Mortgage/Savings advice

[RandBlade]

A couple of years ago Amanda and I bought our first property to get on the property ladder. I've always squirreled away some of my money in savings and thankfully the prices in the North where we live are nothing compared to the South of England so I had just enough for a 25% deposit for our home which was a newly built, rather small end-mews (end of a mini terrace) 3 bedroom property. Its a rather nice new estate but within one of the rougher parts of town outside of the estate. We've got the master bedroom as our room, the second room as a guest room and the small third room has been my office but I'll be losing that shortly to change it into the nursery. I think in about 4-5 years time I'd like to be able to upgrade to a bigger property - ideally fully semi-detached, in a nice area with a good school and a bigger house and bigger garden (especially if we have more kids) and ideally keeping a guest room (invaluable to have for when Amanda's family manage to visit the country). However while getting onto the property ladder is in some ways difficult, it seems that moving up the property ladder has headaches of its own - especially eg selling your own home and entering a chain.

Since we bought the house we've not really made any further savings, other than making the routine payments on the mortgage. Or more particularly we have been saving regularly but spent all those savings on the wedding and honeymoon and now the savings are being put aside for the expenses of kitting out the nursery. However we've got no debts for the wedding and I believe we have enough to cover the nursery so I'm wondering what to do next? Is it worth paying down or paying off the mortgage or would it be better to put the savings somewhere else? I'm looking to ideally be able to afford a house twice as expensive as the current entry-level one we've got without much extra in the way of income (we went for the house we had the deposit for and could comfortably afford rather than stretching ourselves into getting one we could barely afford and struggle).

A few specifics:
1: The mortgage rate I've got at the moment is ridiculously cheap. I shopped around a lot before sticking with my own bank as the had the best offer; getting one which would after the 2 year window tracks for the life of the mortgage at Base Rate (currently 0.5%) + 1.49% so we're currently paying just 1.99% interest. That is basically interest free given the rate of inflation. There are no similar mortgage rates at the moment so remortgaging will make it go higher, of course if Base rises it'll go higher but that's not expected for a couple more years.
2: However I can't find any cash savings rates that are superior to that. If I could it'd be an easy decision for now.
3: The house values haven't really changed in the Warrington area in the 3 years since we bought the property. We'd probably get the same level to sell it as we paid for it.
4: There is a similar house listed To Rent on my street for nearly double my Mortgage repayments. IE if I was to rent the house and use that to keep repayments going I'd be making a profit.

Selling just seems an awkward pain in the backside and given the high rent that seems to be available, my preferred solution would be if it was at all possible to try and rent out our current home and buy a bigger home. Property has always seemed the soundest long-term investment in the UK so if this were possible it'd be nice. However under the terms of our current mortgage we need to live in the property so we'd need to re-mortgage it to get a Buy To Let mortgage which charges higher interest rates. Not being sure how to raise the deposit for a new home, I imagine remortgaging could release equity but am not sure if I'm looking at this all wrong.

Has anyone here ever dealt with moving homes as an owner? Am I right to be worried about chains and selling the home or am I putting too much worry into it? Is it worth trying to keep to let our original property?

So basically I'm wondering what to do from here. With about 4 years before I'd be looking to take any actions, what would be the best things to do?
1: Put savings into paying down the mortgage we have now? Could pay most of it off in 5 years if all savings were put into this, remortgage as buy to let to release deposit.
2: Put savings into paying down the morgage and then sell it.
3: Put savings elsewhere and keep just making minimum mortgage repayments.
4: Something else entirely.

[Ominous Gamer]

The sooner you pay it off, the easier it will to decide when to sell. But its a gamble because if something happens to either of you two, you'll be hard pressed.

but if you want to rent, I wouldn't pay anything extra into the house. To many what ifs with renters, so why put more into than you need to? Use that savings as your next down payment.

[Wraith]

Put savings elsewhere and keep making minimum mortgage payments. If there's anywhere where you can get more than 2% interest (and that should be easy), then you're losing money on anything extra you put into the mortgage.

[RandBlade]

Without getting involved in the Stock Market what good ways are there to make over 2% interest?

Just got a letter from my bank stating that my savings account interest rate is being cut to 0.1%

[Loki]

There are some online savings accounts that can get you close to 1%.

