Is it worth buying as a stepping stone or renting?

dandan11_2

Hi guys,

I'm pondering my situation at the moment.
I want to purchase a house which at the moment is out of my means.
I have the means to purchase a 1 bedroom flat with a mortgage (help to buy mortgage). I would like to purchase a house in a couple or years....that is my overall aim.

The flat is £75k. A two bedroomed house is about £125k.
At the moment I rent (£600pm) and am able to save £1000 per month to put towards the property purchase.

Would it be better to purchase the flat now with a mortgage with the intention of moving after 2/3 years into the house OR would it be better to continue renting and saving as I am at the moment.
The rent is £600 pm. The mortgage on the flat would be about £350 per month. Would it be better renting as the mortgage payments in the first few years will just be paying off the interest...by buying the flat I would be able to save more than the £1000 per month.

The more i think about this the more confused i become. Any one have any views?

Pixie5740

I wouldn't buy somewhere just to live there for 2/3 years. Especially not with the way property is bought and sold in England (I'm assuming you're in England) because in a couple of years time should you see a house you'd like to buy you'll need to form a chain to sell the flat and buy the house, or sell the flat go back to renting and then try and buy a house.

If you did buy the flat you'd need to factor the costs of buying and selling as well as management company fess as a leaseholder and other costs of home ownership such as potentially having to replace a boiler or some other maintenance, then again you might get lucky and nothing will go terribly wrong in the 2/3 years you are in the place.

dandan11_2

Thanks for the reply.
There are obviously costs related to home ownership and yes, being in a chain when I come to sell is less appealing than being a first time buyer.

That being said, the £600 a month i am paying now in rent equates to £14,400 over two years.

Pixie5740

How much mortgage interest would you pay in those two years?

HappyMJ

I'm a bit confused. Is the flat at £75k rented out for £600 a month? If so that's a great investment property with a 9.6% return. If leveraged using a mortgage at 5% interest at 75% LTV then the return jumps to a whopping 23.4% on funds invested i.e on the £18,750 deposit you'd get back £7,200 in rent and pay out £2,812.50 in interest netting £4,387.50 profit.

In comparison I pay £475 a month on my home which was last sold for £130k in 2005.

Red-Squirrel_2

dandan11 wrote: »

Thanks for the reply.
There are obviously costs related to home ownership and yes, being in a chain when I come to sell is less appealing than being a first time buyer.

That being said, the £600 a month i am paying now in rent equates to £14,400 over two years.

If a mortgage payment was £350, you'd be saving £250 a month.

I would warn you that I pay £150 a month over and above my mortgage payment in service charges, ground rent, parking etc. just to live in my leasehold city centre flat, that's before any bills or maintenance costs, and my service charge is one of the cheapest in the area. The savings might not be nearly as much as you're hoping.

Of course, if house prices continue to rise you could 'win' by gaining equity in a flat just for living there, but that's always a gamble as nobody ever knows what will happen to house prices.

Personally, I wouldn't buy somewhere unless I had a reasonable expectation I'd live there at least 4-5 years.

Pixie5740

HappyMJ wrote: »

I'm a bit confused. Is the flat at £75k rented out for £600 a month? If so that's a great investment property with a 9.6% return. If leveraged using a mortgage at 5% interest at 75% LTV then the return jumps to a whopping 23.4% on funds invested i.e on the £18,750 deposit you'd get back £7,200 in rent and pay out £2,812.50 in interest netting £4,387.50 profit.

The OP currently rents a property paying £600pcm in rent and is thinking about buying a £75k flat to live in.

HappyMJ

Pixie5740 wrote: »

The OP currently rents a property paying £600pcm in rent and is thinking about buying a £75k flat to live in.

Ok thank you so if OP is willing to live in a much cheaper property then OP why don't you find a smaller flat to rent?

dandan11_2

Yes I currently rent at £600 per month in rent.

The flat i am interested in purchasing is £75k. The mortgage payments would be about £350 per month. I would pay £89 a month in ground rent/maintenance fees/water rates.

dandan11_2

Thats certainly a possibility. The flat i am looking to potentially buy is also on the rental market for £400 per month. (£9600 over two years)