The high and low risk ways to get to mortgage free.

Big_Zee

Due to the nature of the forum name "Mortgage free Wannabe" this is likely to be a bit controversial.

However, my own thoughts are - particularly in the current climate of low interest rates, if it is possible to do so (given the banks reluctance to lend), you are going to be better of in the long term by owning a relative % of a number of properties as opposed to 100% of 1 property.

So for example - say your dream home is £400K and you have the aim of owning it mortgage free. I would argue that while this would obviously be a nice place to end up, you are probably likely to be better of in the long run by owning 25% of 4 houses valued at £400K instead.

Even if your preferred end goal is to get to the point of 100% ownership on a single property, it maybe quicker to get to that point by splitting your assetts across various properties to try and gain form a combination of capital value and income as opposed to just paying as much of the mortgage as you can off on a single property.

Although this is obviously the most risky option and in a static or negative market, you would need to purchase property at either below market value or with signicant rental yield, you are currently in the unique position that if you have the initial capital for a deposit the actual interest rates available are extremely low.

Yes it obviously high risk, but I think if you are smart about it and not adverse to risk then you can use this method to make significant capital gains even in the current climate.

Over the past 2 years I have put this into practice and moved a considerable way towards my goal. With an intial starting budget of £50K I bought into the london market on a decent rate 15% LVR. Within 18 months saw a increase of 25% in property value, re-mortgaged again at 15% to release the increased capital, which has then been put into a property (actually 2 connected properties) on the south coast that had been on the market for 2 years and reduced by 35%. I'll do these properties up over the next 6 months (while living in them and renting my london house), split them onto seperate leases (as they were just on one freehold), then re-mortgage as seperate properties - hopefully at values increased enough from my purchase price that I can get some more equity to put into property number 4.

The point being from above, that although we all dream of living in a mortgage free property, there is more than one way to get there if your prepared to be flexible and take risks - even in the current market (actually this may help as when else could you have you been able to get 35% of a house price - which itself was already knocked down significantly from its 2007 high).

Mortgagefreeby50

Well done! I'm just not clever or brave enough to go down that route. Interesting reading though

Big_Zee

I must admit - it is not for the faint hearted and when buying you really need to be looking at it from an investment / return point of view - even if it is going to be your home for a few years (which is what you really need to do to avoid capital gains tax if you end up selling). Luckily the house I bought on the south coast is one I really want to live in as well - I had actually been watching the property for 2 years just waiting for it to come down in price!

I'm trying to make up time as I only bought my first property 18 months ago and have been kicking myself for years that I didn't get in on property in the early noughties. Obviously making money on things not easy (especially when the banks are not lending or want such high deposits) - but there are definately some interesting properties out there with investment potential. I think you just need to be very flexible and be prepared to take risks - and of course a bit of luck!

Tommygun2000

But how long will these low interest rates last? No one knows but when just that they will go back up.

Obviously everyone wants to pay off as much as possible before they go back up.

Big_Zee

Tommygun2000 wrote: »

But how long will these low interest rates last? No one knows but when just that they will go back up.

Obviously everyone wants to pay off as much as possible before they go back up.

Your right - but the way I see it is this - it's unlikely that interest rates will go up any time soon - and the banks know this and have factored it into fixed rate mortgages - so if you are risk adverse you can mitigate that by getting a long term fixed rate mortgage. Yestday I contacted the COOP my existing lender and they were offering 3.89% on a base rate tracker with a LVR of 15% gainst a 5 fixed rate of 3.99% agin with an LVR of 15% ! - 0.1% difference !!!

So going for the 5 year fix I know my risks for the next 5 years - and I am assuming that come year 4'ish if things are not looking great come year 5 then I still have plenty of time to alter plans - and by which time i should be in a much better financial position to do so.

Tommygun2000

Big_Zee wrote: »

Your right - but the way I see it is this - it's unlikely that interest rates will go up any time soon - and the banks know this and have factored it into fixed rate mortgages - so if you are risk adverse you can mitigate that by getting a long term fixed rate mortgage. Yestday I contacted the COOP my existing lender and they were offering 3.89% on a base rate tracker with a LVR of 15% gainst a 5 fixed rate of 3.99% agin with an LVR of 15% ! - 0.1% difference !!!

So going for the 5 year fix I know my risks for the next 5 years - and I am assuming that come year 4'ish if things are not looking great come year 5 then I still have plenty of time to alter plans - and by which time i should be in a much better financial position to do so.

If you really think IRs will not go up soon then why go for a long fixed rate? The fixed rates are for those who believe rates will go back up before the end of their term are they not?

Big_Zee

Tommygun2000 wrote: »

If you really think IRs will not go up soon then why go for a long fixed rate? The fixed rates are for those who believe rates will go back up before the end of their term are they not?

Essentially just because the COOP offer terrible variable rates - IE just 0.1% less than a 5 year fixed rate - and actually MORE than a 2 or 3 year fix!

happycamel_2

That's a good strategy if you are savvy enough to know (or guess) when and what to buy and sell but it depends on your family circumstances too. I have two kids so I want a decent size house in an area with good schools, splitting my equity across 4 houses would give me enough to get at most a 2 bed terrace for four of us while I let the others out.

As it happens we have one let property and our residential property, we owe over a third of a million on these two but we have a good quality of life in a nice house. It's not just about the money, it's about having a home too.

I'm OPing because I think interest is money wasted and we earn more than we need to have the standard of living we want so it makes sense to OP rather than save. It's not all about taking risk to maximise wealth for us, we couldn't deal with the consequences if it went wrong.

For a people without kids though, your approach is feasible and, if they have the interest and aptitude (and credit rating) sensible.

I'm interested to know when and how you got a 25% increase in value in 18mo though, in London house price inflation is around 4% at the most and in many areas of the country prices are static or falling. High LTVs risk negative equity and getting stuck on SVR when rates increase with no way to remortgage.

Thrugelmir

Big_Zee wrote: »

Within 18 months saw a increase of 25% in property value

That's an exceptional increase. Where in London did you buy?

Tommygun2000

Tommygun2000 wrote: »

If you really think IRs will not go up soon then why go for a long fixed rate? The fixed rates are for those who believe rates will go back up before the end of their term are they not?

Big_Zee wrote: »

Essentially just because the COOP offer terrible variable rates - IE just 0.1% less than a 5 year fixed rate - and actually MORE than a 2 or 3 year fix!

Why not go with someone else, you are not stuck with the COOP are you?

If someone genuinely thinks interest rates will not go back up in the next few years then why pay more for a fixed rate?

It seems to me that the popularity of fixed rates deals shows that many today think that rates will go back up in the next few years as inflation starts to go up.

You would be very happy you got a long term fixed rate when the base rate starts to creep back up, but your payments don't go up like everyone elses :T

downsizer3

I think thats a perfectly reasonable way to go, if you are able to take the risk.
The reason I am risk averse is quite simple - I have dependants and thats completely changed my outlook from calculated but larger risk to taking as little risk as possible.
I got out of one of those 'calculated risks' by the skin of my teeth in 2010 and frankly won't be risking my home again - spare cash when I get some - yes - but my child's home - nope.
Good luck to you though - hope it works out and as a strategy - I can see a lot of merit in it.