Move to a bigger house or buy a small flat and rent?

[oreoxoreo]

Hi I cannot seem to make up my mind on the following.

Got a small 3 bed house for myself and my 2 DC.
My mortgage is low and I am in a position to borrow more, which I would like to do whilst fairly young.

I could move to 4 bed (I don't really need 4 bed, but would love a bigger garden). I could possibly get a lodger if I want to. Or the bigger space might be handy if my DC want to live here post education (they are now 11 and 8), given that I am in London suburbs.

The alternative is to buy a tiny flat (think one bed in Chatham) and let it out. I expect I would have to add some of my own money in addition to BTL to repay the borrowed money, but the equity would be building up and I would have repaid it by the time I am retired.

Which one to go for?

If your home is big enough, why saddle yourself with more debt? Use the money to have a good lifestyle, or save for a rainy day.

I agree with Sirrah and if you do have spare cash because your mortgage is low put it into your pension or ISAs for your kids further education or to put deposits down on their own homes eventually.

If you don't 'need' a 4 bed house besides taking on more debt, your costs will be higher when living there. Also bigger gardens are fine in principle but will you have the time to maintain it? Your kids are at an age where running around in it will be less of an attraction!

Remember that buying a second property to rent out costs you extra in stamp duty before all the taxes foisted on landlords by the government.

There are other options beyond property. Pension saving would be a much better balance than all your assets being in property

Over pay your mortgage to pay it off early. Once this is done invest in ISA’s etc.

There’s going to be a Brexit financial shit-storm and you don’t want to be caught out with large debts to pay off.

This is what I don't get.
How savings or ISAs can be better than property?
I make good pension contributions as it is, so feel like investing in pensions would just sink the money and be a gamble.
The property is a clear cut investment for life. (DC life)

Because property isn't as good an investment as it used to be. You need to check out all the costs of investing in property as nothing is clear cut.

My DD and DSiL moved from their 2 bed London flat 6 years ago to live in Surrey. They kept the flat (as an investment) and rented it out. The rent barely covers the mortgage on it and they have lost tax benefits that they used to have by being 'landlords'. They would sell it today for cash to pay off their home mortgage but the increase from the £250K they paid for it in 2007 is minimal so they are hanging on to it until the Brexit shambles is over. This could take quite a while!

You are fortunate to be in the position of being cash rich with a pension, so to speak. Best bet is to see a financial advisor and decide what your best options for investment for your kids should be.

1. Because there are no entry fees. Do you know how much you would need to pay up front in SDLT, legal, survey, mortgage fees etc?

1. Because there are no exit fees - have you calculated EA and legal fees to sell?

1. Because there are no ongoing fees and obligations - LL insurances, EA management fees, repairs, accountancy fees etc.

Do the maths and see how much property price growth you would need to see just to cover all of the fees which have eaten into your initial investment.....or alternatively look at how property prices have “performed” (declined?) in your chosen area in the past few years to calculate how much you would have “made”.

Seriously - keep life simple - enjoy it now and have plenty of financial slack.

Also if you do trade up to 4 bed - calculate the fees incurred along the way - might make more sense to reinvest that sum into your existing home - if you need the space.

In past years property has been a good investment - well above inflationary increases, shortage of rental properties so easily rentable, costs can be set against tax etc. but in my opinion the situation is changing - prices stagnant and some properties taking longer to sell and more buyers trying to gazunder. Changes in tax and renting mean that some costs can no longer be set against tax and deposits are now pegged to 5 times weekly rent, more regulations to do with being a landlord etc etc. Add to that Brexit - obviously when it does happen the economy is going to be in disarray for a while (fuck knows what shit Boris, Hunt or Gove are planning not to mention the long-shot if Farage gets elected one day). There’s going to be less people to rent - a lot of EU people will leave because of how they’ve been treated and if £ dips so they earn less than they could do in EU countries or back home. UK people who can leave (with Irish passports and in-demand portable qualifications etc.) will. The City of London will get a hammering.

Also if you are a landlord do you have the spare time to keep on top of maintenance and repairs? For a 1 bed flat in Chatham are you expecting to rent to young working couple - they’ll expect pristine decoration and fully working appliances in a nice block with parking (high service charges) not some crummy victorian terraced-house converted into flats.

Do you know how rentals are taxed these days? And the associated costs? For most people, getting a flat to rent out is a bad investment these days but it could work in some circumstances.

You could speak to an IFA and go over your options.

This is not what I asked and all very strange for me. It does not make sense to borrow money (under current mortgage) for investing in ISA or funds or similar. If I think of buying a flat then it make sense.. even if rent wouldn't cover all outgoings, I can afford to cover several hundred per month, and would have a flat at the end of 20 or so years.
It just doesn't make sense to borrow more under the current house for investment into some kind of fund.
Perhaps I am being naive.

