to buy or not to buy

JeffMason · 18 June 2018 at 10:15AM

Hello.

I'm new to the forum but was advised to join and ask advice before talking to professionals. I hope you can offer some advice for a newbie trying to be smart with their money.

I have just inherited 200k which is in a bond and earning 7k a year. I am currently renting at the cost of 8k a year. My income is 25k a year. The bond interest will almost cover my rent but should I buy a house instead? I could get something for around 200-250k.

I thought perhaps spending half on a deposit and getting a mortgage; that way my housing payments would be considerably reduced per month, I'd own a house, and I would still have some money in savings.

But perhaps there are better options. I'm aware this is a good problem to have and feel very lucky!

Any thoughts?

RubyHouse · 18 June 2018 at 10:45AM

This is not a simple Yes / No answer, It would entirely depend on what you want.
Do you have a good quality of life in your rented place? Do you like the area, the house, neighbours etc?
What are your long term plans? Do you want to retire early? Would you want to be paying rent after retirement?
If no, then would you get a better quality of life if you buy your own place and adapt it to how you wish, can you buy a decent place in the area you would want to live in within your budget?

If you were to get a mortgage for half the cost, you would be paying a hefty amount in interest each month; can you get something cheaper to buy with cash and still leave you with savings?

You may not get the return on investment if you buy a house compared to leaving the money in savings and theres always a risk of the market falling, so you may lose money if you decide to sell.

It is indeed a nice predicament to have, and I wish you the best of luck!

ReadingTim · 18 June 2018 at 10:46AM

Are you looking for somewhere to live for the long term ie a place to call home, or are you looking for investment advice? (which may or may not involve buying property)

JeffMason · 18 June 2018 at 11:18AM

RubyHouse wrote: »

This is not a simple Yes / No answer, It would entirely depend on what you want.
Do you have a good quality of life in your rented place? Do you like the area, the house, neighbours etc?
What are your long term plans? Do you want to retire early? Would you want to be paying rent after retirement?
If no, then would you get a better quality of life if you buy your own place and adapt it to how you wish, can you buy a decent place in the area you would want to live in within your budget?

If you were to get a mortgage for half the cost, you would be paying a hefty amount in interest each month; can you get something cheaper to buy with cash and still leave you with savings?

You may not get the return on investment if you buy a house compared to leaving the money in savings and theres always a risk of the market falling, so you may lose money if you decide to sell.

It is indeed a nice predicament to have, and I wish you the best of luck!

I am happy with the rented place. The quality of property I'd be able to buy would be similar. If renting I can move easily if I want to, not that I am right now, but would hope to be able to move on from my current job (and area) in the next 5 years or so.

I have no interest in retiring early, but I would like to go more freelance in the future.

If I wanted to buy somewhere outright then I would need to spend all the money, possibly even a little more - although I'll try not to do that. So I'd be looking at 200k for a decent two bed.

I'd like to have somewhere I know I can stay in if I want to, and decorate etc. But I'd also like to be smart with the money and make it work the best it can for me.

Right now, I'd just like to have somewhere to live that is nice enough, but keep my outgoings as small as possible. So I'm trying to figure out if I'm going to spend more money per month renting or buying. At first I thought buying has to be cheaper but now I'm not so sure.

JeffMason · 18 June 2018 at 11:20AM

ReadingTim wrote: »

Are you looking for somewhere to live for the long term ie a place to call home, or are you looking for investment advice? (which may or may not involve buying property)

Both. Although, I could perhaps be moving area within 5 years so it might be a little soon for a long term place to call home - unless it would be smart to buy it and then rent it out in years to come.

Pixie5740 · 18 June 2018 at 3:05PM

It's an either or scenario. You either buy a home or you buy an investment property. The kind of place you might want to call home does not necessarily make the best rental property or generate a decent yield.

Over time owning usually works out less expensive than renting but the pay off depends very much on the area and property type. You need to work out the costs of home ownership and the costs of renting over 5 years to find out which is least expensive. Is the break even point more or less than 5 years? How much are property prices increasing or decreasing in your area? Although I will add the caveat the past performance is not necessarily an indicator of future performance.

