Extend vs pay off mortgage vs buy

[Hungronymous]

Hi all,

New here and looking for some advice please!

A quick overview of our situation:

• we're a couple, late twenties, both working with household income of £180k ish.
• we bought a two bedroom house a couple of years ago for £315k, £250k mortgage, 35 year term
• Remortgaged to 25 year term last year and about £215k left on mortgage, house value risen to £325k
• recently got married, no kids as of yet but a consideration in the next 2-4 years

The question going round and round my head is what we do next? The options I believe we currently have are (any other ideas welcome):

1. Reconfigure house to make it a 3 bed. This would likely require an extension and depending how far we go with it could cost anywhere from £30-£60k. Similar 3 bedroom properties in within a 0.5 mile radius are selling at around £360-£375k

1. Save up for another, larger property and keep this one to rent with some minor refurb/redecoration. The property has had recent infrastructure changes locally so would like to hold on to it if possible as it was bought as a long term buy and hold investment.

1. Save and pay down the mortgage as rapidly as possible. Having done some quick calculations, we could have it paid off in around 6/7 years, but this is without factoring in pay rises, kids etc.

As we're still quite young, paying down the mortgage so drastically seems maybe too financially conservative but I might be kicking myself in a few years if interest rates go sky high.

Legislative changes in the buy to let market are putting a bit of a dampener on my dreams of being a portfolio landlord, plus stamp duty costs but if I want to hold on to the property then I'm going to have to accept the cost at some point.

Any advice/pointers/guidance would be great!

Thanks

Interesting dilemma - one crucial piece of information missing from your post, how much would current house rent out for, i.e. what is your predicted rental yield as of today (possibly the infrastructure changes would result in increased yield in future but probably best to plan off today's prices). I would have thought unless you are in an unusually strong rental market you won't get a terribly high yield with that level of mortgage (as you say tax and regulation changes have made BTL a less attractive prospect than previously), so you would be just covering your costs (or maybe even making a slight loss if you get bad luck e.g. non paying tenant or long void period). Bear in mind that by not accessing the equity in current house you'll have a lower deposit to make in new house, so a higher LTV on new mortgage and therefore more interest paid? Plus things like having to pay CGT if you ever sell rental place etc. So you'd be counting on the long term capital growth to make it a worthwhile investment really? If you bought a larger place would it be in the same area - so you'd have both property 'eggs' in the same basket - potentially profiting twice from the growth but equally sharing the same risk that the infrastructure change won't result in significant house price growth?

I think if you have the plot size, personally I would go for the extension option - at the less optimistic end of your estimates (so it costs £60k and your house is then worth £360k), the net 'cost' is £25k. You'd be spending near enough £15k in costs to move to the equivalent 3 bed house (£8k stamp duty, £2k estate agents fees, £2k legal fees, £1k moving costs and miscellaneous expenses), and that's before you get into the additional mortgage interest you'd be paying on a bigger mortgage. And you could possibly end up breaking even or making a nice profit at the better end of your estimates, and even if you don't you'll have everything done up to your tastes and specifications which is not a bad return on investment (most people do spend a bit on updating decor etc when they move even to a property which doesn't need major work).

But, crucially, I wouldn't borrow extra mortgage to do the extension, I would save and fund as much of it myself as I could - if you can pay off the full mortgage in 7 years, you should be able to save say £50k in 5 years easily enough? This does take you into a period where you may have kids but you can manage in a 2 bed until at least first DC is a toddler and 2nd is a baby I would have thought (someone may come along in a minute to tell you how they had 10 children in a studio flat and were grateful ). Obviously ideally you wouldn't want to do major building work when pregnant/with small DC around. But the benefit of waiting until you have the capital is (a) no extra mortgage interest to pay and (b) you can reevaluate the market at the point of committing and if things have changed you can change rather than committing now when lots of things are uncertain?

That's some great advice, thanks maxelly.

The rental return would be around £1200-£1300pcm currently so if we went with a repayment BTL mortgage I imagine we would at best be breaking even and probably be making a net loss. I would hope that it would be worth it in the future though due to the capital appreciation and rental price growth but difficult to know.

In terms of where we would be moving, it would be out of our current area. Our area isn't the sort of place I'd want to bring up kids (at least in the short term, hopefully the neighborhood improves!).

With that in mind, we would need to move out of our current place one way or another within the next 5/6 years.

Makes my head hurt thinking about all the options but talking it through on here seems to help!

I can’t see the point of extending if it costs 30-60k but adds only 35-50k. You’d need to get it right just to break even so a lot of hassle for no gain.

In terms of BTL, it doesn’t work for many. However, it depends on who earns what. For example, if one of you earns 25k and the other 155k, then renting out the property would make a little more sense than if you’re both higher rate tax payers. Not sure if enough sense to be a viable option as the rental yield isn’t very good.

Since you don’t want to stay in the area when you have children, I’d save up to move to where you want to be. It’s best to move before you start a family to avoid the additional stress of babies/toddlers when you’re moving.

As you do have considerable disposable income, I’d be investing it via ISAs and increasing your pension contributions (more time for the money to grow and very tax efficient).

Ah that changes things if you are sure you want to move out of the area when you have kids.

In that case I'd forget extending, I'd save hard for the next few years and make the move to a bigger place in the area you want to be in, in 3-5 years time (I wouldn't get too caught up in having to move before you have kids, just go when the time is right, and you can definitely have at least 1 kid if not 2 where you are now, understand what you say about not wanting to bring them up there but for the early years it's less important IMO). Ideally I would move just as you see the return from the infrastructure investment if this is within your timelines.

You could save and pay off the mortgage but depending on what interest rate you are on, your savings might be better off judiciously invested in a mixture of ISAs, managed funds and perhaps as PP said (depending on your tax rates) additional pension contributions, rather than paying off the mortgage. Lots of people are very keen on going mortgage free as soon as possible which is understandable for the possible lifestyle benefits but purely in financial terms mortgage rates are relatively low at the moment and even a fairly conservative set of investments should well outperform what you are paying in interest...