4

Some basic assumptions:

  • London real-estate market is very expensive.
  • I used mortgage calculators "how much I could borrow".
  • I cannot borrow enough to buy a home in an area I want to live in long term; the only places I can afford I could bear to live in for 2 years maximum.
  • I'm thinking about taking a mortgage anyway to "step into property ladder"...
  • ...and I borrow £250k for 25 years...
  • ...and I buy the place worth £300k

The rationale being - over the 2 years I'll own the place I will repay 2 years worth of mortgage worth ~£25k, I'll also accumulate savings worth another ~£25k and increase my credit score, and borrow some cash from friends and family, and...

Eventually I might be in a position to buy a place that is at least semi-decent.

Now the question is: assuming the my £300k property is still worth in region of £300k what should I do?

  • Sell it, repay existing mortgage, use the surplus to fund a new one.
  • Remortgage.
  • Any other shenanigans.

Asking here because it's hard to find a proper guide... Most of the first-time buyer guides don't discuss the length of time to live in a property. In my current circumstances I cannot afford a place I want to have (shared ownership might be an option) so I'm contemplating getting a "anything really" further away to make the plan real in years to come.


Alternative way of asking the question - how long should I pay the mortgage to break even / be positive when selling the property?

(assuming the real-estate prices stay still)

(can do a Google Spreadsheet to simulate different rates of depreciation / appreciation too)

  • 3
    This depends on how much you can sell the property for. In general you should expect the property to be a cost, not a profit; if you are lucky the cost nay be less than renting something comparable. Rule of thumb I've seen is that you shouldn't buy unless you plan on living there at least five years, but that depends on a huge number of details that you haven't given us. Personally, I consider "the property ladder" to be something between myth and scam; the whole concept of "starter house" makes sense only in a housing bubble. – keshlam Oct 5 '16 at 23:11
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    The cost of owning a property is not restricted to the cost of the mortgage. You need to also take account of annual council taxes, maintenance fees, insurance, and possibly ground rent. In addition, you should also consider the costs of buying and selling - legal fees for both buy and sell, estate agents fees for selling, and possibly mortgage arrangement fees and movers costs to haul your personal effects to a new address. – Nick Oct 6 '16 at 1:52
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    another ~£25k and increase my credit score Oh my !! Where did you get that from ? Secondly a first time buyer has certain benefits, which willn't be available if you do this. You forget about the timelines involved in buying and selling. You are assuming the house prices will keep on rising, possible in London, but you cannot guarantee that it will happen within a certain time period. Don't make assumptions while buying a house. It ain't £20 or £30 that you are talking about. – DumbCoder Oct 6 '16 at 8:00
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    Note that sometimes housing prices suddenly crash, especially after going up for a long time with talk of "being on the property ladder is huge". Especially with Brexit coming up, there is a lot of uncertainty right now. Don't get into a situation where you must get back at least what you paid for it. – RemcoGerlich Oct 6 '16 at 9:22
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    Hey @MichalStefanow - the dramatic change in the price (which will happen) will swamp every other effect. Good luck! – Fattie Oct 8 '16 at 14:53
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... assuming the my £300k property is still worth in region of £300k...

If you are buying a house your closing costs, various valuation reports, one of mortgage fees, etc would be in the region of 4-5%. There would also be Stamp Duty of 5%.

When you are selling the house, you would incur costs of around 5%.

So essentially if you buy a house worth 300K, one would be paying around 330K. If one sells the house assuming its still worth 300K, one would only get 285K.

So unless you property appreciates by around 15%. It would be a loss. Add to this; there would be routine maintenance costs; plus if you are unlucky major improvement costs.

You would save on Rent, and if this is equivalent to EMI (Equated Monthly Installment = monthly payment) of mortgage, you would have saved some money. Say 1000 that goes every month to rental, goes towards EMI. Around 24000 for 2 years. You may also get some tax breaks on this EMI.

So you would need to compare the savings of differential rental; this should be greater than the difference between buy and sell the property price.

2 years seems a short period. You maybe well of living in cheap rental place and save more for 2 years and buy the property you are interested in.

  • Thank you for the answer. I was aware there are different fees - arrangement fee, solicitors, stamp duty - I should be more explicit... I think I should create a mini-website that would take everything into account and tell the user if it is a decent deal. – Mars Robertson Oct 6 '16 at 6:01
  • If the mortgages are structured like USA ones, you'll repay very little principal in two years, it'll mostly be interest. – mkennedy Oct 6 '16 at 19:56
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    @mkennedy For reference, that 'style' of mortgage is not unique to the US. Consider the requirements of a mortgage: (1) We need a set amount of money from the bank, today. (2) We need to have fully paid off the bank in the future (say, in 20 years). (3) We need to pay the bank interest, every month, for the amount still owed at the beginning of that month. (4) We need to pay the bank the same amount, every month. The only way to achieve all these conditions is to 'solve for x' and find the amount of money to pay the bank each month, that covers monthly interest to pay off the loan by year 30. – Grade 'Eh' Bacon Oct 6 '16 at 20:39
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    ... In doing so, you will find that you pay more interest at the beginning, because more principle is owed at the beginning. By the end, your principle balance will be small, so your interest will be small. This is not a complex calculation - each payment period, your interest simply equals the opening balance * the interest rate. – Grade 'Eh' Bacon Oct 6 '16 at 20:40
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    I'm not sure on the clarity of "if rent is equal to monthly payment you would have saved some money". I would suggest that if, over the course of the 2 years, rent is equal to the interest portion of the payments, there is no loss or gain; if rent is greater than the interest portion, then that additional amount is a saving. You require this additional amount to be in excess of the buying/selling fees in order to make an overall profit (ignoring any change in market value). – AndyT Oct 7 '16 at 15:32
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5 years is a safe bet. Any less time and one of many setbacks put you in the negative.

  • 2
    While true, it would be best to flesh out the answer. – RonJohn Sep 16 at 6:10

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