alongside the money which remains in my business account. I generally leave around 2k per month in the business account. I consider this my second 'war chest' if you like, which I can use to pay myself when I am out of work...

Sepa74

Hi, Your pension sounds brilliant, and if you fill up your ISA limit each year, then I can understand why you are hunting around for another investment. As you say, property is probably the thing to be looking at, unless you want to do some training and invest in yourself.... but then your income will increase (hopefully) and you'll be still looking for somewhere to invest your money!

The way I understand it is that if you take out dividends from the company, anything over a certain limit is taxable, usually at the 40% rate. I have been limiting my dividends to what isn't going to require me to pay higher rate tax, and leaving the rest in the business even though the rate of interest is paltry (but still better than paying 40% tax on it!). This means my war chest is building up in the business. As the war chest grows I will be looking at what to invest my money in from the business. I'm not ready to do it yet, but maybe in a few years I will look at the options around buying a BTL that the business owns rather than me personally. But I'm not there yet, and who knows what the future will hold.