mortgage or no mortgage?

pricedout_1

I struck out two years ago and started my own business which luckily has payed off. If I do this for another two years I should have enough availbale as dividend income from my business plus my own personal savings to be able to buy a one bed flat in west london - cash, no mortgage.

Is this the best thing to do? If I bought now I would probably need a 60/70K mortgage, but I would only have it for around two years as I would be clearing it in that time. (No point in paying mortgage interest when you dont need to)

The other issue is that I would be buying a one bed with the market at a historical high with the increased risk of negative equity over the next x years, but as a cash buyer, as long as the negative equity per year was less than the amount I would be paying in rent then I would still be quids in.

pricedout_1

Hello .... any MSE's out there! ......

Zammo

Congratulations on the business. :beer:

What sort of drugs are you selling? :money:

PosterBoy77

hughgallagher wrote: »

I struck out two years ago and started my own business which luckily has payed off. If I do this for another two years I should have enough availbale as dividend income from my business plus my own personal savings to be able to buy a one bed flat in west london - cash, no mortgage.

Is this the best thing to do? If I bought now I would probably need a 60/70K mortgage, but I would only have it for around two years as I would be clearing it in that time. (No point in paying mortgage interest when you dont need to)

The other issue is that I would be buying a one bed with the market at a historical high with the increased risk of negative equity over the next x years, but as a cash buyer, as long as the negative equity per year was less than the amount I would be paying in rent then I would still be quids in.

Firstly, well done with your business.

As to whether you should buy a flat or not, your guess is as good as anyone else's. However, as you say prices are at a historical high, and flats in particular are overpriced.

I would say, do you wish to buy a flat to live in for the next 5 or 10 years, or just for a couple? Just for a couple of years, the cost of buying itself with stamp duty, valuation fees, solicitor fees and potential mortgage fees can all add up to a large amount, perhaps as much as half your rent would be for a couple of years if you rented instead of buying.

In many parts of the country rent is much less than the interest on a mortgage for the same property. The savings found here could equal the potential future capital growth of a property.

If you take lots of money out of your company at once you could become a higher rate taxpayer and loose lots of your cash in tax. However, taking it out of the business more slowly could keep you at the lower rate of tax.

I would be more inclined to rent for longer, and potentially only buy when you can buy a small house once you have extracted money from your company minimising your tax bill.

vansboy

What we've done, (cutting a long story short), is sold our house & bought a flat, but rather than paying cash, we've a offset mortgage, which is in credit.

This means we've not lost the opportunity to draw funds, should the house we find cost more than we'd hoped & should give us 2 properties, again.

Now all we've to do is find a house we like/can afford/is in the right place/has an owner that wants to REALLY seel - see my previous posts!!

VB

VB

pricedout_1

vansboy wrote: »

What we've done, (cutting a long story short), is sold our house & bought a flat, but rather than paying cash, we've a offset mortgage, which is in credit.

This means we've not lost the opportunity to draw funds, should the house we find cost more than we'd hoped & should give us 2 properties, again.

Now all we've to do is find a house we like/can afford/is in the right place/has an owner that wants to REALLY seel - see my previous posts!!

So you have an offset mortgage in credit with no monthly repayments!

Are you earning interest on that credit?

pricedout_1

mikael wrote: »

Firstly, well done with your business.

As to whether you should buy a flat or not, your guess is as good as anyone else's. However, as you say prices are at a historical high, and flats in particular are overpriced.

I would say, do you wish to buy a flat to live in for the next 5 or 10 years, or just for a couple? Just for a couple of years, the cost of buying itself with stamp duty, valuation fees, solicitor fees and potential mortgage fees can all add up to a large amount, perhaps as much as half your rent would be for a couple of years if you rented instead of buying.

In many parts of the country rent is much less than the interest on a mortgage for the same property. The savings found here could equal the potential future capital growth of a property.