[Lewkowski]

There are some online savings accounts that can get you close to 1%.

I heard there used to be some nice ones out in Iceland...

[Loki]

They're FDIC insured in the US...

[Wraith]

Without getting involved in the Stock Market what good ways are there to make over 2% interest?

CoDs, I guess. You're probably not old enough to consider annuities. Why avoid the stock market, though? My unmonitored mutual fund account gained almost 18% so far this year, and that's actually fairly typical for my funds. You're young enough that you really shouldn't be too risk averse.

[wiggin]

RB: The advice I'm about to give should be taken with a large grain of salt, since I know nothing about either tax law or property markets in the UK. Furthermore, I do not currently own a home.

That being said, I think there's several intersecting issues here. You have (presumably) several priorities:

1. Moving into a larger home when possible (kids, etc.).
2. Maximizing the utility and return of your savings.
3. Maximizing your long term financial security.

These can be contradictory at times, so it's challenging to sort out. I think the easiest answer to your question can be found if you can answer the following question: How much money do you need, and when? I imagine you'll have two separate answers: a goal for overall non-house savings at retirement, and a goal for savings to move into a larger home worth X dollars in Y years. You may also have some ancillary savings goals - e.g. buying a new car at a given time, saving for college tuition for the little one(s), etc. - but house and retirement are certain to be the biggies.

If, say, you know that you'll need an additional 50k pounds in equity or savings before you can buy a home, and you want to trade up in 3 years, that gives you a hard date and amount to work for, after which it's easy to sort out the appropriate course of action. In general, I'd say any short term needs (3ish years or less) should be stuck in something highly fungible - money market accounts or high yield savings (Loki mentioned FDIC-insured internet savings accounts that yield around 1%; I'm sure there's some British equivalent). These won't gain in value - in fact, given inflation, they'll slightly lose value - but they will be highly fungible and not likely to lose value over time.

Longer term investments can be made for other sorts of saving (mostly retirement or far-off goals). This can go into home equity or into some sort of tradable equities like stocks or bonds. These either are illiquid (homes) or subject to significant volatility (both homes and equities), but also can sometimes offer better returns. For a home, you have two immediate and guaranteed returns - first, the interest rate on your mortgage (a 2% guaranteed return), and second, the imputed benefit from not having to pay rent (in this case, you already have this benefit since you already bought a home, so your marginal return is 0). You also have risks, though, in that you can easily lose equity in your home if the housing market has a hiccup, which can wipe out any benefits from pouring more money into the home. Stocks/bonds/etc. have higher returns in general, but are subject to more volatility.

The point of this exercise is not to remind you of basics, but to try to parse out which combination of savings/investments makes the most sense for your needs. In that context, I'd say that absent a compelling tax reason, there's little reason to pay off your mortgage faster - you're getting essentially a zero inflation adjusted return on any money you plow into that, assuming your home value doesn't change much. Factor in that the money is HIGHLY illiquid, it doesn't make much sense to put more money into that when there are options that are nearly as good in terms of return and are highly fungible.

Now that we know you're not putting your money into the house, that leaves the question of what to do with both your future savings and the house. The answers are intertwined. If you want to keep the house and rent it, you're going to need a LOT of cash to upgrade into a new house, since you can't rely on much equity from your old home for a downpayment. I would make that your first priority, and see how much equity you can pull out of the first home through refinancing-for-rent to help pay for the second home (you'd have to talk to a bank to work out the details). This is going to be challenging, and remember that you're talking about moving in several years, by which time interest rates will likely start rising, so your yields on both rent and the cost of both mortgages will start rising. If you can swing getting enough money to cover the second downpayment in the time allotted, that's certainly doable. However, I would caution against being too excited about the prospects of renting your home. Being a landlord is NOT fun or easy, and there are lots of hidden costs (especially taxes!). Furthermore, you assume you can keep high occupancy rates for your home, but it's quite possible that the market is fairly thinly traded for your specific location and home, so don't assume it will be easy to keep renters. You may end up having to pay two mortgages without offsetting rent at times; make sure you can handle this for a fairly lengthy period without severe financial stress.

