Is it madness to sell up and rent?

[SRK16]

This is probably outing as a relatively unique situation. We have the opportunity to move into a relatives empty home- it is significantly larger than ours, but we would pay the same rent as we do for our current mortgage. Having calculated, our heating will be more expensive but I don’t think significantly so.
Our options are:
A/ sell our house and put the money into a savings account while we look for our forever home (something that maybe needs renovating) and we can live in the rented house while we do it up. Pros: Are then chain free, live in a bigger home at relatively small cost. Cons: is it bad to no longer own particularly in light of covid. Might feel unsettled?

B/ rent out our home to cover cost of mortgage while we pay rent to relative. Pros: still have our property, don’t have to pay exit fee on mortgage, Cons: hassle to rent it out? Will have to do some maintenance work to the house in order to rent it.

Thoughts?

I suppose there is option C- stay in our current home and just look for a house while we stay here!

Check when you need to pay capital gains tax. I think (not 100% sure) that you don't have to pay capital gains if you sell the home you live in but you will have to pay capital gains if you sell a house you have rented out. You might want to talk to an accountant.

I would leave my "owned" house to live in a rented house!

It would cost a lot of money and your lump sum value would decrease with negative interest rates

Meant to say I would never leave my owned house

You would get zero interest on the lump sum raised from your house sale.
I would wait and search for your future home only a few months before your mortgage deal ends to avoid exit fees

Check how much tax you will pay in rent. I'd be reluctant to sell up and rent unless it's only in the very short term. You might make money if you sell and then prices fall, but it's a bit of a gamble. If you sell and then prices rise you will need to get a lot of interest on the money in the bank to keep up, even if prices only rise a small amount because you will only have your equity to invest.

You need to do the maths basically.

It would be absolute madness to do it!

If you are planning to buy a project house, then selling your current home and renting isn't a bad idea, as you can crack on with ripping stuff out etc without worrying about not having a kitchen, bathroom etc.
You'd also be chain free which might make you more attractive to someone looking for a quick sale.

Is there an advantage to renting the relative’s home over renting one on the open market? Are you getting a big discount for family? Will a proper tenancy agreement be drawn up and is the relative happy to be a landlord and all the legal obligations it entails?

Are you desperate to move out of your current house? Or would you like to move if the right thing came up?

If you sell and move into this house you’ll be taking a punt on houses prices dropping as the rent you pay will no longer be paying off capital as your mortgage does.

It might be worth considering if you’re desperate to move OR you think prices are due a huge crash. But if not I would probably sit tight.

I would never sell to then end up renting. If I was in your position I would rent it out.

Also be aware that once you are out of the market you can get priced out.

Local pricing economies can be weird. I sold up in my home city 4yrs ago. The market there has gone mad. My old flat has gone up by almost 30% whereas the city I now live in has totally stagnated/possibly seen house price drops.

I’m looking to move back & having to spend more to get the same is very off putting!

@SRK16 did you make a decision? We have a similar predicament!

Only our owned house is a tiny weenie mortgage (and a tiny weenie house - hence the move!)

Sorry meant to come back but got caught up in the weekend!
Thank you all for your thoughts.

We wouldn’t have considered renting on the open market, our relative is going to give us a reduced rate for various reasons. We will have a formal tenancy agreement and the relevant documents if we go ahead.
The main advantage would be having more space! But there are various other reasons why the move would be good for us at the moment.
It really comes down to do we sell up or rent out.
We haven’t decided what to do. We are in the process of looking at the exact costs and investigating if we would pay capital gains. Really uncertain but hoping looking at the figures will help. Hearing all your thoughts was very helpful.

I agree with previous posters. If you're planning to live in the relatives house short term (up to a year) then selling would make sense so that you're chain free and give yourself plenty of time for a dream home to come in the market.
Otherwise it would be very risky to have all your money in a savings account with very small interest rates while the housing market might go up in the meantime much more than your capital.

If you sell up and rent, you may be able to negotiate the price down on your new property because you won't have anything to sell. Will the relative let you leave the rented house when you like? It could be v useful to live elsewhere so you can do up the new one e.g. new kitchen.

Yes we can leave when we want to/will be a very short notice period. I did see an advantage that we would be chain free which gives us more flexibility and perhaps more ability to negotiate. We expect if we moved to be there for between 1-3 years, no longer. I think we would start looking for our dream house after 6-12 months to give us time to find something and renovate.
Other reason we are considering it is to test out whether we would like to live in that area or not.
I think a lot depends on how the market will be after covid, which is so hard to Know! Still doing calculations...

As pp said, do the maths.

We did this a few years ago (we sold up and rented). It worked very well for us. We moved areas, took our time finding the next house, could move really quickly in a competitive market when perfect house did come on the market etc.

Financially, house prices in the area we left weren't increasing so there was no disadvantage to selling. Yes, we'd have been paying a mortgage down, but actually weren't paying that much off the capital. We did probably save overall even when we were renting because we didn't have any big expenses at the rented house in terms of maintenance - no DIY / repairs / decorating as that was all taken care of by the landlord and we saved the difference between the mortgage payments and rent.

As above, it took us about 2 years to find the right house. We just simply wouldn't have got it if we'd have been in a chain. Prices were going up in our new area really quickly and houses like the one we bought (probate sale) were getting snapped up often by developers. It went to sealed bids and I think we only got it because we set out that we could do everything fast to meet the sellers deadlines, money was ready to go etc.

If you rent out your current house, you will (a) have to serve notice on your tenants / have viewings etc whilst tenants are still in situ (which they may or may not co-operate with / tidy up for etc) and (b) can only exchange once the tenants are out of the property. If you get a difficult tenant, that could be a really long process.

If you rent out your home you will have to remortgage to b2l mortgage. You will have to pay tax on any income and you can only offer 25 pet rent of mortgage interest rate against your tax bill. You would also need gas and electricity certificates.

Short term it gives you the freedom and flexibility but financially it depends on whether the market will stay the same, increase or decrease. How good is your crystal ball, op?

We are probably going to be doing this as there are so few houses up for sale and none that we would even consider

I am looking in a 20 mile radius of a certain point and there have been between 48 and 54 houses that are within our price range and with the number of bedrooms etc we need.

The issue is there is the same about 45 houses that have been there since January with one or two coming on the market then getting sold every so often.

I have only seen 2 places that looked ok and they went within 48 hours.

We are selling and going into rented so when eventually something we might consider we will be cash buyers who can move very quickly.

I think in your case I would sell and move into the rented property but actively look for your forever home as a matter of urgency and hope more places come to the market soon.