Mortgage question

[Arscal]

We currently own two properties, our home and our previous home which we now rent out.
We're struggling financially since our family has grown and only really managing the interest payments on our mortgage. However, things probably will be easier in a few years time as there will be less childcare to pay for meaning my salary will contribute to something other than Nursey fees and DH's salary likely to increase too.

Would you sell the second property to make things easier short term or would you struggle on to keep hold if the second house with a view to using it as a sort of pension in the future?

We just can't decide what to do for the best!

It really depends on the numbers.
How much equity is in the rental property? ie would you make enough to cover the outstanding mortgage if you sold?
How much is the rent on your old house v the mortgage? How long outstanding on the mortgage on the rental ie if you stick it for 5 years, will the mortgage be finished, and rent will all be profit?
Could you go interest only on the rental property?

Warning: if you need childcare year round (ie you don't work term time only), it is still quite expensive - we are currently on £750/ month for DS2 (full time childcare), and have calculated £350/ month for before/after school and holidays for DS1. Will this be enough to make a difference?

Thank you for your reply :)

We didn't take any of the equity from our rental property when buying our current home which effectively means we had a 100% mortgage.
Our current home has gone up in value a little however, I would say by around 40k. We have 19 years left on both mortgages.

If we sold the rental home we could pay off the remaining mortgage on that property and then have around 50k lump sum to pay off the mortgage for our current home.

Yes, I would need childcare all year round but do only work part time (although working part time doesn't have much of a baring as of course I then only receive a part time salary too).

That all sounds quite 'bitty' when I read if back, sorry. I hope it makes sense.

I'm worried about making a rash, almost knee jerk, decision but we are really struggling and it feels like the easiest thing to do would be to sell and also to increase the duration of the mortgage on our home by 5 years to give us even more breathing space (with a view overpaying when our financial situation improves).

Is this crazy talk do you think?

I'd sell the second property. If the last few years have taught us anything, it's that house values can fall as well as rise. Plus, all the whole you own that second house, you have the financial commitment of repairs, maintenance and the risk of major incidents such as fire or flood. Insurance will rarely cover all this. As a pension investment, it's a risky one.

On the other hand, you have an opportunity to shore up your current home, which will then give you the security to put proper plans on place for your retirement.

In theory it is a great idea to have a second property as a pension. But not if you cant afford it.

Interest rates will go up within a couple of years, at most, according to what we all read. So then you might be forced to sell for what you can get.

In your shoes I would sell, use the equity (after tax, dont forget its not tax free) to pay down your mortgage, and see if i can fix a good cheap fixed rate with the higher equity before it all goes pear shaped.

I'd sell as well. Renting comes with a myriad of extra costs - the mortgage still needs paying in the months without tenants, Council Tax becomes your responsibility then, etc. Plus repairs and refurbishment to keep it looking good and rentable. Your margins are too close, there's not enough equity backing this up for my level of risk appetite at least.

Cut your losses and consolidate your finances based on a single property for now. I think you'll sleep easier.

are either of these properties in London?
can you release equity in the rental property while still covering the outgoings on it? Is the current tenant paying proper market rate? are you using an agent to manage or are you doing that yourself?

The overall response is pretty much as I expected. I guess I was hoping for someone to throw an idea into the pot that we hadn't already thought of... commonly known as a miracle I suppose. :)

We do manage it ourselves so don't pay any management fees (other than one off fees to find new tenants and draw up contracts).

In fairness, over the years we have not had to spend a great deal of money on it. It's vacant at the moment so we've taken the opportunity to decorate and sort a few maintenance jobs and repairs. We've spent around 3k in total but that's the first real spend in 5 years. However, its 3k would could have done without having to spend!

It being empty is what's prompted all the serious discussion. After the spruce up it's looking pretty good so its probably a good time to sell if we are going to. Also, the prices in the are have increased a little recently and houses are selling pretty well so, again, not a bad time to sell.

We do charge the going rate of rent for the type of house in the area but would probably be able to increase by 25 pcm if we let out again (neither hear nor there in the great scheme of things). I doubt we would ever have an issue finding tenants so would not be massivley concerned about that.

The issue I guess is having a gang of kids in quick succession and living off one salary for the last 4 years. 6 years ago when we decided to keep the house and rent it out we were DINK and it all made sense then. Our circumstances have changed somewhat!

I suppose it comes down to how you feel about risk, and also how you feel about "living" now, whilst your dc are young.
For me, I'd sell. It's a lovely feeling being near the end of your mortgage, it gives you choices about if you work at all, or if you work PT or maybe in a lower paid but more enjoyable job, etc., and get the balance of your life working better for you.
Potentially, you might miss out on some rental income once those 19 yrs have passed and if you still have it, but that's a lot of years to be waiting, and of course you've been lucky so far with good tenants etc but there are horror stories out there. It's also one less thing to 'do' - be looking after all the maintenance that goes with home owning.

Well I think you need to do your sums.

(a) if interest rates go up by 3% can you afford the mortgage? for how long?
(b) how much would all the fees and stamp duty etc cost you for selling up?

(c) Is house B going to be your pension scheme long-term? if not, what other pension do you have? and how much are you investing in it?
(d) Are you thinking of going back to paid work; if so, when and how much will you clear between you after childcare?

If you can afford an interest rate rise, you could keep House B.
If you know you can't, you could still keep House B if you reckon that there would only be a short gap of a couple of years before you will be jointly earning enough, and you can remortgage house B to cover that gap.
But if there is a danger of crashing if interest rates hit 5-7%, then be very careful.