Where to put my money, buying a new house and renting out my flat.

RHemmings

ParkerManc said:

RHemmings said:

If the house needs £80K work doing on it, and you need a mortgage on that house, then in reality/the end the improvements to the house are not costing you £80K. Because if you bought something that you don't need to bring up to standard then you would have £80K less mortgage and wouldn't be paying the interest on that. 

Thanks for your reply. I'm not sure I understand though? To buy something that doesn't need bringing up to standard in the same area, would cost 10's of thousands more than the £360k purchase price plus £80k in renovations.

I'm not paying £80k in renovations from the mortgage, that's interest free cash. 

First, I'm not saying that you shouldn't buy that house. Just that I'm talking about the way you are calculating the cost. I don't think you are doing so accurately. At least: not in the long term. 

Here we see it again. You say that you are not paying the £80K from the mortgage but from other cash. But, if you didn't have to do the renovations, then you could use that £80K to reduce your mortgage and end up paying less overall than just the £80K due to less interest.

Your total cost will be the £440K (purchase + renovations), plus the interest you pay in servicing the debt. Hence, the renovations will cost you more overall than £80K. Because as well as the £80K paid out directly, you will pay more in total because you can't use that £80K as part of your deposit and have a smaller mortgage. 

As an example, let's assume that you have £180K on hand, and are buying a house for £360K. You have £100K for the deposit and £80K for renovations, and hence a mortgage of £260K. According to a mortgage calculator online, the total amount you will pay for your mortgage over 15 years is £370,091. Or, a total cost of £550,091

If you bought a house for £360K and it didn't need the renovations, then you would only need a £180K mortgage, and the total cost of the mortgage over 15 years would be: £256,217. So, a total cost of £180,000 + £256,217 for a total cost of £436,217. Or, £113,874 additional cost for the renovations.

But, a more accurate way of calculating the total cost would be to shorten the term to achieve the same monthly repayment. The monthly cost of the £260K mortgage is £2,056. £180K over 9 years is a monthly cost of £2,072 which is close enough. 

For the 9-year mortgage, with no renovations, the total cost of the mortgage is £223,896, or £403,896  to buy the house in total. So, the final cost of the renovations is £550,091 - £403,896 = £146,195. There are things to consider as money changes value over time etc. And a bigger deposit may unlock some more competitive mortgage rates. But, you do end up paying a lot more for the house in total than just the £80K. With the shorter mortgage, you are also more protected against interest rate changes etc. And, the financial freeing up that comes with a paid off mortgage will occur later. 

I'm not saying that you shouldn't buy the house and do the renovation. But, I am saying that you should consider the lifetime cost of the house if you have to do renovations as you say you do. You seem to be considering the £80K as irrelevant to the mortgage, where having to spend that on renovations will affect your mortgage - you need a bigger one. 

It could be that you have found a mad bargain and can renovate it for £80K and could then flip it for a profit (if you wanted to). I initially looked at fixer-uppers and very rapidly (including help from here) worked out that it simply wouldn't work out financially. I'm not able to do pretty much any of the work myself and the cost of the house + renovations would always be more than I could buy a similar house for. Because I'd want things done to a good quality - no cheapest possible laminated kitchen worktops etc. If I was able to do the work myself then I could do it cheaper, but then I'd have to consider how much work I put in and what the value of that work is. 

GDB2222

If it’s a large renovation you will need alternative accommodation for a while. Plus removing your stuff and storing it. You need to factor in the cost. 

ParkerManc

RHemmings said:

ParkerManc said:

RHemmings said:

If the house needs £80K work doing on it, and you need a mortgage on that house, then in reality/the end the improvements to the house are not costing you £80K. Because if you bought something that you don't need to bring up to standard then you would have £80K less mortgage and wouldn't be paying the interest on that. 

Thanks for your reply. I'm not sure I understand though? To buy something that doesn't need bringing up to standard in the same area, would cost 10's of thousands more than the £360k purchase price plus £80k in renovations.

I'm not paying £80k in renovations from the mortgage, that's interest free cash. 

First, I'm not saying that you shouldn't buy that house. Just that I'm talking about the way you are calculating the cost. I don't think you are doing so accurately. At least: not in the long term. 

Here we see it again. You say that you are not paying the £80K from the mortgage but from other cash. But, if you didn't have to do the renovations, then you could use that £80K to reduce your mortgage and end up paying less overall than just the £80K due to less interest.

Your total cost will be the £440K (purchase + renovations), plus the interest you pay in servicing the debt. Hence, the renovations will cost you more overall than £80K. Because as well as the £80K paid out directly, you will pay more in total because you can't use that £80K as part of your deposit and have a smaller mortgage. 

As an example, let's assume that you have £180K on hand, and are buying a house for £360K. You have £100K for the deposit and £80K for renovations, and hence a mortgage of £260K. According to a mortgage calculator online, the total amount you will pay for your mortgage over 15 years is £370,091. Or, a total cost of £550,091

If you bought a house for £360K and it didn't need the renovations, then you would only need a £180K mortgage, and the total cost of the mortgage over 15 years would be: £256,217. So, a total cost of £180,000 + £256,217 for a total cost of £436,217. Or, £113,874 additional cost for the renovations.

But, a more accurate way of calculating the total cost would be to shorten the term to achieve the same monthly repayment. The monthly cost of the £260K mortgage is £2,056. £180K over 9 years is a monthly cost of £2,072 which is close enough. 

For the 9-year mortgage, with no renovations, the total cost of the mortgage is £223,896, or £403,896  to buy the house in total. So, the final cost of the renovations is £550,091 - £403,896 = £146,195. There are things to consider as money changes value over time etc. And a bigger deposit may unlock some more competitive mortgage rates. But, you do end up paying a lot more for the house in total than just the £80K. With the shorter mortgage, you are also more protected against interest rate changes etc. And, the financial freeing up that comes with a paid off mortgage will occur later. 

I'm not saying that you shouldn't buy the house and do the renovation. But, I am saying that you should consider the lifetime cost of the house if you have to do renovations as you say you do. You seem to be considering the £80K as irrelevant to the mortgage, where having to spend that on renovations will affect your mortgage - you need a bigger one. 

It could be that you have found a mad bargain and can renovate it for £80K and could then flip it for a profit (if you wanted to). I initially looked at fixer-uppers and very rapidly (including help from here) worked out that it simply wouldn't work out financially. I'm not able to do pretty much any of the work myself and the cost of the house + renovations would always be more than I could buy a similar house for. Because I'd want things done to a good quality - no cheapest possible laminated kitchen worktops etc. If I was able to do the work myself then I could do it cheaper, but then I'd have to consider how much work I put in and what the value of that work is. 

Thank you for such a comprehensive response! I see what you mean now, if I put that cash into the deposit, I'd be borrowing less on the property, and as such, pay a significant amount less in interest over the period.

The challenge lies in, if I were to buy at £360k and put that £80k into the deposit, I'd be buying a property in either a worse location, or a less desirable house. There aren't any £360k houses without a noticeable downturn in quality of life, for example I'd have to drive to the same schools, instead of a 3 minute walk, I'd have to drive to the trainstation for work etc. There's a reason the house next door went for £550, and it's because they're nice sized houses in a very desirable location. 

I think the flat is the crux of making this feel comfortable long term. If I can get money out of it and spend it on the deposit, or put it into a higher yield but lower value rental, that seems to minimise costs whilst still giving me a secondary income. Perhaps with the interest rates as they are, the money is best spent in the deposit?