If you do choose to avoid the renting idea (personally I think that's putting all of your eggs into one basket - real estate - when you should diversify your assets into more fungible and more varied assets), that leaves you with less need for savings for the downpayment on your second home. You can figure out how much you'll need if you get the proceeds from selling your first home plus the cost of your target second home (remember about taxes and fees). It will be a significantly lower number than the previous scenario, so you can probably save that up in near-cash vehicles and still have excess savings for riskier investments. I would consider doing this, and putting some money into other equities not tied directly to the vicissitudes of the property market where you live - ideally in some sort of tax-sheltered account, if possible (e.g. for retirement or college savings or whatever). This allows you to get your second home without tying up all of your savings in it, and also protects you from overexposure to the property market and the pain in the ass of being a landlord.

I recognize there are risks in this - it requires a sufficiently liquid property market to allow for you to sell your home at the same time you find a new one, but you're going to be stuck with liquidity problems no MATTER what you do, and at least this way less of your life savings are tied up in a single form of asset. It also allows you the opportunity to keep your immediately needed savings in safe assets but to still achieve much better returns in diversified non-cash, non-property assets.

[Timbuk2]

Lots of good advice from people above.

Has anyone here ever dealt with moving homes as an owner? Am I right to be worried about chains and selling the home or am I putting too much worry into it? Is it worth trying to keep to let our original property?

I'm due to exchange and complete this week on selling my third London property, which I have been renting out for the last 2 years, so I can offer my own experiences here.

Monthly rent is generally higher than monthly mortgage payments on the same property, as you've noticed by the rent on your neighbouring house. I made a very small profit, ~£80 a month, on my 1-bed flat, once monthly mortgage landlord's agency fees and insurance were taken out.

If you can afford the deposit on a new property in a few years without releasing the equity in your current one, I'd say go for it. Being a landlord is not without its headaches as wiggin stated, and as you know by the threads I've posted here I have had my own difficulties with tenants. But keep on top of things, find good tenants, and it makes great financial sense. It pays for itself, you'll get a regular monthly income, and the property value will rise over time. It's a nice nest egg looking after itself, accruing equity month on month, year on year.

That leaves you with plenty of options for the future. You own 2 properties. Should you, say, have lots more kids, you could then sell both properties, release all that equity, jump a few rungs up the ladder and buy a 4, 5 or 6 bed house in a nice part of town.

This has worked wonderfully well for me and my partner; in 3 years since I bought it, my 1-bed flat has is selling for £33,000 more than I paid for it. Like I say that sale completes this coming week. My partner's flat where we're living is under offer at full asking price for £65,000 more than she paid for it 5 years ago. Releasing the equity by selling both our flats and reaping that sheer profit has allowed us to buy a lovely house together in Twickenham in West London with a value approaching half a million.

To answer your question, you should have no fears about selling. I've not had any major issues with chains and the like on the 3 properties I've sold to date. Certainly find a good specialised conveyancer to run the sale and onward purchase; they will do all the chasing up and management of the process. Conveyancers are often the bottleneck, so finding a good one is probably the best advice I can give. Selling my first property ten years ago, I very nearly had my purchaser pull out because my conveyancer was hopeless; delay after delay after delay.

To give you some idea of chains, I can relate our current situation:

The chain we have at the moment is the longest I've been involved in. The purchaser of my partner's flat is renting currently, so that's the bottom of the chain. My partner's flat is the next link. The house we've offered on in Twickenham is the next link. The vendors of that property have had an offer accepted on a house in Sunbury, so that's the next link. The vendors of that property have had an offer accepted on a house in Fleet; the next link. The vendors of that property are not relying on the sale for their onward movements, so that's the final link and the top of the chain.

The conveyancers up the chain have a lot to coordinate when we come to exchange and complete in 6-8 weeks time, but there shouldn't be too many bumps to iron out for a five link chain. We have gained a lot of confidence in our conveyancer thus far; she's been great. Our valuation survey has completed successfully, and on friday we received the good news that our mortgage application has gone through. Since interest rates are at rock bottom, the package we applied for is a fixed rate for five years, so we don't have to worry about rising rates on our not insignificant mortgage for a while to come.

Sooo ... it's good that you're thinking along these lines now. As you say the property market is slower in the north than the south, but housing value will always always always rise in the long term. I've long maintained that property is an excellent investment.

