Buy to let, invest monthly, or overpay mortgage in our situation?

[Nomoremargaritas]

Both my husband and I have recently had salary increases and we're considering taking some equity (around £50k) out of our house to buy an additional property to rent out. We'd be looking at flats around £150k to £200k. This would be a long-term investment rather than us looking to make money from it every month. I've been researching the likely monthly costs and questioning whether it actually stacks up financially.

We're in Scotland and would have to pay the additional dwelling supplement, which is 8% of the purchase price, as well as the usual stamp duty equivalent, insurances, letting agent fees etc.

Our other option would be to invest more in a stocks and shares ISA each month. Online calculators have suggested that if we invested £600 a month over 20 years we could come out with between £158,000 and £300,000, based on various growth rates.

If we bought a flat at £100k we'd have invested around £112k over 20 years, taking into account our initial deposit and the ongoing costs of being landlords. It seems unlikely the flat would rise in value enough to make a BTL a better option.

We have two young children and I'm wary about committing to an additional mortgage and all the stress of being a landlord. Is investing more the answer?

The other option would be to take the £600 and overpay our mortgage each month. The MSE calculator tells me that would shave 9 years off the mortgage, and we'd have it paid off by the time I was in my early 50s.

Lots of our friends have buy to let properties but earn more than we do. It's not so much money that a financial adviser would be interested in talking to us, and we don't have family we could ask for advice.

Any thoughts would be greatly appreciated.

I’m not an expert at all, but I’d personally be wary of taking out an extra mortgage to do BTL. I’d rather overpay mortgage, invest or put more in my pension - things I could pause if my own circumstances changed. I’m in my early 50s, DC at the uni stage - being mortgage free or having substantial savings would be very welcome right now.

Dont feel you can’t talk to a financial advisor though - they can give you advice on an overall approach to savings, investments, retirement planning. It’s not just for people who have thousands to invest.

Not financial advice but I would overpay.

BTL generally seems to be a nightmare, particularly if you have a big mortgage. Most profit people have made is from capital gains, rather than paying off the mortgage - and in the meantime it’s 20 years of extra work to do.

Id personally stick it in a S&S ISA global tracker fund, and then let it sit and do its thing tax free.

Just invest spare money in a S&S ISA. Over the long term it will likely grow far more than your own mortgage will cost you.

Forget about BTL. The additional dwelling supplement, maintaining the property, mortgage interest etc makes it unlikely to make you more money plus you have the hassle of managing the rental, finding tenants etc and one bad tenant could wipe out years of income.

Unless you can afford to pay the 2nd mortgage in-between tenants and maintain the 2nd property, boilers will need replacing over time etc , then overpayment your mortgage if it's a higher interest rate than you can find a savings account interest for
Remember rental income gets taxed and may push you into higher tax bands also and even without accounting for maintenance costs and mortgage when the property is empty, the tax and gas and electric safety checks will all cut into that rental income
I wouldn't go anywhere near rental properties if I didn't have serious cash behind me.
If you have a long period of time, I would look at investing with stocks and shares ISA if you can leave it alone for at least 5 years in a global fund it's likely to outperform savings and mortgage interest in the long term

I was a LL for a few years and hated it. I hated getting all the calls about things that broke, having to try and find plumbers, electricians, landscapers, damp experts etc. Tenants don't have the same kind of patience that you would have as a home owner (understandably) so everything needs to be sorted straight away. There were definitely periods where working full time and looking after the property/tenants were a struggle. Not worth the little money you are left with after tax, if there is any at all. I think it's only worth doing if that is your primary job and you have multiple properties you rent out.

I think if the interest on your mortgage is more than 4% it's worth paying that off quicker (depending on if there are any fees involved in doing so), otherwise I'd go for stocks and shares.

Thanks all. Interesting to hear that the general consensus is to avoid BTLs.

We already invest £500 a month into a stocks and shares ISA so if we added the additional £600 we could see significant growth in the future. Equally we could lose it all!

We could afford to pay the additional mortgage between tenants but it would be at the expense of other things that are important to us, like holidays with the children.

I'm a higher rate taxpayer so also conscious about the effect of that on the rental income.

We're in the process of renewing our mortgage and we've been quoted 4.8%. Does that change the view on investing vs overpaying?

It's so hard to know what to do for the best. I don't want to be so focused on the future that we don't enjoy life now but equally I want to give my children the best life I can and help to set them up for the future.

I feel like at the age of 40 I should know this stuff!

We're in the process of renewing our mortgage and we've been quoted 4.8%. Does that change the view on investing vs overpaying

No.

Overpay your mortgage. That way you can stop if things change (eg if one of you is made redundant) and then once you've paid off - invest in stocks, shares, ISAs.

Whilst BTL looks inticing - there's a lot of work and worry even if you go through an agent and things go smoothly with 'good' tenants. Overpaying is easy to arrange and works for you without any additional 'work' on your part.

Can you not increase your pension payments? Or pay 50% pension and 50% mortgage overpayment? I think it’s better to diversify rather than go down one route. I wouldn’t do btl as it’s too much hassle.

I currently pay 10% of my salary into my pension, so could increase I guess. I just see my pension as being way off into the future and I/we may want the money before that?

If you invest the money in an ISA you can withdraw it if you need to, but you should always keep some accessible cash to reduce the risk you'll have to withdraw from an ISA at a time when investments have fallen.

There's a lot of discussion about pension vs ISA, but it depends on your tax status while working and in retirement. But there's the disadvantage that you can't touch your pension until you're at least 57 in your case.

But quite often, you could split any contributions 50/50 as a decent compromise.

You haven’t mentioned how old you are because if you’re under 40 you could open a LISA

With all the proposed legislation from the SNP & Greens, there is no way I’d invest in BTL.

