House purchase dilemma

adonis10

Having lived in my mortgage free flat for 2.5 years I'm now looking to get a place with my partner and have a dilemma.



Option 1:
Sell flat and put down a massive deposit and have a very low mortgage and plenty of disposable income.

Pros:
- low commitment each month
- plenty of disposable income to accommodate inevitable interest rate rises

Cons:
- no fallback plan (fully owned property to live in) if interest rates reach silly heights in the future
- not really making extra disposable income work well and increase in value

Option 2:
Rent out flat for around £800/month, put down about 20k each on a new place (ideally a house) with a 200-230k mortgage.
Pros:
- one fully owned flat and working towards owning another
- rental income basically covers my part of the mortgage
- plan b if anything goes wrong with a) economy and/or b)relationship
- no chain when buying a new place
- no fees to sell the flat

Cons:
- high monthly mortgage which could get out of control when rates go up (although renting out spare room could help mitigate this)
- not much disposable income to save and/or put in pension.


Just looking for some advice, really. I'm sure there are people here who have been/are in a similar situation.

fairy_lights

Unless you want to be a landlord and take on all the responsibility and risk that come with it, I'd go for option 1. If you'd only have a small mortgage anyway then you'll be able to get it paid off and be back to being mortgage free soon enough anyway.

adonis10

fairy_lights wrote: »

Unless you want to be a landlord and take on all the responsibility and risk that come with it, I'd go for option 1. If you'd only have a small mortgage anyway then you'll be able to get it paid off and be back to being mortgage free soon enough anyway.

Well I would probably go with the option of using a letting company and then let them do the dirty work. I'd be extremely selective of who I have in there to try and ensure that there is as little damage etc. as possible.


I just like the idea of eventually having two properties. I know that if I've got a small mortgage I probably won't be quite as good with my disposable income as I would if it had to go to paying off a 2nd home.

pinkteapot

Read up on being a landlord (even with a managing agent) and see how you feel about it...

If you go with Option 1, as soon as you are mortgage-free again you need a good plan for investing your disposable income that was previously going on clearing the mortgage, if you're aim is saving for the long term. Cash savings are no use for that. Less thought involved if you put it all into property by having two properties, but on the other hand you're not diversifying your investments...

It also depends on what interest rate you could afford your repayments up to when interest rates rise. The Bank of England are suggesting that they think the 'new normal' long-term rate will be around 2-2.5% (base rate, not mortgage rate), as opposed to around 5% previously.

If rates ever did go silly high, you could always sell the flat at that point (subject to a tenant finishing their tenancy agreement length first), though house prices may have taken a knock...

Pixie5740

adonis10 wrote: »

Well I would probably go with the option of using a letting company and then let them do the dirty work.

There's your first mistake.

pinkteapot

Oh. Your forgot Option 3:

Sell the flat, put down a huge deposit, still get a big mortgage and have a bigger/nicer house.

That's what we did. We went from being £35k off mortgage-free in a £250k house, to taking on a £250k mortgage on a £500k house.

Depends if you want the value of your property investments to be split between two properties, or all in one. Obviously by having two you can generate an income stream from the rent on one of them.

We avoided interest rate worry on the big house by:

1. Ensuring the mortgage was still affordable up to about 8%, and by the time they get higher than that we're likely to have had pay rises.

2. Buying something in a hugely popular area where there's always demand. If rates go up and the worst comes to the worst, we can sell up. Unless house prices have fallen by more than 50%, we won't be in negative equity. And if house prices have fallen 50%, the whole country is stuffed anyway.

adonis10

pinkteapot wrote: »

Oh. Your forgot Option 3:

Sell the flat, put down a huge deposit, still get a big mortgage and have a bigger/nicer house.

That's what we did. We went from being £35k off mortgage-free in a £250k house, to taking on a £250k mortgage on a £500k house.

Depends if you want the value of your property investments to be split between two properties, or all in one. Obviously by having two you can generate an income stream from the rent on one of them.

We avoided interest rate worry on the big house by:

1. Ensuring the mortgage was still affordable up to about 7%, and by the time they get higher than that we're likely to have had pay rises.

2. Buying something in a hugely popular area where there's always demand. If rates go up and the worst comes to the worst, we can sell up. Unless house prices have fallen by more than 50%, we won't be in negative equity. And if house prices have fallen 50%, the whole country is stuffed anyway.

Ha, true. Unless I win the lotto, I don't want or need a 400/500k house. No kids and really rather not pay the extra bills for space I don't need.
It'd also be difficult with option 1 because I'd be putting down in the region of 170k and partner 20k, which could cause issues should anything happen later down the line. At least with option 2, we're going fully 50:50.

If rates went silly high, two foreign students come in to rent out the 2nd double room and the income from that deals with the increase.

adonis10

Pixie5740 wrote: »

There's your first mistake.

Why's that then?

To be fair I think I'd probably do it myself (after much research) and save £100 ish a month. At least then I'm in full control and can personally pick tenants etc.

pinkteapot

adonis10 wrote: »

Ha, true. Unless I win the lotto, I don't want or need a 400/500k house. No kids and really rather not pay the extra bills for space I don't need.
It'd also be difficult with option 1 because I'd be putting down in the region of 170k and partner 20k, which could cause issues should anything happen later down the line. At least with option 2, we're going fully 50:50.

That's not a problem at all.

When you buy together, your solicitor will ask whether you want to buy as "joint tenants" (equal shares and if one person dies, the other automatically owns the whole house) or "tenants in common" (the shares you own are written down in a legal doc, your shares are separate and form part of your estate if you die).

So, in your case, you could go tenants in common and work out a way of documenting your shares of the house. This means it's all organised in terms of what would happen if you split up and sell. Your solicitor can help with this.

If you do go the tenants in common route, you must both have wills if you want to ensure the other person gets your half of the house in the event of your death. Again, get a solicitor's advice on this.

TBagpuss

If you sell the flat and buy a new property, then you can also set up a regular saving or investment plan with the disposable income, giving you a mix of investment in property and non-property, and with the option of using some of the savings to reduce the mortgage if and when rates rise or you have difficulty meeting the monthly payments.

boliston

I would not be so keen on jointly investing with a partner as if you split up it could get complex legally. I would let out my existing flat via an agency and use the income to jointly rent another flat. That way you keep flexibility if your circumstances change.