Pay off mortgage or invest?(5 Posts)
Regular poster but have name changed
Recognise that we are v fortunate to be in this position but we live in SE London in a large three bed terrace in a very up and coming area. We made this purchase after selling our previous property and following the death of our parent. House has rocketed in value - and given location- unlikely to reduce. We bought for £499 k and a number of similar properties in street have sold for 750k in the last few months. My husband and I have a repayment mortgage with 250k and 22 years left on it. We are overpaying and the interest rate is fixed for a 18 months more at 4%. We have a good income and reasonable savings (not earning much interest of about 50k). We are likely to move out of London in 5 years for a variety of reasons. Unlikely to be less than that. Our ideal would be to be in position to keep our house but somehow use equity to finance purchase of another. London house would be let. I do not really want to be without a London foothold.My question is - what would enable us to be in a better position - pay off mortgage through overpaying now or use additional three hundred a month or so as nest egg for another deposit. Thanks in advance if you got this far
What are you going to invest in? - the Chinese stock exchange is on the slide again.
I am no money expert but I've looked into similar in the past. Have you tried crunching your numbers in an overpayment calculator to work out how much interest you could save based on any overpayments I.e http://mortgages.firstdirect.com/mortgage-calculators/mortgage-overpayment-calculator/html
With your numbers you would basically take 5 years off your mortgage if you paid £300 extra per month or save £34k in interest, personally I would overpay rather than save £3600 p/a or £18k cash over 5 years, but interested to see what others say....
Buy to let legislation is changing but if you have a low mortgage v's rental income then tax etc should still work out ok, I think.....
I had a look in to this recently. The advice seemed to be that if you were paying 4% interest on your mortgage you would need a return on investment of around 10% to make it better to invest than to pay off the mortgage of your primary residence.
One financial adviser said something along the lines of "would I advise someone to borrow 400k in order to invest it" and the answer is of course "no". Which is another way to look at it.
First of all I'm sure you're aware of the 3% additional stamp duty coming out in April for buy to let purchases. I am not sure if this will impact your current property if you let it out, or if you will just pay extra on the home you're moving in to, I'm sure the details are out there somewhere.
We have recently rented out our 1 bed flat in Chiswick and are now buying slightly further out of London. One thing I learned from the process was that actually the rental market in London is not great when you look at yields - the total yearly income from renting compared to the price of the property - your yield would be far greater outside of London where rental prices are comparatively higher.
If you were looking to move into lettings you may want to consider selling your London property to finance several non London properties with much better yields (assuming passive rental income is a goal of yours). If the rental income is not a goal, and in fact you're just looking to store a large sum of money in the value of the London property (with the intention of retaining that wealth within the family for generations) then it doesn't really matter what you do other than paying off the mortgage.
Consider other options than just saving for another property as well. There are a lot of headaches that come with lettings and unless you're really after the passive rental income to help support a lifestyle then it may be better to look at safer/simpler savings accounts including peer to peer lending.
Just my 2 cents!
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