First House & Future Strategy Plan, Am I Thinking Right?

JSCB

Hi everybody!

So I'm in kind of a unique position, I'm looking at buying my first home alone and have a few ideas for how things might go going forward. I was hoping that if I listed some of my plan, whether you guys would mind reading over it and with your much better judgements, knowledges and experiences than me, offer me any advice/suggestions that might come to mind?

So,

I'm coming 22, still living at home but in no rush or immediate need to leave
I have approximately £50k in savings
Earn approximately 45k per year before tax (but am self-employed so this isn't exactly set in stone - I do also have 2 mortgage agreements in principle already so don't need to worry about the effects of my self-employed status on this)

I'm looking at buying my first home, probably a semi-detached 3 bed house in the region of 140k in my own name, with the potential to spend up to around £15-20k on improving it. I'd look to make the kitchen/dinning rooms into one, decorating throughout, possibly extending into the loft since I'm a plasterer by trade so could do a lot of that work myself, and adding a driveway to the front.

I'd be looking at a 25year repayment mortgage with a 15% deposit of around £20k, leaving me with £30k to develop the property, pay fees, buy furniture and have a decent emergency fund left over since I'm on my own and self-employed.

I'd also be thinking of having it on a 2 year fixed rate, so until I was 24 before re-evaluating.

In the future, if I ever met a partner, I'd plan if locally for them to move in and then potentially buy in to the mortgage, or otherwise to buy a new house in joint ownership in our names while transferring my own property into a ltd company and renting it out as the start of a portfolio in my mid 20's with ambition to grow this portfolio into my 30's and beyond. This would also give me some security of a home to return to if ever needed.

I'm looking at buying now over continuing to remain at home, as I'm getting to the point where I have the funds saved and feel I need to beginning doing something with them (you can only hold so many current accounts and monthly savers!!) as apposed to just hoarding more and more. I also want a project to work on on the side and I feel I could learn a lot from that, and I think I'd gain personally by taking the leap and being fully independent as well.

How does this plan sound? Does it sound good or bad? Is there anything you'd suggest, agree with or advise against?

Thank you for reading!
Joe

missile

Sounds like a good plan to me.

No point in overthinking too far ahead. I don't want to rain on your parade. Forming a Ltd Co and having a portfolio of properties to let might be a bit of a leap for someone who lives at home with his parents..

tlc678910

Hi OP,
If you carry on with the same saving ethic I bet you will overpay your mortgage and so get the best loan to value in no time.

Just a note about your future plans. If you keep your first home and then buy a second property (e.g. your next home with a partner) you will pay an extra 3% stamp duty, on top of any normal stamp duty. So if you were upgrading to a 300K home that would be an additional 9k.

You would expect to have a mortgage on your first home - to release money for your second, or to have a bigger mortgage on your second because you have kept money in the first property. You would factor in your additional finance costs when calculating how profitable the rental will be.

Let’s say you take rent of £600 each month but have interest only finance costs (which you would not have had if you had sold property one) of £300 each month.

You will take (after interest only finance costs) £3,600. 40% tax reduces this to £2,160. As a higher rate tax payer (your salary and your rental income combined) your mortgage interest will not be fully deductible as an expense - so you pay your rate of tax (40%?) and receive a 20% credit back so an extra £720 is lost to tax. Your income from the property is now down to £1440.

You will need to insure, gas safety test, repair and maintain the property and cover any voids, non paying tenants, eviction etc. You will be able to deduct these costs before calculating the tax you owe though.

Let’s say you average an optimistic 1k income each year. It will take you 9 years of letting hassle to make back the additional stamp duty you paid before you turn a penny profit.

You can also see how easily a landlord could come unstuck if they owned a few (mortgaged properties) and in a recession at the same time as their own work taking a down turn several of their tenants stopped paying.

Think through the scenario with numbers that are realistic for you but it is easy to see how without house price growth letting out a property (with a mortgage) is not worthwhile and could cost you money. So then I suppose it is important to consider whether you think there will be strong house price growth.

Another approach you could consider, if you are not convinced of strong house price growth, would be to overpay your mortgage and if you want to upgrade your home in the future do that by taking all your equity with you and selling the old place. Overpay the property again until you have paid off a property that you are happy to remain in (there is no tax or tenant hassle paying your own mortgage and benefitting from house price gains of it).

You could then save up for a property to let and as it will be a cheaper property than your home, I expect, pay less stamp duty. You could specifically choose a property that you think suits letting i.e. economical to heat and maintain, small garden, in area of high demand etc. The greater chunk you put down the more financially worthwhile it will be as you won’t lose most of the income to mortgage interest/tax.

There may be more anti-landlord legislation yet so keep an eye on that in the meantime.

Good luck!
Tlc