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viva

Small Mortgage Or Just Pay Cash ?

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have recently had an offer on a property accepted and are putting down approx 50% deposit to keep mortgage small (£170 a month) leaving 35k outstanding to leave me a good sizeable amount left of savings for a self build project 2/3 yrs from now hopefully...after visiting my mortgage broker who has sorted me out with a tracker mortgage starting at 3.19% until 2013 from which after that reverts to 3.5% fair enough i thought decent deal..but then he pointed out all the applicable fees starting with his fee £325 for getting me a mortgage in principle to start with which sailed through..£599 lender mortgage arrangement fee £240 valuation fee another £280 redemtion/closing down mortgage fee ? as i only intend to live there for 2/3 yrs then rent it out i realise i will have to change the mortgage again to a btl prob at a much inflated interest rate..(although rental income will be minimum £450 pcm) i am going to incurr the same mortgage fees once again! i do realise its prob better for tax reasons mainly to maybe not pay off your rental property but more so your main residential home..but is it worth all the fees and higher btl interest rates for the sake of only another 35k to purchase the property cash thus being mortgage free at 37 ? i will still have cash savings besides this for my self build deposit and have been told i can put the equity against my self build...what should i do ? cheers again guys + have until monday to decide :)

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have recently had an offer on a property accepted and are putting down approx 50% deposit to keep mortgage small (£170 a month) leaving 35k outstanding to leave me a good sizeable amount left of savings for a self build project 2/3 yrs from now hopefully...after visiting my mortgage broker who has sorted me out with a tracker mortgage starting at 3.19% until 2013 from which after that reverts to 3.5% fair enough i thought decent deal..but then he pointed out all the applicable fees starting with his fee £325 for getting me a mortgage in principle to start with which sailed through..£599 lender mortgage arrangement fee £240 valuation fee another £280 redemtion/closing down mortgage fee ? as i only intend to live there for 2/3 yrs then rent it out i realise i will have to change the mortgage again to a btl prob at a much inflated interest rate..(although rental income will be minimum £450 pcm) i am going to incurr the same mortgage fees once again! i do realise its prob better for tax reasons mainly to maybe not pay off your rental property but more so your main residential home..but is it worth all the fees and higher btl interest rates for the sake of only another 35k to purchase the property cash thus being mortgage free at 37 ? i will still have cash savings besides this for my self build deposit and have been told i can put the equity against my self build...what should i do ? cheers again guys + have until monday to decide :)

If you bought the whole property outright, then your effective return on the extra 35k would be 3.19%/(1-your marginal tax rate). If you are in the higher earning band, this would equate to 5.17% p/a or 3.99% if you are in the 20% band. I doubt there are too many places where you can guarantee this sort of return without risk these days, so your actual cost would be not only the fees, but the difference between the return you will get by paying off the mortgage and the fees you outlined above. Looking at the best easy access rates available, and the fact you will be taxed on saving interest, but not the effective interest you get by keeping the money in the equity of your house you are probably looking at a further loss of £550 per year if a higher tax rate payer and £360 if you are a low rate tax payer, i.e. over a period of 2 years you would be looking at a cost (after tax) of up to £2600 if you went the mortgage route over that which would be spent by buying the house outright.

(I rushed through these calculations, so may have made a mistake, but the principle is what matters.)

As you said, you can always get a mortgage on the house at some later stage when you need it for the self build (I would suspect).

So, the issue comes down to, do you think a tracker at 2.69% above base rate is a significantly better deal than you are likely to get again in the future? My gut feeling is that you will probably be able to get such a deal again.

Edited by Tiger Woods?

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Thats a tough choice.

We have always used the banks money to make money so to speak, but if you want to rent out it may be better to pay cash and be free of the bank. I think it depends on the long term ideas you have re the self build. We have always taken on renovation developments but wouldn't even consider a self build. What drives you to want to do it?

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Thats a tough choice.

We have always used the banks money to make money so to speak, but if you want to rent out it may be better to pay cash and be free of the bank. I think it depends on the long term ideas you have re the self build. We have always taken on renovation developments but wouldn't even consider a self build. What drives you to want to do it?

If you have enough money in savings to buy the house outright, then keeping the money in a savings account means that you will still be using your own money to buy the house only you'll have to pay the bank every month for the privilege.

You lend the money to your bank by depositing it, the bank lends it back to you at a higher interest rate. It doesn't make sense.

Even if you deposit it at another bank they will lend your money around to each other, often with go betweens such as house buyers and sellers (ie, lend it to a buyer who swaps it for a house with a seller, who lends it to your bank, who lends it to you.

Only keep money back if you are using it as an alternative to insurance for some large asset.

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I see where your coming from. I don't usually own a house for longer than two years and like to earn plenty of money on the sale of every property .I just have always felt that to have my hard earned cash where I can spend it, if I see something else come along helps.

I think it depends on what your plans are for the longer term, for me its about earning money. With the kids grown up I can be a modern day gypsy and just keep moving on. Being sentimental over a house is not the way to earn money.

The house we live in now is the only house I have ever liked, probably because we renovated a ruin, so its a labour of love and I don't intend on selling it yet. But if someone comes along with the right amount of cash it would be gone tomorrow.

.Back in the UK it was always about making money.

So it is about your longer term outlook. Everyone is different. B)

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yeah i am swaying towards just paying cash tbh which will still leave me 75k towards my selfbuild project..i got a motgage promise in principle of 147k from my broker/lender so shouldnt have a problem maybe borrowing another 100k for the self build + rental income of 450pcm towards it from the 3 bed semi..hate all these uneccessary mortgage fees! etc its a no brainer then guys isnt it surely ? only thing is though i wont be able to put the mortgage interest relief against my tax for letting the property out ? when it becomes a btl.. as most landlords just finance their btl properties with interest only mortgages purely for this reason dont they ? + what is the tax relief against the mortgage interest exactly a certain % ? because if its minimal maybe it just doesnt matter that much anyway to me in my situation..cheers for the very good advice guys :)

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When it becomes a BTL to rent out you take out an interest only BTL mortgage at this point to finance your new build. Then you claim the interest payments on your accounts.

yeah going for the pay it off in cash option guys..but having got a mortgage promise in principle from my mortgage broker( whos fee is £ 325 approx to get me the mortgage) he said we wont make the full mortgage application until we get the offer accepted in writing which we now have..and i have to go back to his office mon night to confirm apply and sign for the the full application etc so my question is ...its not too late to tell him that i want to pay cash and not to apply for a mortgage ?? he wont have already done this on my behalf without me signing anything will he ? as he prob realises that he will lose the commision from the lender and the fee he will charge me for getting me a mortgage..and maybe wont be so happy about this ? although for his initial advice,dealing with the ea,putting me onto his solicitor he uses etc i am still willing to pay him for his time to be fair to the guy..any ideas or suggestions how much this could or should be cheers again :)

Edited by viva

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  • 201 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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