If you take lots of money out of your company at once you could become a higher rate taxpayer and loose lots of your cash in tax. However, taking it out of the business more slowly could keep you at the lower rate of tax.

I would be more inclined to rent for longer, and potentially only buy when you can buy a small house once you have extracted money from your company minimising your tax bill.

Thanks Mikael. I suppose I would be staying in the property for more than 2 years, but circumstances can easily change. If I bought a 2 bed instead of a one bed then that would be more of a long term option but I would struggle to find a 2bed in the area I want to live in that is below 250K and 3% stamp duty, but possible though.

Good point about taking the money out of the company. Currently my salary and dividends each year are below the 40% tax threshhold. But If I took huge lump sums out then I would probably be well over that threshhold and pay loads of tax. So yeh ... it's going to take a few years to get the money out of the company.....

PosterBoy77

hughgallagher wrote: »

Thanks Mikael. I suppose I would be staying in the property for more than 2 years, but circumstances can easily change. If I bought a 2 bed instead of a one bed then that would be more of a long term option but I would struggle to find a 2bed in the area I want to live in that is below 250K and 3% stamp duty, but possible though.

Good point about taking the money out of the company. Currently my salary and dividends each year are below the 40% tax threshhold. But If I took huge lump sums out then I would probably be well over that threshhold and pay loads of tax. So yeh ... it's going to take a few years to get the money out of the company.....

I am in a similar boat where I run my own business and only pay myself enough to reach the higher rate tax threshold, but not go over it. You would need to guarantee yourself a large house price increase just to make it worthwhile paying the tax at 40%. Also as you say, buying anything over 250k, the stamp duty becomes madness. My girlfriend and I are renting for a couple of years as we are not sure where we want to live long term. For us it is not worth flushing so much money down the toilet in taxes and stamp duty, in particular because we can rent a property for much less than the interest itself costs on a mortgage. This can vary across the country though. From the prices you mention though, you are probably in an area where prices are high and rents are not too bad, so financially it makes very little sense to buy, unless you fully expect huge house price growth to more than make up for interest payments, taxes and fees.

vansboy

hughgallagher wrote: »

So you have an offset mortgage in credit with no monthly repayments!

Are you earning interest on that credit?

Nope - but if we'd not got the mortgage & paid it off instead, we'd not have any £$£$ capital anyway.

So at least we've still got the option to draw on the funds, whenever we need to.

VB

pricedout_1

vansboy wrote: »

Nope - but if we'd not got the mortgage & paid it off instead, we'd not have any £$£$ capital anyway.

So at least we've still got the option to draw on the funds, whenever we need to.

VB

ok, that's interesting ... I've not heaqrd of that being done before.
Did you place the proceeds of your original sale on the house into the savings account on the offset and then borrow against the savings? (Just trying to work out if I can do that too.) (I actually have a "IF" plan but just have an mini ISA in the plan.)

pricedout_1

mikael wrote: »

I am in a similar boat where I run my own business and only pay myself enough to reach the higher rate tax threshold, but not go over it. You would need to guarantee yourself a large house price increase just to make it worthwhile paying the tax at 40%..

I would always try to avoid the 40% regardless really, but yes only large increases in value would justify it and the price increases based on the current interest rates have already been made so I don't expect large increases over the next few years.

mikael wrote: »

For us it is not worth flushing so much money down the toilet in taxes and stamp duty, in particular because we can rent a property for much less than the interest itself costs on a mortgage. This can vary across the country though. From the prices you mention though, you are probably in an area where prices are high and rents are not too bad, so financially it makes very little sense to buy, unless you fully expect huge house price growth to more than make up for interest payments, taxes and fees.

I see what you are saying, but it all seems to come down to the size of the mortgage. If you can get a small enough mortgage then you would be paying much less in interest (for the few years that you have the mortgage) than you if you were to rent. Then at the end of that short period of time the property is yours. Hopefully when you eventually sell it will have at least gained some value giving you gains on the capital amount paid originally. This has to beat, paying the going rate for rent year on year ?