Dilemma , need some £ savvy advice... should we sell rental flat (mortgage) and put money towards being able to pay off some of our family home mortgage?

[Lloydcolestilldoesitforme]

So the situation is this.
I am remarried to my lovely DH who is stepfather to my 2 DC (8 & 9). To give you some context, I am the main breadwinner for my children and in our household, I pay the lion's share of my DC costs and a big chunk (More than 50%) of my shared costs with DH.

When myself and DH set up home together, he kept on his (tiny) bachelor flat in SW London (Balham) and rented it out. He used his nest egg as part of the deposit on our family home. It is a very small one bed and I think subject to a cap as to how much it will increase in value because of its size. According to our last mortgage advisor, DH has a very good interest only mortgage and we were advised not to change it as the lender permits him to rent the flat out. However as the rental received is quite small, at the moment DH is only paying the interest. The rest of the money goes to the lettings agent, insurances, maintenance, rainy day etc. So in effect, we are making no progress towards building the pot required to own at the end of the mortgage term. The flat is probably worth somewhere between £180-£200k and we estimate there is about £70k equity in it.

Because we set up home 'relatively' late i.e. early 40s, our shared mortgage has many years still left. Whilst it is affordable, it is dependent on us having 2 incomes and frankly i full time work in a stressful, hard job and I am starting to think I don't want to work like this until retirement (currently another 23 yrs!) Or at least don't want to feel like I have to. We currently have about 40% equity in our house.

So am wondering what would be the best choice for us?

1. Sell the flat now and use the equity to pay off some of our shared mortgage?
2. Keep the flat but remortgage so at least we own something at the end of it?
3. Sell the flat and buy another rental property which is a better investment
4. Not worry about any of this as we can always downsize when the kids have left home?

I am trying to save money every month that we can use an overpayment as a new year's resolution but starting to feel very tied to being dependent on 2 incomes and me always having to work at a certain level.

Any thoughts greatly appreciated!

So, on the family balance sheet, the rental flat is just a big liability (mortgage) and a big asset (current value) that isn't costing anything month to month but isn't contributing anything either?

To me, there's no point having an asset if it's not paying its way. If it's appreciating in value or earning an income and the ROI is higher than putting the equity on deposit somewhere or paying down a debt that's a reason for keeping the status quo. If it isn't appreciating in value very fast then I would personally realise the asset and make the cash generated work for you somewhere else.

Thank you for taking the time to reply. That's what my instincts are telling me Cogito... The flat is growing in value but I think it will only ever grow to a certain limit because of its size.

Day to day DH is incredibly good with managing money (never had debt etc), has savings but doesn't think about money in this way. I think he is lulled into a false sense of doing the right thing in this instance.

I think I need to get my maths head on and do some number crunching to prove to DH that whilst it's not costing us anything, it might not be the best investment longer term and the investment could work harder for us. So really a combination of either 1, 2 or 3?

Hi - I live near Balham and I can only assume you have been very badly advised regarding the value of the flat. Unless it is a teeny-tiny studio in bad condition on a really run-down council estate, I can't believe that (a) its value is so low and (b) the rent only just covers costs. I'd have it revalued and look at RM for similar flats to see what rents are in the area.

If you now live outside London, I'd be tempted to keep the flat in case any of your children ever need to live in the capital. You don't say how long you and your husband have been together but, if it is several years, you/he might be surprised by how chi-chi Balham has become (I know, I know) and how desirable properties are there.

We were in a somewhat similar position, and sold the flat. Definitely the right call for us, the flat (London zone 1) sold for far more than we thought, so we freed up some cash and didn't have to deal with tenants, freeholders etc etc.

Ps forgot to say, one bed flats in Balham go for well over £300k!

Who valued the flat? How far is it from the tube station?

I can't believe it's only worth that much as rental / sale.

We are in similar situation to you, I am desperate for DH to sell his house - not being able to benefit from the equity against our current mortgage is a huge cost, make sure you factor that into your calculations.

I sold my investment flat last year and spent around 25%improving our home, paid off some debts and then the rest has gone in an offset, so I can access it if I need to. I am very happy with the improved house but also thrilled not to have to manage the flat anymore! Yes it was washing its face but I was relying on the market appreciating for it to actually make any money and constant fear of losing tenant/boiler blowing etc. I say sell!

Thank you everyone for all your replies. Some really useful food for thought.
lalalonglegs - interesting to hear what you say about prices. It is at the tooting common end of Emmanual Road, from memory about a 10 min walk to the tube. It is a really small one bed in a victorian conversion. Small kitchen and bathroom but reasonable size lounge and bedroom. Freehold and in good nick. DH rents it out currently for 900 pm through an agent and the agency fees (plus a new boiler and carpet) seem to consume any profit on the rent. I can't remember how much it was last valued at but certainly less than 200k. Irrespective of the decison we make we need to get it valued again from the sound of it!

suzietwo - I can relate to the 'thrill of not having flat management'. I know DH dreads the phone ringing. At the moment he has a good tenant and fingers crossed there are no issues but it can all change in a phonecall.

Thanks again everyone. I love mumsnet. Where else can you ask these questions!

Here is a studio at that end of Balham under offer at £289k, here is a titchy one-bed on Kings Avenue - ie, that direction but even further from the tube - at £330k... You really need to get it revalued .

Rents on the Hydethorpe estate - as that neck of Balham is known - seem to start at £300pw so I do think you could be making more money out of this than you currently are. I would add that if you decide it is worth keeping the flat, you may want to get the rent in line with market rates soon as, in the vanishingly small possibility that Labour wins the election, the government may legislate against rent hikes in the future.

Good luck with whatever you decide.

With regards to option 2 you would need to check the terms of the current mortgage. If he took it out on a long term fixed rate there may be a large penalty for ending it early to switch to something else.

I don't see how it is valued at comparatively so little. And the rent doesn't cover the interest only mortgage. That doesn't add up at all. You need to find out what the going rate is for flats in that area. There doesn't seem a lot of point in keeping it unless you think the value will massively increase in the future.

Glad this has been useful. Get going with a new valuation and good luck!

I would keep it on if it were you but would have it revalued and move it to a repayment mortgage. It has definitely been undervalued, a friend bought his flat in Balham for £190k seven years ago. It will be worth much more now. Good luck.