I also think the we are due a correction in the housing market as prices have increased so much since Covid.

My DH used to be a landlord but since the changing laws in Scotland it has become an absolute nightmare to be honest. The costs are huge (taxes etc) and he was finding it just wasn’t worth it. He took all that money and put it in stocks and shares and has made a lot more through this than he would have renting. He worked hard on these properties to renovate them then rent them out but now makes more money not working and keeping that money in investments - odd state of affairs in Scotland when you can do that!!!

Thanks again, the replies have been very useful.

We do have a cash ISA with a couple of thousand in it (thanks, maternity leave). I've also got a LISA which I used for saving up the deposit for our house and haven't paid anything into since.

I'm 40 so really want to get a grip of our finances.

I can see the arguments both ways, but for me the SNP's taxing of people who are trying to better themselves and help their children is utterly mad. It's almost like you're being punished for not relying on the SNP's handouts and supposed 'freebies'. That would be a whole other thread!

If you're 40 then under the current rules you'd be able to access money from your pension in under 20 years - shorter than the timeframe you were talking about for a BTL.

And there are tax advantages to paying into a pension, especially as you say you are a higher rate tax payer. It's another option you should have on the table. .

As a 40% tax payer any money you put into your pension immediately attracts 40% tax relief and you got massive growth from the start.
If you are able to salary sacrifice it you don't pay the NI either.
I know your pension is way into the future, but if you can afford to lock up the money now then if has a couple of decades of compound growth and will be worth a fortune when you're 57 and able to take it out

If you don't want to lock it all away, choose a proportion for pension then the rest in savings.

Firstly make sure you have a really good cash buffer. If you couldn't work for 6 months how would the family get by? Do you have excellent sick pay, income protection, critical illness cover, life insurance? (We have a year's income in cash, we can spend a small portion on holidays and top it up over a month or 2, or a bigger portion on a new roof this month and top it up over y months)

Then put the rest in your S&s ISA. If in s&s then make sure you won't need it for 5 years.

The ISA will very likely outstrip your mortgage interest by an order of magnitude

Invest monthly

the earliest you could access a private DC pension will be when you are 58. I'm a little ahead of you at 44 but have previously prioritised my pension to the point where even if I didn't contribute another penny and I got average 5% growth I won't have to worry about retiring at 58.

18 years seems a way off I know, but if you are a higher rate tax payer it is the most effective way to build wealth for your retirement, due to the tax relief and employer contributions. The earlier you start with the increases the more chance you will set yourself up for success. Its good to know that if my job got replaced by AI tomorrow I only have to worry about meeting my living costs and not saving more for retirement.

Make sure you have 6 months expenses in cash first. Increase pension to take advantage of tax relief to avoid paying 40%. I'd also continue to try and pay as much into your S&S ISA as you can in a global ETF.

It doesn’t have to be all or nothing, how about 200 extra in pension, 200 extra in isa and 200 overpay mortgage.

BTL would be my last choice. It is high risk, low return, hard work and illiquid.

Mortgage overpayment is psychologically attractive, low risk but also potentially illiquid. We did this - and in fact used an offset for liquidity as we had a big mortgage and no savings - but now in my 50s I wish I had been braver with pensions/investing.

How much is your pension vs your stocks and shares ISA? Do you want to retire before state pension age? Pension savings are very tax efficient if you are currently a higher rate tax payer and not likely to be in retirement. Similarly the LISA - if you get a 25% bonus from the government, even without any investment growth, you are likely to make more than your 5% mortgage overpayment!

I also agree you need some cash emergency savings.

So my suggestion would be LISA, think about your pension, mixture of S&S ISA and maybe a bit of mortgage overpayment if you want to.

Not to get into a political argument but I don't see how the second home charges/taxes and the increased regulations that make being a landlord more difficult and costly equate to 'punishing families that want to better themselves' - surely it only penalises those who specifically want to better themselves through acquisition of property. There's still plenty of other ways to invest your capital and not be taxed on the interest/income or subject to burdensome regulatations, ISAs and pensions being the main ones, yes very high earners can eventually max these out but I don't think that applies in your case. I'd go with a stocks and shares ISA personally in your circumstances, very liquid, risk appetite can be entirely tailored to your personal circumstances and no effort or input required at all, just sit back and watch the growth, I know it's not bricks and mortar/a tangible asset but it's perfectly real money and much easier to manage than having your capital tied up in property/eggs all in one basket? And at £600 per month each you are no where near the ISA contribution limit so no worries there...

But it's very tax efficient- particularly if you are in a highr tax band. Do you currently get child benefit? (As paying more into a pension may increase your eligibility).

I've got a flat that I rent out in a Scottish city and I really wouldn't recommend it as an investment. I did it initially because I bought at the peak of the market before the financial crash and couldn't afford to sell when I needed to move on. I now use an agent to manage it for me because between having a full-time job and small kids I couldn't handle the calls about repairs and emergencies myself. They tended to come at the most inconvenient time, like when we were away on a much needed family holiday and my tenants locked themselves out and I had to coordinate someone getting into my house to get the spare keys and then do a 50 mile round trip to let them back in. The agent now handles all of that for me, plus arranges all the maintenance and checks required to meet legal standards. That comes at a cost, but work tends to be cheaper than if I arrange it myself because the agent has a good network of tradespeople who get a lot of work from him. I have a small mortgage with a very good interest rate on the property, but I find that most years I don't take enough in rent to cover my costs and end up having to subsidise it from my income from employment. I suppose once I've paid off the mortgage that will change, but realistically the financial gain will come from price inflation when I eventually sell. If I did that tomorrow I reckon I'd make about 30% profit, which I'm not sure is worth it for all time and money I've put into it over the last 15 years.