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gruffydd

Housing Row With Cousin

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Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway.

Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please!

Edited by gruffydd

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Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway.

Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please!

No it won't work, simply because if he puts the money in a cash account the post tax interest on the 170k will not cover the interest only mortgage payments, unless the interest rate on the mortage is less than about 3.25%.

Now, if he invests the 170k in something clever, the income / capital gain from these investments might well cover the interest payments and more, which might turn out to be a good strategy. This was essentially the principle of endowment mortgages. But you would have to know what you are doing with the investment, or it could turn out worse than a repayment mortgage, as many people who were sold the endowment products found out.

Whether house prices rise or fall is immaterial.

frugalista

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the interest rate on the loan will be higher than the interest rate in the bank, so it wont cover the IO payments, he will had to pay more from his salary. He will also get taxed on the interest from the bank, further reducing the interest he recieves....

why would he want to do this? he will have had to supliment the morgage payments for 10 years, costing him thousands more...

Two options :

Buy a house

have the interest payments pay his rent until house prices return to normal multiples..

Edited by moosetea

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No it won't work, simply because if he puts the money in a cash account the post tax interest on the 170k will not cover the interest only mortgage payments, unless the interest rate on the mortage is less than about 3.25%.

Now, if he invests the 170k in something clever, the income / capital gain from these investments might well cover the interest payments and more, which might turn out to be a good strategy. This was essentially the principle of endowment mortgages. But you would have to know what you are doing with the investment, or it could turn out worse than a repayment mortgage, as many people who were sold the endowment products found out.

Whether house prices rise or fall is immaterial.

frugalista

according to my calcs, the interest after tax should just about cover the IO payments, with a little to make up if he is a 40% taxpayer. If he's a lower rate taxpayer, then he'' be able to cover it. Something in between is more likely if some of the interest on the capital pushes him into the 40% band. However, factor into that the tax deductability of interest repayments and then the sums work OK.

Still clearly a rather uninformed decision though currently. You can lead a horse to water... :rolleyes:

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according to my calcs, the interest after tax should just about cover the IO payments, with a little to make up if he is a 40% taxpayer. If he's a lower rate taxpayer, then he'' be able to cover it. Something in between is more likely if some of the interest on the capital pushes him into the 40% band. However, factor into that the tax deductability of interest repayments and then the sums work OK.

Still clearly a rather uninformed decision though currently. You can lead a horse to water... :rolleyes:

The interest part of the mortgage is not tax deductible if he intends to occupy the property. That was abolished years ago in the UK.

Or maybe he intends to buy Swindon, Kansas, in which case the interest would be tax-deductible. I don't know if there really is a Swindon, Kansas, but there should be.

frugalista

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according to my calcs, the interest after tax should just about cover the IO payments, with a little to make up if he is a 40% taxpayer. If he's a lower rate taxpayer, then he'' be able to cover it. Something in between is more likely if some of the interest on the capital pushes him into the 40% band. However, factor into that the tax deductability of interest repayments and then the sums work OK.

Still clearly a rather uninformed decision though currently. You can lead a horse to water... :rolleyes:

whats the morgage/bank account combination?

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The interest part of the mortgage is not tax deductible if he intends to occupy the property. That was abolished years ago in the UK.

Or maybe he intends to buy Swindon, Kansas, in which case the interest would be tax-deductible. I don't know if there really is a Swindon, Kansas, but there should be.

frugalista

sorry, my mistake.... thought he was intending to BTL. However, still some tax to be offset if he chooses to let rooms (or rather no income to declare up to 4.5k or whatever it is)

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Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway.

Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please!

Take it from me Swindon aint that swish!

I don't get it. Even if he's determined to buy now it would surely make more sense to buy for cash. This strategy is like taking out a loan to invest in a savings account.

He's got little to lose and everything to gain by just holding on to the dosh for say, a year. Even the most bullish predictions for the market have HPI running at < 5%. In a years time, things should be clearer....

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Let me get this right, he plans to borrow money at 6% so that he can earn interest on other money at 4% (pre-tax).

I'm sorry, are the only buyers left in the market absolutely fxxxing mad? :unsure:

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All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please!

It's similiar to endowment mortgage, popular in the late 80s!

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I have lived and worked in/around Swindon all my life, and intend to buy in Swindon (or around the area again). Trust me when I say, house prices are slowly but surely dropping in Swindon. Your cousin would be barking mad to buy now! Tell him to invest his cash.

5% interest (and 5% drop in prices in a year) will be 10% gain on his behalf!

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Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway.

Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please!

Take a different tack-encourage him and let him piss his money away. Only a cousin isn't , no one closer, so let him do it...

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He's found a house and he's planning to buy but through an OFFSET MORTGAGE?????

What on god's green earth is that and does it make more sense for him to use one of those - he's saying he can put his lump sum into the Universal Building Society Offset mortgage and earn untaxed income on his savings at a level above the mortgage rate on offer - guaranteed!?????????

:blink::unsure:

I don't have an answer cause I don't even know what an Offset mortgage is!!!!!!!!! HELLLLPPPPPP

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He's found a house and he's planning to buy but through an OFFSET MORTGAGE?????

What on god's green earth is that and does it make more sense for him to use one of those - he's saying he can put his lump sum into the Universal Building Society Offset mortgage and earn untaxed income on his savings at a level above the mortgage rate on offer - guaranteed!?????????

:blink::unsure:

I don't have an answer cause I don't even know what an Offset mortgage is!!!!!!!!! HELLLLPPPPPP

An Ofset mortgage means that he doesn't pay interest on the part of the loan which is equal to the amount in his savings account. So if he has £170k in savings and a loan of £240k he'd only pay interest on £70k.

It's still madness though I cannot believe he will earn untaxed income on his savings and NOTHING is guaranteed.

Edited by terrified

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He is purchasing for 164k and has 170k to play with -------- he's saying he can pay off his mortgage and actually earn a small amount of money in the process??

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He is purchasing for 164k and has 170k to play with -------- he's saying he can pay off his mortgage and actually earn a small amount of money in the process??

In that case yes he would earn interest on the £6k and not on the £164k mortgage however I would be surprised if it was tax free unless he doesn't earn enough to pay tax ??

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  • 336 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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