[Dreadnaught]

EDIT: Just realized I forgot about the whole time you told us about the slideshow/photobook to announce the pregnancy, and that we already knew about this.

My gut tells me that trying to get a buy-to-let mortgage + buying a new place seems like it would really financially strain you. If you've not really been able to save a substantial amount, having a kid isn't going to help on that front. Not to mention the stress of having a kid, working, paying for a new place while quietly fearing at night that your rental tenants are going to go away or damage your current house. I'm currently facing a similar dilemma and having tenants isn't always easy. Plus they may insist on repairs you would otherwise delay were you living in the house.

I have a bias towards simplicity here -- while property in general can be a good investment, too many moving parts in your financial life can lead to real risk. I think you should either stick to your current place and really try to squeeze some savings out of it, or you should sell and move into a place that works for you in the long-term (but doesn't require you to stretch your finances too much further). If the mortgage rates aren't attractive for buying a new place, it seems like sticking around is the best course of action.

[RandBlade]

Thank you for all the advice, given me much to think about and still not made my mind up. I called the bank today to double check what the balance of the mortgage so far is and got mixed news. The bad news was that I had the interest rates slightly wrong in my head its Base+1.99% we're getting charged (thus its currently 2.49% interest) but the good news is it seems we've already at just the minimum payments for 3 years made a reasonable dent in the repayments. As I said we put down a 25% deposit and at the original value of the property the mortgage is now essentially 66% of the property value down from 75%. When I contrasted the rents that neighbouring properties are listed on the market for to my current mortgage payments I didn't think about the fact that currently most of the payments each month are capital repayments and not interest. I view capital repayments as a form of long-term savings, us essentially paying ourselves via the bank while interest is a cost. The interest element alone is less than a quarter of the rent being quoted.

Of course just because a house is listed on the market for a rent doesn't mean it'll actually be let at the level of rent and interest rates aren't going to stay at this low forever.

Based on a 2.49% interest rate I'm finding it harder to think of ways to easily and safely make post-tax 2.49% on savings.

To answer the question about the Stock Market, I'm nervous about investing in stocks as they haven't had too good a record in the UK recently. The FTSE index now is approximately no higher than it was 15 years ago. Current opinion polls show Labour as likely to win the next election which makes me even more concerned about it too - as far as I know no Labour government has ever left office with the FTSE index higher than when it took office. Even after spending 13 years in government recently the index was I believe lower in 2010 than it was in 1997.

[Loki]

What prevents you from investing in the S&P500?

[RandBlade]

That's gambling on the S&P value and the Pound/Dollar exchange rate. Even if the S&P goes up it could be to no effect if the exchange rate goes the wrong way.

As I'm wanting to save for moving up the property ladder in ~5 years and not save for retirement in ~35-40 years I'm more risk adverse.

Scary though to realise just now I'm only 34 years from being 65. Hadn't thought of it that way.

[wiggin]

Not trying to dissuade you from any course of action, RB, but I do wonder why you're so comfortable putting the vast majority of your assets into a single sector of the economy, in a highly illiquid asset (a house). If you just wanted exposure to property markets, put money into an REIT and you'll probably get better returns with less headache and MUCH more liquidity. You're comparing cash savings at ~1% to a 'guaranteed' 2.5% return without factoring in liquidity and market risk. I don't disagree that your pot of money to be used in the next few years should probably have minimal exposure to stocks or the like (though I assume you also have significant long term savings in stocks/bonds?), but I question whether it makes sense to stick it in your house.

[RandBlade]

Good point. I may be missing something obvious but I somewhat view paying into my mortgage as a low-return but zero-risk illiquid investment.

Risk: Yes the property market may go down as well as up, but that ship has already sailed. We already own the house so any movement in value we're already exposed to. Paying more into the mortgage will not increase any equity risk from price movements.

Liquidity: This is an issue yes. No matter what happens I have always since I started work kept an emergency buffer of instant-access cash that I intend never to touch or use and then replace if used in an emergency. That is my liquid reserve, you can't get more liquid than cash in a non-Cypriot bank. I have also always since I was a Part-Time teenager been in a habit of saving some money each normal pay day automatically so if an unexpected tight spot develops can cease saving temporarily and essentially get on-demand extra income. I'm not sure where else I'll need further major liquidity for except for ideally the house purchase at which stage releasing equity will be required anyway. I see no way of saving a big enough deposit without releasing equity.

