To Sell Or Not To Sell?

BANNERSMUM

Hello-I am new to this so hope am asking this question in the right place. My partner and I are just about to make a big decision re. our houses and mortgages and are not sure if we have our sums right....we are both 38 and just settling down together...due to previous relationships/divorce we both have morgages and we want to be mortgage free as soon as possible. His mortgage is £80,000 on a house worth @ £140,000- he pays £900/month over 10 yrs (just agreed this last week). Mine is £55,000 on a house worth @ £120,000 in an offset £15,000 off set -term is now showing as 9 yrs left-costs £600 a month as i overpay £100 a month. Our dilemmma is that we have just finished doing up my little house and were intending to rent it out for £400/mth and keep this as a future investment. However from looking at the MSE site it appears that if I sold my house and used the money from it plus my savings we could pay off my partners £80,000 morgage and have no mortgages at all. We worked out if we sold mine and paid off both mortgages + saved both our mortgage fees (£1500)every month in isa's this would save more than the cost of both mortgages would be over time...is this correct or are we missing something as everyone I know says I am mad to get rid of my house as it is an asset?? Any advice out there?

LindsayO

My only advice would be to check out house prices and rates of sale in your area. There is a board on here on house prices and almost everyone is saying they are going down, and may stay down for a long time, so that might factor in to your thinking.

Another issue for me, if I were in your situation would be wanting to put the past behind me, so getting all the financial obligations over to your partner's ex would be very appealing to me

On the other hand, as someone who is recently seperated I would be very wary of selling my house to pay of his mortgage, I'd want a bit of independent financial security

jamesd

BANNERSMUM, the short version is that you're planning to lose quite a bit of money.

BANNERSMUM wrote: »

His mortgage is £80,000 on a house worth @ £140,000- he pays £900/month over 10 yrs (just agreed this last week). Mine is £55,000 on a house worth @ £120,000 in an offset £15,000 off set -term is now showing as 9 yrs left-costs £600 a month as i overpay £100 a month. Our dilemmma is that we have just finished doing up my little house and were intending to rent it out for £400/mth and keep this as a future investment. However from looking at the MSE site it appears that if I sold my house

Has either of you or the pair of you as a couple made a principal private residence election with HMRC? Also see PPR and couples. It's vital that you do this before you sell and ideally before you move in together or you'll pay a lot of unnecessary capital gains tax on the sale.

Once you become a couple (move in together) you have only one PPR, not one each. So you can lose the PPR freedom from CGT. So talk to an accountant or tax specialist first.

Do this regardless of whether you keep one or both places or sell. It's the easy way to save a lot of tax.

BANNERSMUM wrote: »

and used the money from it plus my savings we could pay off my partners £80,000 morgage and have no mortgages at all. We worked out if we sold mine and paid off both mortgages + saved both our mortgage fees (£1500)every month in isa's this would save more than the cost of both mortgages would be over time...is this correct or are we missing something as everyone I know says I am mad to get rid of my house as it is an asset?? Any advice out there?

You're mad to do this unless you're desperate to be rid of the mortgages.

You have mortgage value of 120,000 (after subtracting your offset) and payments of 1500 a month including your overpayment. I'll call that 1400 to roughly align both mortgages and treat them both as ending in ten years so the calculations can all be for ten years.

Option one is to sell your place and pay off the 80,000 mortgage of his then invest 1400 a month for ten years. I'll assume 9% growth tax free and this ends up being worth 272,950 at the end of the ten years. Add 250,700 as the value of his place at the end of the ten years with 6% a year property price growth, less than the average rate. So this option has a value of 523,650.

Option two is to sell your place and not pay off the mortgage. You have the 80,000 to invest at the start plus your minimum 500 a month mortgage payment. This is worth 293,590. You also get the 250,700 value of his place so the total value of this option is 544,290.

Option three is to keep both places and do a full rental setup. That means increasing the mortgage on his place to 119,000 which is 85% of the value his place. That pays off 46,000 of the 55,000 mortgage on yours leaving 15,000 outstanding. With buy to let property the interest on 100% of the value of the BTL property at the time it became a letting property is deductible from income, regardless of which property the mortgage is on. So up to 120,000 is eligible, the full value of your place. Normal homeowner mortgages are cheaper than BTL mortgages so doing it with his mortgage probably beats changing yours to BTL to let it out. So now the interest rate on that 119k of mortgage is effectively zero and I'll assume 6.5% on the remaining 15,000 of mortgage. That's 975 a year or 81.25 a month.

For simplicity I'll assume interest only mortgages, also that's the best type to use for BTL because it keeps that interest tax benefit. That means deducting the 119k and 15k = 138k from the final answer I calculate next because that money has to be paid off to match the first two cases.

You now have 1400 a month less 81.25 a month to invest, 1318.75. That's worth 257,110 in ten years at 9%. You have to subtract the 15k mortgage left behind on your place and the 119k mortgage on his place. That leaves 123,100 gain. Now the two properties and their price increases. His is the same 250,700 from the other two but you still have yours in this case and that 6% property price value increase means it's worth 214,900. So this option has a value so far of 123,110 + 250,700 + 214,900 = 588,700.

