What to do: Overpayments or not?

Metis84

Hello, I'm hoping for some advice...

We bought our first house in August 2008, so our house obviously lost value from the day we bought it.

We've been in the fortunate situation where our earnings have increase over that period, and we're almost there with the amount we'd need to put down on a larger property (15%).

So, this is a pretty great situation, and with signs that the market might be picking up, there becomes an optimum time for us to move in terms of the property we buy having potentially lost more value than the one we'll be selling. And while we'll benefit from any rise on our current property, the properties in the range we'll be looking to buy will rise by a bigger absolute value.

The complicating factor is that due to recent developments, my job now means that we're likely to be staying local for the next year or so, where the plan had been to make a major geographic move. So, it seems we're going to be stuck in this house for a little while, until we get to the point of being able to move where we want to long-term.

We're considering using the cash we have to pay off a big chunk of our current mortgage:
- this seems like the best long term choice in terms of saving on interest etc
- However, we want to make sure we've thought through the implications properly. It will give us less flexibility if the market goes down again and we find our equity is lower than the value we'd need for the deposit on our next property
- we have been aiming to get to a 15% deposit for our next property, which would give us better interest rates (although the irony that the longer we wait to save that money might leave us back were we started if rates increase sufficiently during that period)
- the other option we considered, although we're thinking it might be a pipe dream was to put 10% down on our next property, and rent out our current one. Again, the implication of over paying now, might take away the small chance of us being able to do this

I guess we're just overly fearful/cautious after our first experience, having made huge sacrifices to save up our deposit for our first house, just to see that wiped off the value from day one. We just don't want to have something similar happen again.

If anyone has got any thoughts to add of factors we've no considered, I'd really appreciate it!

Thanks,

sensibly_insane

There has been number of threads on this issue recently in http://forums.moneysavingexpert.com/forumdisplay.php?f=149. Plan your move cautiously. It is the start of building up of another property bubble and it is bound to burst as any other bubbles in the past. How soon, no one can tell could take ten years or could be a few months.

Current apparent house price inflation is the result of reckless money pumping into the system by the government which is not sustainable in longer terms. It is a complex subject but you need to understand one thing everyone cannot be the winner in this game, someone has to lose. After your first experience, you very rightly know who lost in 2008 crisis.

Thrugelmir

If the rate of interest you are paying on your mortgage is higher than you are earning on your savings. Then paying the mortgage down wins every time.

ValHaller

Metis84 wrote: »

....
So, this is a pretty great situation, and with signs that the market might be picking up, there becomes an optimum time for us to move in terms of the property we buy having potentially lost more value than the one we'll be selling. And while we'll benefit from any rise on our current property, the properties in the range we'll be looking to buy will rise by a bigger absolute value.

.....

We're considering using the cash we have to pay off a big chunk of our current mortgage:
- this seems like the best long term choice in terms of saving on interest etc
- However, we want to make sure we've thought through the implications properly. It will give us less flexibility if the market goes down again and we find our equity is lower than the value we'd need for the deposit on our next property
- we have been aiming to get to a 15% deposit for our next property, which would give us better interest rates (although the irony that the longer we wait to save that money might leave us back were we started if rates increase sufficiently during that period)
- the other option we considered, although we're thinking it might be a pipe dream was to put 10% down on our next property, and rent out our current one. Again, the implication of over paying now, might take away the small chance of us being able to do this

I guess we're just overly fearful/cautious after our first experience, having made huge sacrifices to save up our deposit for our first house, just to see that wiped off the value from day one. We just don't want to have something similar happen again.

If anyone has got any thoughts to add of factors we've no considered, I'd really appreciate it!

As has already been hinted, the government is stoking up the housing market to generate a feel good factor for the next election. A problem with this is locality - in order to get house prices off the blocks in areas where the Tories do badly - the North - they have to let things go crazy in their heartland - the SouthEast

So how you should play this depends a lot on locality - and as you are considering moving, you need to consider the difference between localities.

The trouble with stoking the housing market for a feel good is that it is too much cream cakes - ultimately it feels bad and house prices can sink back. If you can buy below the level the market might sink back to, then no real damage.

As for the risks you perceive from putting money against your mortgage if house values drop, really it makes no difference. If you have the 15% as cash and you have to sell for less than you bought for, you'll have to make up the shortfall from your 15% before you buy another property. If you put the 15% to the mortgage and you sell for less, you leave the deal with your 15% returned, less the shortfall. So better to put the money to the mortgage if that gives the best return.

sensibly_insane

"House prices are booming again but the bust that’s bound to follow will cost us dear. A rise in rates would inevitably cause an immediate and deep house price crash."

An interesting article published today

Dave_the_Ginger_Cat

Thrugelmir wrote: »

If the rate of interest you are paying on your mortgage is higher than you are earning on your savings. Then paying the mortgage down wins every time.

Agree

Whatever you do with this money, the net effect on your finances are neutral, you'll either have it in the bank or in equity. You don't have to put down all the equity in your current house as deposit for your next one.

The only time I could see it might matter is if you entertain owning two, which has been a much discussed topic on this forum.