If our income falls then we can stop over-paying and it will cushion the blow of the stop and even further get the minimum repayment recalculated due to the overpayments and it will be lower.

Worth nothing that interest is dead money. I get no tax relief from it. Which I'm OK with, never saw the point of rewarding or encouraging debt and discouraging the paying down of debt. The only way here to get tax relief is on the mortgage is oddly enough for buy-to-let mortgages as the interest on the second home can be deducted against the rent of it for tax purchases. Though realised there's a potentially big tax headache from owning 2 homes in that Capital Gains Tax must be paid on a second home (even one you used to live in) while there's no CGT on your own home. You have CGT on stocks and shares too but I wouldn't be investing more than the tax-free amount you can put into a tax-free ISA each year so share/fund investments are more tax efficient it seems.

Long-term I have savings in stocks that I have built over the years and do not want to touch under any circumstances. That is for retirement. I'd rather act as if these stocks don't exist so they can be left alone and never messed with.

[Unheard Of]

Rand, we're currently in a similar position. It's pretty much impossible for us to get a savings rate that beats the value the mortgage, so we are overpaying our mortgage and putting down a small amount of savings. We're more comfortable doing this as house prices are rising fast in our neighbourhood - our loan to value is rapidly approaching 50% and we've only been in the house 6 years.

We are also tempted to invest a simple tracker fund (probably a FTSE100 tracker with the lowest costs I can find). The aim here would be long term return - maybe twenty years. It's more risk than we'd normally be comfortable with, but the savings rates are so poor that it's starting to seem sensible. We haven't finished thinking this through yet.

You mentioned the cost of furnishing a nursery in the OP. You can get a lot of good quality stuff second hand - most clothes and furniture for small children stops being useful long before it wears out. It's not necessary to spend a lot of money - we certainly didn't. Put the difference into a savings account for Randblade Junior.

[Loki]

Incidentally, if you call the child "Randblade Jr.", I'm calling child protective services.

[GGT]

Dear Rand,

While your OP is full of good questions, with plenty of great replies and suggestions....I'm gonna take a different route and play armchair psychologist. It's common for newlywed men, and soon-to-be-first-time-fathers, to focus on something they're familiar with (finances) and can control (investment choices). The underlying anxieties of "being a good husband and father" are more nebulous, harder to pin-down, chart or plot in a ledger or bank account.

While it makes sense to project that real, mature, concern and worry onto money matters-- it can also distract you from being fully present as a husband, and sharing impending parenthood with your wife, in other very important ways. This is one of the most important times in your life, and a crucial time in your (new) marriage and relationship with your spouse.

Yeah, it's thrilling but also scary! So don't add to your anxieties by projecting too far in the future. "Kit out" the nursery, fawn over your wife, take a parenting class, read baby books, learn how to give a Prenatal Massage or Infant Massage, shop for the "best" crib or stroller (that can be used for future kids ). Make time to relish these last moments with Amanda, put that at the top of your list. Repeat: the marital relationship is priority #1. Strengthen that, and make everything else secondary, including financial decisions.

Since you've already been quite responsible handling money and finances, try to re-direct your energies into the "newer" areas surrounding family and home that don't come with a dollar sign. You'll have plenty of time in the next few years for that.

[Hazir]

I think you'd be wise to differentiate between a house you actually plan to live in and other real estate you own. It should come as no surprise to anybody to think that it' s a bloody good idea to be the full owner of your home; I read the theories above calling that putting your eggs in one basket, one with low liquidity for that matter, and then I look at my own situation and say 'well, I beg to differ'. I have a nice enough place in a very desirable part of Amsterdam and if I add up all my bills (including those for internet and cable) I need about €500 a month. If you don't live it, you appearantly can't understand the advantages of that. It enables me to work part time, go on vacations etc etc. Imagine what happens if you decide to keep working full time without having interest to be paid on your home.

