Are £6500 Early Repayment Charges worth it to buy another property?

Neo_X

I'm in the process of buying a new property in East London with a Woolwich (Barclays) residential mortgage. The property is about a mile away from my existing property that I have a residential mortgage on also with Woolwich, which I bought in March 2012.

In order to purchase the new property, Barclays requires me to convert my existing mortgage to a buy-to-let mortgage. It's on a 2-year fixed term and therefore I will incur 3% Early Repayment Charges of approximately £6500.

This is on top of all the other costs: surveys and solicitor costs for both properties, stamp duty on the new property, mortage application fees, etc. Of course, all of these charges are unavoidable in any case. But, the £6500 Early Repayment Charge could be avoided if I wait until March next year and find another property then.

So, my question is, given that I really like this new property and I think it's a good deal, is it worth ditching it and waiting till March 2014 to save the £6500? I'm not sure what the house price increases are these days, but it used to be ~8%. Offset against the value of the new property (£265,000), let's call it six months' between now and March 2014; that's over £10,000 increase in value.

Thoughts or comments anyone? Is it worth it to do it now and not wait?

Goldiegirl

It sounds as if you are purchasing another property because you want to, rather than need too. By that I mean that you are not having to sell your current property and move because of a job relocation or something like that.

You are keeping your current property and moving just up the road, so this is something that is nice to do, rather than a necessity.

To my mind, and in the absence of a crystal ball to predict what house prices will do, I'd say £6500 is quite a lot to pay on something that is not vital.

Neo_X

The aspect of need vs. want in house buying is subjective. The purpose of the transaction is long-term investment. All I'm trying to do is weigh up the figures. No one can predict house price movements. But, I'm not risk-averse. £10,600 increase over six months, even if overestimated by as much as £4000, seems enough to cover the £6500 ERC in my view. Additionally, I will be gaining upwards of £1500 pcm rental income as well.

On the face of it, it seems worth it (with the risk caveat of course). But, it would be useful to get a second opinion on the figures because there are other things to consider such as mortgage interest over those six months, which I'm not sure would be a factor anyway because this would always be a cost in any case.

One other thing, the £6500 is not something I'd pay outright. It will be added to my new BTL mortgage. So, I'd not see it come straight of my pocket, but that shouldn't detract from the fact that it is still a cost on my portfolio.

Thrugelmir

Best investment you'll ever have is the property that's your home. Personally I would repay £6,500 (if permissable) off the current mortgage rather than incur an unneccessary cost.

Leveraging with debt is more akin to gambling than investing in the current economic climate. As the days of the credit boom are well past.

Neo_X

There's no leverage here. And I'm trying to avoid a discussion about general investment philosophy. I've done my research and I'm familiar with investing in a volatile market.

My question really surrounds the figures I'm talking about. Is the £6500 worth it against the potential gain over the next six months. I should also mention the property is in the Olympic catchment area of East London where my existing property has already achieved ~15% gain in the past year. I believe the new property will therefore certainly not be below 2.5% gain over the next six months, the minimum I'd need to break even on the £6500 ERC (as far as I can see, that is).

Also... this time it's different

kingstreet

Will Barclays allow you to remortgage the current property to a BTL with them, or a new lender while you port the rate from the current mortgage to a new mortgage with them so you can avoid paying the ERP?

Neo_X

This is what they are doing - they're allowing me to remortgage the current residential mortgage I have with them to a BTL mortgage. But, I still need to pay the ERC apparently on the existing mortgage even though it's with the same lender. And it has to be BTL as they won't permit me to have them both as residential.

izools

Maybe it's worth putting it to them that unless they're willing to waive / reduce the ERC you'll look to take your business elsewhere - point out to them that if you'll have to pay the ERC whether you stick with them or not you're clearly better off finding a better value lender.

Which to be honest mightn't be too difficult depending on your LTVs.

kingstreet

Neo_X wrote: »

This is what they are doing - they're allowing me to remortgage the current residential mortgage I have with them to a BTL mortgage. But, I still need to pay the ERC apparently on the existing mortgage even though it's with the same lender. And it has to be BTL as they won't permit me to have them both as residential.

They aren't doing what I'm suggesting.

You've omitted the bit about porting the rate from the old mortgage to the new one.

What benefit do you derive from doing both with Woolwich if you can't port the rate to avoid the ERP?

What I'm suggesting is;-

- remortgage current property onto BTL product with Woolwich or new lender

- apply to Woolwich for new mortgage on new property while porting existing rate for existing amount from existing mortgage on the date the completion of the remortgage and the new purchase takes place

- any increased borrowing is given on your choice of product from the lender's current range.

This way, there will be no penalty payable, as you will see out the remaining time on the current rate.

You must specifically ask the lender if it can/will do this. Some lenders will, some won't, but you must ensure they fully understand what you want to do. Otherwise, as it appears now, you're going to end up with two Woolwich mortgages and an ERP to pay as well.

If you have not alresdy done so, speak to an independent or whole market broker to investigate this further.

Thrugelmir

Neo_X wrote: »

There's no leverage here.

In my dictionary. The use of credit or borrowed funds to improve one's speculative capacity and increase the rate of return from an investment.

melj16

can you not request consent to let, and stay on that deal until your fixed rate rolls off, and then convert to BTL?