Cash or equity for deposit on new house?

rjgb

Hi,

I'm looking for some advice on selling our house, buying another house, and being sensible with our money (i.e. make savings!).

We have a mortgage on our current house. We paid a 20% deposit when we purchased it three years ago and I expect we have increased its value fairly significantly through renovation. When we come to sell it, we should receive a lump sum of cash.

We also have quite a bit of cash saved up. We could use some of our savings to pay off some of our existing mortgage, and would like to do so to reduce the debt. However, the mortgage company says that we cannot later access the cash used for any overpayments.

We are looking to sell the house and purchase a new house, with a mortgage which will be roughly a LTV of 60%.

My question is, if we used our savings to pay off some of our existing mortgage, could we use the equity in the current house as the full deposit for the new house, or would an upfront cash deposit be required for the purchase of the new house?

My concern is that, until we sell our existing house, we would have no, or very little, cash for the next deposit if we used our savings to make mortgage overpayments. How would this work at exchange of contracts, when the deposit is required, as this normally occurs a couple of week prior to completion? Could a very small sum will be negotiated at exchange of contracts and the final remainder of the deposit be done at completion?

Thanks,
RJGB

ACG

So you want to release some equity from your existing property to use as a deposit on the new property?

(Sorry, just trying to clarify).

rjgb

In short, yes.

We could either:

(a) keep our savings in savings, not use them to pay off some of our existing mortgage, and use them as a cash deposit when buying our next house, or

(b) use our savings to pay off some of our existing mortgage, and then rely almost fully on the equity that would be released when we sell our existing house to pay the deposit when buying our next house.

The problem with (a) is that savings interest rates are not too hot, and we'd be a bit better off reducing the capital due on our mortgage.

My question is whether there's a problem with (b), i.e. needing our savings to fund a deposit on the second house.

Thanks,
RJGB

harvey115

Just to clarify a bit from what I understand.

You have a mortgage on your current house with some equity. So if you sell the house you will end up with some cash.

You want to buy another property with 60% LTV. I guess you came up with this number by looking at your cash savings , money you have in your current house and the value of the new house.

If you are about to sell the house, I would suggest not to overpay to your current mortgage and keep the savings in hand for the next purchase. Although you will get the remaining money from you existing house during the process, I would keep some cash in hand as well.

Paying off a bit to the current mortgage may possibly cost you lees in terms of interest! but its your call really. If I were you I would not overpay because you are about to sell the house.

rjgb

harvey115 wrote: »

If you are about to sell the house, I would suggest not to overpay to your current mortgage and keep the savings in hand for the next purchase. Although you will get the remaining money from you existing house during the process, I would keep some cash in hand as well.

...

If I were you I would not overpay because you are about to sell the house.

Thanks for your comments Harvey115. Why do you say the above?

harvey115

I say this because there are a few unknown variables in place:

- ERC - early payment charges might be in your current deal
- You will have the money in hand to use for other purposes

If you overpay now and are selling in the next couple of months, you are basically putting your money in an account with no access until the house sale is completed. However if you are thinking of a longer time for selling the house, overpayment would be beneficial.

You could also think of a split of the savings. Some going to overpay the mortgage and some to stay in your savings account with instant access.