Critique my thinking please.

greco_2

I have a mortgage of £200k with the Woolwich (not an offset) which tracks at 0.39% above base and can be paid off at any time without penalty. I will shortly be in a position to pay it off if I want to.

I am in the process of buying a piece of land in the Med and intend to build a house there to retire to. My total budget for the project is £200k. My intended timescale for completion of the build is March 2010.

My original plan was to pay off £100k of the mortgage and use the rest for the land purchase and the first stage of the building work and then sell off my UK property to pay off the rest of the mortgage and fund the rest of the work.

I’m beginning to think that I might as well hang on to the entire £200k to give me maximum flexibility as I can get 6.5% just about anywhere at the moment which nets down to 5.2% after tax (my wife and I will be basic rate taxpayers from April 2009).
In effect, the £200,000 will be costing me £31.67 per month (£200,000 at 0.19%). If interest rates move against me, I can just pay off a chunk of the mortgage. If I needed more money to continue the work, I may have to borrow it at a higher rate.

I have already put the maximum into ISAs and the Halifax regular saver.

Am I missing something or does this look OK?

iNFLUENCE_2

The figures seem right to me. £31.67 per month isnt a lot to pay for the flexibility.

However like you say what you need to consider is the chance you would need more money for the project and have to borrow that at a higher rate (now is not really the time you want to be in the borrowing market. And I suspect we might see an interest rate rise soon.

Where are you planning to live in between selling your UK property and finishing the project? You should really factor into this is you have to rent, what if your project goes over budger. I'd be a little nervous about having the figures so tight, so theres no flexibility in case the project went over budget.

greco_2

Thank you. Possible cost over runs are factored into the budget.

The intention would be to rent a place in the Med to supervise the work and this would cost about €400 per month. We will have around £100,000 in accessible money in ISAs etc which will be enough to live on for 4/5 years (this is rural Greece I'm talking about) before we need to draw on pensions.

Any more thoughts would be welcome.

debbie42

What are you going to do with your house in the meantime? Is the 200K mortgage secured against that house? I got a bit confused with the selling house etc.

greco_2

The mortgage is secured against our house. We will continue to live in it for the time being as per the third paragraph of my OP. Sorry but I'm not clear where the confusion is.

debbie42

It was that para which confused me!

If you eventually sell off the house paying off the mortgage and releasing funds then I couldn't see where the keeping the mortgage came into it. Is it just the £100K payoff which you are considering deferring for a while? So you've got £200K coming in from somewhere but you think you only need £100K of that for the new development?

So if you go ahead with the development in Greece, you wouldn't be in a position to pay off all your mortgage without taking out an extra loan?

runciblespoon

I think you're missing the currency situation. A year ago it was about £1=EUR1.50. Now it's £1=EUR1.25. That means your build costs in pounds have just gone up 20%. Plus the cost of materials (cement, steel etc) are going up too, as are architect's fees.

I think you really need to factor into your thinking about what risks you want to take with the currency market. Are you committed to build dates yet? If so you might want to book your currency transfers now so you know what you're getting (you don't have to hand over the pounds now, but you can agree a date at which you do so). Alternatively you can wait and risk it: it might work out, but if it doesn't either you have to delay the build until the rate improves, or potentially take a hit at the lower rate.

While analysts think the pound is undervalued at the moment, there's no telling whether it'll be 1, 2, 5 or 10 years before it comes back. The noises I've heard is in the short term it'll drop further (starting on Thursday when the ECB is likely to raise rates), and take more like 1-2 years to go back into the 1.3x levels, but you never know.

greco_2

Thanks. I'm pretty much resigned to the currency situation but as the land purchase isn't completely nailed on yet, I'll take a view on it when/if I complete the purchase. My feeling is that the £'s depreciation against the € is slightly overdone but I'll consider fixing the rate when the purchase goes through. Until it does, we can't fix build dates although I would expect to be able to make a start over the winter.