Put the money into kids saving accounts - they can get good interest. move it round every year to stay on the top interest and it's always tax free as they have their own allowance

Once they get to 16 look at converting to some form of first time buyer accounts if they still exist then. The government currently gives a 25% bonus on top of any money saved. Obviously no guarantee they will still be around but something might be

www.moneysavingexpert.com/savings/child-savings-tax-free/

No one is suggesting that you borrow more on your current mortgage - they are suggesting you pay it off, and then use what you would have spent on monthly mortgage payments to invest in an ISA / your pension. Why have a big loan when you don't have to?

In your situation, if you really desire a larger garden, I'd probably move for that (I love my garden). However I'd have to weigh the costs up of stamp duty etc vs the benefits of being mortgage-free!

I don't think you're thinking along the wrong lines.
Property will always be a good investment if it's going to be used. But price increases aren't guaranteed anymore, so you can't say a one bed flat will make money over 10-15 years. The future isn't certain. Recession?
I wouldn't buy a flat, being a landlord is a big headache, maintenance, extra stamp duty to start with and I couldn't even be bothered with the tax returns. Capital gains tax too when you sell.
You need to take any inheritance tax into consideration, if you plan to leave to your children.
I would look at investments for the children if your pension is truly sufficient.

Property isn’t looking so good st the moment. It’s illiquid and the tax changes are a bind. It’s also effort.

I would put my money in an indexed linked tracker find (vanguard) as a relatively good bet low fee low hassle.

Also consider some % in gold which should reflect your view on the global economy.

You already have property, and pension. You’re in a good position.

I’d buy the bigger house

10% increase would be more on a bigger property

Property prices only go down in the short term - long term investment

You can sell and give your children a slice when they need it -

I think borrowing against your own property to spend on a buy to let is risky, unless you have a good knowledge of the market you are buying into (what types of 1 bedroom flats do people want in Chatham?) and have done a full analysis of the financial impact on you and your family. If the rental income from the buy to let (before you take out your mortgage and maintenance costs) push you into being a higher rate tax payer you could end up paying out 40% of the rental amount in tax. Take another 25% for maintenance, insurance, service charges etc and you are left with a couple of hundred pounds profit to go towards the mortgage. And that's before thinking about interest rate changes, house price deflation and reducing rents, and future legislation as the government are keen to discourage private buy to let landlords.

Of course you don’t borrow money to invest in a ISA. Just don’t borrow any more money and save.
You sound quite naive and financially unaware.

Something not mentioned so far that I've read here, is that the second house can be like a piggy bank.

I had a house that I bought 20 years ago. When I got a job elsewhere I rented it out (always been easy to rent out, not for a lot, but it covered the mortgage - which was converted to BTL). When DP and I wanted to buy a new house, the old one I'd paid down a bit, plus the house had gone up in value 50% over the 15 years in between, so we were able to double our deposit for the new house, and get a better mortgage deal, by upping the mortgage on the old house (rent had caught up by then, and I was in profit each month - hence being able to pay it down a bit).

We've had to move for work again, so now our joint house is also rented out, and we rent else-where - but again, both houses have increased in value (the little one by a relatively small amount), so should we decide to buy something here, we can borrow on those two houses and buy the new one with a bigger deposit - balancing the amount we borrow against the rates for each percentage so we get the best deal.

My philosophy was to maximise to a safe level, my borrowing while I was young and able to pay it off - so that when I'm older and no-one wants to lend to me, or I want to wind down my work, I have options. It's paid off so far.

Brexit is a spanner in the works though, I'll give you that.

'plus the house had gone up in value 50% over the 15 years in between,'

butteryellow the situation with property investment now is vastly different from 20 years ago. The chances of prices rising in the way they did after the crash of 2007 are next to zero in most places.

OP you don't borrow money (under current mortgage) for investing in ISA or funds or similar.

You use your excess money at the end of each month after your mortgage and all expenses have been paid! There is no borrowing involved, just saving your own money.

I'd buy the bigger house, because you are more likely to get a 2nd shower, or a downstairs toilet or a bigger garden or a bigger driveway / more parking, or maybe even detatched. All of which are just nicer and make your life more pleasant, as well as meaning the amount of money you would eventually make (even 10% growth) will be bigger, on a bigger investment.

I would go for bigger house if I were you. Above all people mentioned about saving, but the value of £100 today is definitely not the same value £100 after 20 years. Money depreciate over years, plus most saving account got crap/low interest rate. Thanking about you put £200,000 in your bank account, how much it's really worth after 20 years?

Property will appreciate in the long long. £200,000 property now is definitely worth more than the £200000 cash in 20 years. The impact of Brexit will be temporary, over the time the supply of land/house are still limited.
Apart from that if you lived in a 4 bed house now will give you a pleasant life style, which is also added value to your life.

There’s a middle ground

What about a slightly roomier three bed with a larger garden

As for getting a lodger, good heavens if you can avoid that - then avoid it.

How savings or ISAs can be better than property

Because global equities have increased more than property! People just don’t understand investments in the same way and not do they gear themselves with that exposure.

I'd invest in a BTL, but the place to buy is in Birmingham or Manchester where the yield is getting much higher compared to BTL in or around London. A new build, low maintenance with managing agent, let to professionals.