Alternatively you could carry on renting and invest your money elsewhere because just now you're only getting a 3.5% return which isn't great. That could be property but since the government is making BTL less and less attractive you might want to look at other investment vehicles which you could do yourself or you could engage a financial advisor or you could just do nothing because sometimes nothing is the right thing to do until you decide what it is you want to do and where you want to live.

steampowered · 18 June 2018 at 3:15PM

At that price bracket, buying will probably be cheaper (assuming you don't move in the next 2 years or so).

You probably want to plan to own a property without a mortgage in good time before you retire.

buggy_boy · 18 June 2018 at 3:20PM

It really depends on what you want, don't forget you will need to declare the interest from your bonds and pay tax, you will get £1000 tax free but will have to pay tax on the rest, that is a £1200 tax bill, if you become a 40% tax payer (remember they income from bonds may push you into a 40% tax payer if you earn more) then thats a £2400 tax bill.

On the flip side owning a property comes with all the expense or maintenance and repairs..

It also all depends on what you think house prices might do (Anyone that tells you one way or the other is a fool), how long you wish to stay where you are.

Basically only you can decide what is best for you.

JeffMason · 18 June 2018 at 5:46PM

Thanks for all the advice so far. Plenty to think about.

The 7k a year from the bond is after tax.

If I rent at 8k a year then I'm only spending 1k of my job income on rent as the majority is covered by the bond.

And if I bought outright then rent is zero so I'm 1k better off per year.

But I wonder what the situation would be if I went for the middle ground? And would anyone say that was advisable? If I spent half the bond and covered the other half with mortgage.

I can see that the cost of renting will increase as the years pass (and probably not in line with pay increases) but perhaps buying with 50% of the cost in a mortgage would be cheaper and continue to get cheaper as time went on...

I'm not in love with my current job or where I live so would jump at the chance to move if a job elsewhere came up, and I'll probably be itching to move anyway within 5 years.

Thanks again!

steampowered · 18 June 2018 at 7:54PM

JeffMason wrote: »

If I rent at 8k a year then I'm only spending 1k of my job income on rent as the majority is covered by the bond.

Remember that inflation will eat away at the value of your savings, and will increase the cost of rent over time.

Inflation is currently running at about 2.5% a year - about £5,000 a year on a £200,000 pot. So you'd need to keep £5k of interest in the savings account for your account to keep the same 'real' value.

I can see that the cost of renting will increase as the years pass (and probably not in line with pay increases) but perhaps buying with 50% of the cost in a mortgage would be cheaper and continue to get cheaper as time went on...

Remember that taking a mortgage does not change the return you get from the property. The value of the property is the same whether it is mortgaged or not.

If you are tempted to take a half mortgage rather than buying outright, the true calculation you should be running is whether the interest rate you'd get on your savings (after tax) would exceed the interest rate on your mortgage. Mortgage rates are at record lows right now so if you get a good rate on your mortgage this is entirely possible.

I think if you are looking to stay put for more than 3 years or so, for a £200k property the maths works in favour of buying.

need_an_answer · 18 June 2018 at 8:19PM

The bond that the money is invested in,is that a static £7k per year or is it something where the interest rate will rise or fall when next invested?

I would always be in the camp that suggests you buy your own property however if you are looking to move around the country for employment then renting does provide more flexibility as its easier to move without having the hassles of selling etc.

Will there cone a point in life where you may want to settle in one place and buy something? If so that's when to do the buying thing however you do need to be mindful that your capital amount is not increasing so as pries rise on property it may become less of a cash purchase and need to be supplemented with a mortgage.

You don't give an indication of your age and how you maty feel as you near retirement and I guess that's for you to decide if its your home or a rental home you wish to while away the days in.

One thing to consider is also the stability of your rental agreement now and also in the future which again leads me to suggest that if you own your property then no one can ask you to leave within a given notice period.

In rented property as a tenant you always have someone else potentially controlling the timeframe in which you stay there.

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to buy or not to buy

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