Bigger house or invest in funds?

btcp

We are about to pay off the mortgage. I wouldn’t mind an extra room and getting a bigger house sounds appealing. At the same time our pension pots are around 100k each which is not much, we are at mid 40th. We are in London, and the house we are paying off increased in price  by 60% in 8 years. It doesn’t sound like a bad investment to me, so would it make sense to buy a bigger house and enjoy it now, then downsize or move to a cheaper area at the retirement instead of investing in pension/ISA now? 

El_Torro

This isn't purely a financial decision. I would say if you're just looking at your assets and looking at how to best utilise your money then stay where you are and invest spare money into your pensions and Stocks & Shares ISAs. It will give you more options in the future, such as having the option to retire sooner. 

Having said that though the above doesn't take into account how big your desire / need is to move to a bigger house. If you really think this will improve your quality of life and can afford it then why not?

I wouldn't look at a bigger house as an investment. The value of the house will probably go up over the long term, but nobody knows by how much. Don't assume that living in a bigger house is a better investment than shares.

Also, downsizing at retirement may not be as easy as you think today. You might become attached to your new house and not want to move when the time comes.

grumiofoundation

The fact that House A has gone up by 60% in 8 years (assuming you could actually sell it for that price) does not mean House B will go up by 60% in the next 8 years.

As said above it isn't a purely financial decision. 

If you want to live in a bigger house, and can afford it (afford it in the short, medium and long-term) - will you regret not doing this?

Albermarle

At the same time our pension pots are around 100k each which is not much, 

Yes rather on the low side.

The value of paying into a pension depends on your and your partners situation.If you work for an employer you should always contribute what is necessary to get the maximum contribution from the employer .Most employers have a fixed contribution but some will increase theirs if you increase yours.

The minimum tax advantage of a pension is 6.25% , but if you are a higher rate taxpayer and /or your contributions are taken from your salary via a salary sacrifice scheme then it will be more, possibly significantly more.

btcp

Thanks all, great points. It is indeed not just a financial decision. Working from home this year puts a bit of a pressure space wise, at the same time it’s not going to be forever. And there is no guarantee I sell this house fast and for the price I want.  So we really need to think it over. 

As for the pension, our employers will not increase contribution if we increase ours. I was paying 25% this year to max out 40k allowance and increase my pot, and they only pay 8%. So the decision I need to make this year is whether to continue with my 25% or pay in 8% and use the rest of the money for something else, I.e. invest in funds, house...

Linton

Which is more important to you - working for longer in 20 years time  or a larger house now?  Could you get a larger house for the same money by moving further out of town?
Presumably you are already investing in funds in your employers pension - what would you gain by investing in funds outside your pension?  If you were thinking of investing outside your employers pension because it has a poor choice of funds you could always put any money beyond that needed to get the maximum employer contribution into a SIPP where you would have the choice of 1000s of funds.

DireEmblem

I would stick with your current house if you are happy with its location / size, and decide how best to invest the additional funds you will have without mortgage payments.  I think you have a choice between buying to let, or investing.  The latter probably has the least amount of ongoing work for yourselves, and if you top up your pension now, you should get tax relief from the government, and then a 25% tax free amount when you eventually retire.

btcp

Linton said:

Which is more important to you - working for longer in 20 years time  or a larger house now?  Could you get a larger house for the same money by moving further out of town?
Presumably you are already investing in funds in your employers pension - what would you gain by investing in funds outside your pension?  If you were thinking of investing outside your employers pension because it has a poor choice of funds you could always put any money beyond that needed to get the maximum employer contribution into a SIPP where you would have the choice of 1000s of funds.

I probably could get a larger house for the same amount of money moving out of town, but we are not ready for it. We like the area and proximity to everything, plus my partner commutes to work a few times a week. 

As for investing in funds outside of pension, there are a couple of reasons. If I max out 40k Tax free pension allowance, I want to put extra money somewhere. I put them in S&S ISA now as didn’t find a better option. Also investment outside pension are more accessible. I know cashing out investment short term is not a good idea, but the fact that I can sell them in an absolute emergency makes me sleep better. 

btcp

DireEmblem said:

I would stick with your current house if you are happy with its location / size, and decide how best to invest the additional funds you will have without mortgage payments.  I think you have a choice between buying to let, or investing.  The latter probably has the least amount of ongoing work for yourselves, and if you top up your pension now, you should get tax relief from the government, and then a 25% tax free amount when you eventually retire.

Location is perfect, that’s the size I wanted to increase. It will be more enjoyable with an extra room but not absolutely necessary. I’d stay away from buy to let, exactly for a reason of extra work which I have no capacity for. 

house_help

Can you extend current house for more space?

ZeroSum

Bigger house = more housework & more furniture to buy