Buying a flat in London with the aim of renting it out in 5 years' time

homebuyer2020

AdrianC wrote: »

£65k equity and £340k purchase price means £275k mortgage.
Taking all the defaults gives £1,377 of monthly repayment.
In four years, you'll owe £245k, so have repaid £30k from the principal, but £36k of interest.
In five years, £237k so £38k, but £45k of interest.

Then there's the £2k of SDLT if you're both FTBs, £7k if one of you has previously owned property - and, of course, the purchase and sale fees. Let's say £5k for both.

So simply owning the property could cost you £57k in interest and fees over the five years - as well as adding £38k to your equity, assuming price stasis.

How much are you paying in rent now?
How flexible do you want to be when an opportunity to emigrate comes along?
What return could you get on your £65k equity in the meantime?

Thank you for sharing this calculation with me! Super useful. I have been told in the past that I should aim to own for 5 years minimum before selling to make a purchase worthwhile, but it looks like, in reality, you have to own for a lot longer than that to make it worthwhile.

Am I correct in assuming that if someone bought a property, stayed in it for 5 years, then moved up the property ladder to a bigger property (also in the UK), they could take the equity and mortgage from the first property with them and it would still be worthwhile? Apologies, this is a massive over-simplification but hopefully, you understand what I am asking!

AdrianC

homebuyer2020 wrote: »

Am I correct in assuming that if someone bought a property, stayed in it for 5 years, then moved up the property ladder to a bigger property (also in the UK), they could take the equity and mortgage from the first property with them and it would still be worthwhile?

Of course the equity will transfer - you'll have £93k of equity after the five years. Whether "the mortgage" transfers, or even whether you've remortgaged before moving, is a separate question entirely.

It's simple basic maths that loan amortisation frontloads the interest you pay, and the amount you repay curves down as time goes on.

homebuyer2020

AdrianC wrote: »

Of course the equity will transfer - you'll have £93k of equity after the five years. Whether "the mortgage" transfers, or even whether you've remortgaged before moving, is a separate question entirely.

It's simple basic maths that loan amortisation frontloads the interest you pay, and the amount you repay curves down as time goes on.

Thank you! I understand. The point I am trying to make and have confirmed is that, if we were not planning to move abroad and instead we stayed in the UK and then moved to a different property in 5 years' time, we would be in a much better position financially, than if we sold up and left the country after 5 years.

AdrianC

You'd be in exactly the same position - the only difference is geographical.

seradane

AdrianC wrote: »

£65k equity and £340k purchase price means £275k mortgage.
https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/
Taking all the defaults gives £1,377 of monthly repayment.
In four years, you'll owe £245k, so have repaid £30k from the principal, but £36k of interest.
In five years, £237k so £38k, but £45k of interest.

Then there's the £2k of SDLT if you're both FTBs, £7k if one of you has previously owned property - and, of course, the purchase and sale fees. Let's say £5k for both.

So simply owning the property could cost you £57k in interest and fees over the five years - as well as adding £38k to your equity, assuming price stasis.

How much are you paying in rent now?
How flexible do you want to be when an opportunity to emigrate comes along?
What return could you get on your £65k equity in the meantime?

But what you leave out is you have to live somewhere in the meantime. Assume the rent is the same as mortgage payments (adjust as necessary) at £1377/mo. That's £82,620 you've paid out in rent that you get nothing back for. So all of a sudden you're £25k better off than had you bought/sold, all things being equal.

To get that in returns from your £65k deposit is 7.7% - pretty unlikely in this day and age.

AdrianC

seradane wrote: »

But what you leave out is you have to live somewhere in the meantime. Assume the rent is the same as mortgage payments (adjust as necessary) at £1377/mo. That's £82,620 you've paid out in rent that you get nothing back for. So all of a sudden you're £25k better off than had you bought/sold, all things being equal.

To get that in returns from your £65k deposit is 7.7% - pretty unlikely in this day and age.

Indeed.

But what if the property market drops? £25k off a £340k property is far from unlikely.

And what price flexibility? You can't take that opportunity, because you haven't sold your flat yet...