Deposit on property or equity investments

ruperts

Hi All


I'm wondering if there's any conventional wisdom, or better yet evidence backed reasoning that applies to my situation.


I can provide more detailed information if required to get the best answer but I'll try to keep it simple for now.


I'm currently renting chiefly because I haven't been able to afford a deposit. I'm now in a position where I can afford a modest deposit but it would mean wiping out all of the money I've been slowly investing into a S&S ISA, which was intended to be my back up pension.


I do also maximise the matched contributions on my work pension, so now that my ISA has reached potential property deposit levels I'm rethinking the logic (or lack thereof) behind having essentially two pensions while renting against just having the one work pension and using the ISA for a property deposit.


Intuitively I feel like this is a 'no-brainer' and that renting is doing more long term damage to my wealth than I could hope to recoup via the ISA, but at the same time it has taken me years to develop and hone my ISA and quite honestly, I'm emotionally attached to it and would feel uncomfortable 'spending' it on a deposit. Also there are market timing considerations.


I like running the numbers. Are there any calculations I can do to convince myself that using the money for a deposit is a far better idea than keeping it in the ISA, if indeed that is the case? Or any other general thoughts on this subject?


Thanks in advance

george4064

This is a tricky question, and all I can say is wait till you think it is the right moment/found the right property to buy. Don't rush, but on the other hand don't wait too long (i.e. never buy a property).

I'd be very interested to see what the more experienced MSE'ers comment on this, because I myself will probably be in a similar situation to you in the near future.

Pincher

Standard strategy is to buy a two bedroom, and rent out a room.
Let a Room relief is going up.

I started a new job about 30 years ago. The company brought in a financial adviser for all the employees to chat with anyone who wanted it. Amusingly, he advised me to get my parents to guarantee a mortgage, and buy a four or even five bedrooms; live in it, rent out the rest.

Excellent advice, shame he didn't get a penny from me.

bigadaj

It's not necessarily soemthing that can be quantified fully but there's some stuff you can do.

A basic comparison between the rent you are paying and your likely mortgage costs, though there are additional potential costs in ownership that also need to be considered.

The increase in Isa limits does mean that you can rebuild the Isa more quickly than was the case a few years ago.

There's nothing fundamentally wrong with renting, as is indeed the case across much of Europe, though the UK obsession with property doesn't look like abating meaning that prices may well continue to increase and rents may also do.

atush

first, how much would you save/spend extra per month if you owned rather than rented? Incl all the costs of owning.

Then, do you have cash savings? How much? How much dd your S&S isa drop during the recent fallds? Would this loss set you back in buying?

If not fine, if so- should you be investing if you need the money soon?

if you decide to go forwards a few months, while considering or investigating buying more seriously, I would divert all new S&S isa funds into cash for the time being.

ruperts

atush wrote: »

first, how much would you save/spend extra per month if you owned rather than rented? Incl all the costs of owning.

Then, do you have cash savings? How much? How much dd your S&S isa drop during the recent fallds? Would this loss set you back in buying?

If not fine, if so- should you be investing if you need the money soon?

if you decide to go forwards a few months, while considering or investigating buying more seriously, I would divert all new S&S isa funds into cash for the time being.

From the research I've done so far it appears that buying will cost approx. £200 per month more than renting all things considered.


This is where I've got to with the calculation so far: for arguments sake if we say renting costs £500 per month and buying costs £700 per month then assuming the mortgage interest is roughly in line with rent inflation then over a 30 year term renting saves around £70k.


My current ISA value plus the £70k invested at £200 per month returning say 7% per annum would be worth £302k at the end of the 30 year term. Meanwhile the property, from a starting valuation of £120k, if it appreciated by 3% per annum (realistic?) would be worth £294k. Which makes it very close but relies on a few big assumptions.


I have a few thousand cash savings which I would anticipate spending on fees, surveys, moving in costs etc. and would have to keep an emergency fund, so practically all of the deposit would come from the ISA.


My ISA investment strategy follows along relatively conservative Tim Hale/Monevator lines - most of it is in Vanguard Lifestrategy 80/20. I'm not sure exactly how much I've lost in recent weeks but I do know I'm still up overall and psychologically I would feel fine with selling the investments as of today, as long as I knew it was going towards a better long term strategy.

Thrugelmir

ruperts wrote: »

This is where I've got to with the calculation so far: for arguments sake if we say renting costs £500 per month and buying costs £700 per month then assuming the mortgage interest is roughly in line with rent inflation then over a 30 year term renting saves around £70k.

Once the property is paid for you have no outgoing. In work/retirement your payback is having no rent to pay. While your rent continues to rise with inflation. If still in work you can add further savings.

ruperts

Thrugelmir wrote: »

Once the property is paid for you have no outgoing. In work/retirement your payback is having no rent to pay. While your rent continues to rise with inflation. If still in work you can add further savings.

I've tried to think about where that fits into the calculation and I think if the equity investment returns more (assumed 7%) than the property appreciates (assumed 3%) then either way I'd be left with an asset worth around £300k. Which means at that point I could buy the property outright from the ISA money and end up in the same situation of having no rent or mortgage to pay.

Thrugelmir

Historic averages are below 7%. Barclays Equity Index is around 5% since it's inception. Last 15 years has averaged nearer 4%.

Excluding dividends FTSE is currently 17% off it's 12 month peak.

Personally I would be less optimistic. In the medium term. China is slowing. The net effect will be to export deflation.

Mistermeaner

A bit of everything would be my 2 pennies.

So many factors than just wealth when considering buying a home (a home) vs a 2nd property for btl.

Is there a reason you can't do both? Buy a house but make sure it's so affordable that you don't cash your whole isa and also that you continue to pay into your isa as well as the mortgage.

nstreather

To put in a nutshell, when it comes to investing in property you have to keep your costs as low as possible which includes your mortgage costs.

Why make life difficult by making monthly payments that are higher than need be.

I would recommend always going with an interest only mortgage

True you can release equity to the property with a repayment mortgage but the costs will be high every month because you are paying the interest as well as the actual price/value of the property.

the true money investors make is through remortgaging the property. With an interest only mortgage, the tenant is paying the mortgage plus gaining a little bit of profit for yourself. give it 1-2 years and then you can remortgage the property based on its actual value to date. the property value will go up and you will receive a lump sum that you can invest into another property. To make most profit always try to get a property below market value so you can make more money through this method. Please read more about Remortgaging first before taking action as its quite a delicate method.