I've ignored the rent probably being more than the 119k mortgage interest and maintenance and letting costs of yours, which it almost certainly will be particularly after a few years. That further increases the value of option 3.

Now, I'm about to go to sleep because I work nights so someone may catch a calculation mistake in this you can see the pattern.

What I recommend is that you spend a couple of hundred Pounds on an accountant familiar with BTL and ask the accountant to work out the relative values and costs of the various choices and work with you to get the PPR and other things right so whatever you choose to do you get things done efficiently for tax.

Jonbvn

Firstly, I don't really comprehend jamesd's post about you throwing money away by paying off your mortgage. I'll let him expand.

I would comment about putting GBP1,500 per month into ISA's. For two people, this is not possible, since it exceeds the ISA limits. You can put a max. of 7.2k into a S&S ISA, with a limit of 3.6k into a cash ISA. Overall you can save/invest 14.4k in ISA's per year.

jamesd

Johnbvn, the difference between having almost twice the property value growing and the difference between investing at 9% and saving mortgage interest at say 6.5%. It adds up over even just the ten year terms here. And the longer they keep at it, the greater the benefit of keeping both places and investing.

Property may not grow at the long term average for a few years but there's no ten year deadline and the average will eventually return.

BANNERSMUM

Hi, Thanks for the above-it gives us more to consider before we decide and the advice to see a professional accountant is probably something we will do before we go either way....must say the thought of no mortgage and no potential hassle with a buy to let is appealing still...!

Oldernotwiser

I think you'd be mad to leave yourself without a fallback position in the early stages of a non marital relationship.This seems to me to far outweigh the financial intricacies of the situation.

Lunar_Eclipse

Oldernotwiser wrote: »

I think you'd be mad to leave yourself without a fallback position in the early stages of a non marital relationship.This seems to me to far outweigh the financial intricacies of the situation.

I agree.

Also, surprisingly there is not much variation financially between the three options James posted (523,650, 544,290 & 588,700 - are they realistic?), given the arbitrary figures that were used (10%, 9% and 6%) and the fact that it is widely believed that property is going to decrease in value in the short term.

I would expect keeping the property to significantly outperform other options, by a factor of at least two. Although maybe over a longer timeframe (say 20 years) and based on historic data which may be completely wrong for the next economic cycle.

No doubt that's helped your clarity of thinking enormously!

jamesd

BANNERSMUM, you could always use a managing agent to relieve you of much of the hassle. One other way to look at this is to consider all the people who have been getting into BTL for their retirement income, while you're getting out of it instead.

Lunar Eclipse, I was deliberately cautious in my assumptions. Long term, investments are more likely to deliver 11-12%+ and if I recall correctly the real long term property return has been over 8%, not 6%. Using cautious numbers was enough to illustrate which options are most financially attractive without leaving much scope for claims that I was being too optimistic about the don't sell options.

Here are the options again, but using 12% for investments and 8% for property growth rates.

Option 1: 650,750 = 100%: 348,500 investment + 302,250 his place

Option 2: 682,450 = 105%: 380,200 investment + 302,250 his place

Option 3: 733,650 = 113%: 306,400 investment + 302,250 his place + 259,000 her place - 15,000 BTL mortgage - 119,000 his place mortgage

For option 3 I'm still ignoring the rental income probably being higher than the mortgage. The percentages from the original calculation with option 1 as 100% were:

Option 1: 523,650 = 100%
Option 2: 544,290 = 104%
Option 3: 588,700 = 112.5%

With either version, option 1 can't recover from losing the initial capital lump sum, compared to option 2, while option 3 benefits from keeping the leveraged investing in the property via the mortgage. The more cautious the investments are, the better option 3 looks, because it's the one with least non-property investment. It's also the one with greatest investment diversification: residential property, BTL property/rent and other investments. So it should be the one with least variability in final result.

Comparing options 1 and 2 also shows the fallacy of the idea that you’ll be as well off by paying off the mortgage and investing the repayments, with option 2 well ahead of option 1. Though there are cases where you can end up better off with option 1, say if you end up on means tested benefits for a long time.

BANNERSMUM

Hi thanks again-just to clarify...we are getting married in September!!

Also a question for Jamesd-re. Option 2 and 3 would we not have to deduct the cost of interest on my partners mortgage in option 2 and both mortgages in option 3 from the final totals to account for how much the mortgage/s will have cost us over the period which makes them less valuable options than option 1? This is where we got to hence posting the query...cheers, Bannersmum

macca64

Jamesd has made some valid points and has taken alot of time to reply to your original post, however I'd like to point out that you need to decide on what risks you are prepared to take. The safe option is selling your house and paying off both mortgages, as the NO one can take your house from you.

If you were to sell the house and invest the £80,000 proceeds, then are you prepared to take the risk that while in the long term, it will no doubt grow in value, in the short term it could fall in value. You'd have to be happy with the risk that your keeping a mortgage to basically invest, which is quite risky IMHO, as if you lost your job/s you would have to pay the mortgage, but the investment could have fell in value meaning you might have to sell at depressed prices.

Food for thought, and my two pence worth.