As for keeping the old house to let; I don't think that's such a good idea in your situation. Because then you are talking about an investment and you really should think twice before you start pouring all the money you have for investment in an illiquid asset like a house. It all seems so nice to letting your house and let it pay for itself. But in reality you will be stretching yourself to cover the new home, and your calculations for the old house only add up if it's rented out and if the tenants don't thrash it, or decide that paying their rent is not their first priority. Then all of a sudden you're looking at paying for two mortgages, and that might not be so popular with the children you may have by then.

And what happened to your plans to move to Canada? How certain are these plans if a couple of months ago you were still seriously considering emigration?

[GGT]

snip

And what happened to your plans to move to Canada? How certain are these plans if a couple of months ago you were still seriously considering emigration?

He also recently posted about losing employment in the Food Service industry due to attrition, transitioning from his current career path, and considering another college degree. At the same time he's a newlywed, with a baby on the way! He's being flooded with choices and decisions...and since he's a serious and responsible kinda guy that likes to plan ahead...it's also causing him some anxiety.

Rand's intentions, motives, and goals are stellar....but he might need a gentle reminder that spending time and effort on relationships is also valuable. And that he doesn't have to have ALL his ducks in a row, at ALL times, with back-up plans for contingency plans, in order to be a good husband or father.

Rand, give yourself some breathing room. It's perfectly fine to delay these decisions....until you've settled into your role as husband and father....and your first child is walking or talking. You don't have to have it all figured out before s/he's born.

[Loki]

I fail to see how engaging in financial planning someone precludes him from carrying out his other roles.

[Aimless]

Seeing as how you don't plan to make any major moves for the next 4 years, I'm not sure I see how your first two options are substantially different from one another, at least not over the next 3 years. Paying off your mortgage doesn't seem to be a clearly advantageous strategy at the moment. This may change over the coming years, of course.

Until it does, I'd suggest you stock up on cash until you feel comfortable, and also put some of your money into short-term relatively safe "inflation-proof" investments. Spend money on improvements that you and your family will enjoy. In 3-4 years' time, you'll probably decide that dealing with renters in Warrington will be more hassle than it's worth (over the long term) and so sell the house

We're looking to sell the apartment in 1-2 years and are currently gearing up to renovate the kitchen, which makes sense for us from a financial perspective as well as in terms of QoL. There are ridiculous tax-incentives in this country for home-improvement

[GGT]

I fail to see how engaging in financial planning someone precludes him from carrying out his other roles.

It doesn't, but that's not how I'm reading his posts. I've seen this before, many times. It's a common topic in marital and parenting circles, written about in magazines, journals, and web sites. It's a type of "flooding" that's typical and predictable during The Honeymoon Phase of Marriage, and especially during the gestation of a first child.

Good intentions for being responsible, pro-active, well-prepared....that can result in more stress and anxiety, and become counter-productive or even harmful. IMHO, the most valuable piece of advice for Rand is reminding him that he shouldn't worry, or obsess over financial planning at this particular point in his life. He's already done everything "right", and can afford to take that one plate off, while dealing with more spinning plates. <Cue visual of a plate juggler>

[Hazir]

With inflation being higher than interests on savings, I wonder what 'inflation-proof' options there are about, if you don't include stocks which are of an entirely different risk class of their own. Whatever he does, his long term planning should not be contingent on short term market conditions.

[Aimless]

short term investment grade Bond funds

[Hazir]

short term investment grade Bond funds

And they would earn him how much after tax ? More than. 1%? You seem to have missed the part where this ongoing financial crisis is paid from people who have actually saved money.

[GGT]

And they would earn him how much after tax ? More than. 1%? You seem to have missed the part where this ongoing financial crisis is paid from people who have actually saved money.

Reiterating (for Rand), whose in a good position right now, and can 'afford' to delay financial decisions aimed at making real estate profits....while making a comfortable home for his new family.

[Aimless]

And they would earn him how much after tax ? More than. 1%?

That depends on the state of and prognosis for the British bond market, specific funds, and the tax situation in the UK. The idea I threw out is reasonable in the Swedish context but may be less reasonable for RB's particular situation.

[Hazir]

Reiterating (for Rand), whose in a good position right now, and can 'afford' to delay financial decisions aimed at making real estate profits....while making a comfortable home for his new family.

There is no such thing as a real estate profit for the house you live in.