Maths help! Working out profit for a hypothetical house purchase/sale

[Kipsy]

Struggling to work out when we’ll break even when selling on a property. This is so we don’t stretch ourselves too much while offering on a property... Please help!

Say we buy a house for £600,000

Let's assume we make the stamp duty holiday deadline and stamp duty works out to £16,000
Other purchase costs (solicitor, survey, moving costs) of approx £15,000
Purchase costs = £31,000

We put down 25% deposit of £150,000
Initial costs = Deposit + Purchase costs = £181,000
Mortgage amount is 75% of purchase price = £450,000

Let's say we get a 2% mortgage for 5 years, fixed rate

Over 5 years the total repayment amount is £108,000, out of which
Capital repayment was £66,000 and the rest was
Interest repaid £42,000
And at that 5 year point, the balance to be repaid is £384,000

If we sell at that point for £700,000
the bank will be paid the balance of £384,000
And we will be left with £317,000

Profit = £317,000 - Initial Costs £181,000 - Interest repaid £42,000 = £94,000

Does this make sense?
Apologies for the numbers, I tried using letters like "P" "D" etc but that was even worse!

Thanks!!

The £317k includes your original deposit amount so it's not 'profit' from that house sale as you already had it.

It is equity though that is your money.

Ignore that - you've since deducted it back out. 🙈

Sorry, my initial post wasn’t very clear. I should have put it as

Profit = £94,000 (£317,000 - Initial Costs £181,000 - Interest repaid £42,000)

Sounds ok. Do you not have selling costs when you go to sell? 700k sale price in 5 years is not guaranteed of course. What will you spend on it during the 5 years in terms of maintenance and upgrading?

Why does it matter? Is it a second home that you’ll pay cgt on?

Probably missing the point slightly but I think your stamp duty calc is wrong - I make it £5k with the holiday, £20k without

Thank you @2thumbs - I did mess that up!

@LittleBearPad - this is for our first home. I’m guessing if it’s our only home, there’s no CGT to be paid if we sell + buy another home to move into? I’m trying to work out what I could offer on a property (they’re all going above asking where I live) that wouldn’t make us incur a loss when it’s time to sell on.

Thanks @Jenjenn - I forgot those. This is just a hypothetical scenario so I don’t know what an actual house might need re improvements. But I should really consider selling costs at least at this point.

You're overcomplicating things.
Profit = sales price - costs
In your example, you'd sell for 100K more than purchase price, but your have the additional costs of interest (42K) and the purchase costs (31K). So your profit would be 27K, not 94K

Yes but presumably you will then be buying another house and will have to pay stamp duty on that. If it's an investment property you still need to pay the 3% extra stamp duty and then capital gains tax on the profit when you sell. And during that time is it a rental? Holiday home? If the latter you have to pay council tax and utilities and also repairs etc.

No such thing is right. The repaid capital is not profit, it’s effectively savings.

And if you dont buy this house, you'd be paying rent.
So if you come out with cash, and arent paying rent, you are much better off.

You cant do hypothetical calculations like this tho - because that selling price is a real guess (our house wouldnt sell for what we paid for it 13 years ago)

The deposit isn’t a cost in the same way as the stamp duty though. It’s equity in the house so an asset.

The money you make is the increase in any price plus the change in equity. Yes I know buying that equity costs each month but your alternative is rent which gains you nothing.

Work out what you can comfortably afford to pay each month in terms of mortgage. That decides what you can afford to pay not a theoretical profit that depends on a certain house price increase.

@ThereIsNoSuchThingAsRoadTax and others who explained re capital not profit - thank you, that’s really helpful. That’s a much simpler way of looking at it.

If I think about it, it does sound ridiculous to think of selling before I even buy!

I agree this is just guesswork, I was doing this exercise to get an idea of when we would recoup the initial sunk costs and be in a position to sell. I understand that no one can predict prices and this may not be helpful. I just pulled the numbers out of thin air, in an attempt to understand how this works. If we do find a house then it will tell me when I could think of selling, what I would need to sell it at assuming I paid asking price and work backwards from there to the max I could offer.

I would be very wary of buying with future profit in mind. Buy a home you can comfortably afford and would be happy in for 10 years minimum. If stars align for property market you will make money on it, move up - happy days. If they don't you have a good home and are chipping away at the mortgage. If you are happy with the house in general, you can afford to sit tight and wait out any property price dips.

Thank you @Jenjenn

Agree, we will definitely not be stretching too much - we are very cautious borrowers. I now see that the ‘profit’ term is quite jarring. We’re not really looking to make a profit - we’re horrible at finances as you might guess from my silly mistakes above! We’ve been wasting ££ for years on rent and really want a stable home for our 2 DC. That’s really what we’re after. But I’m also worried that if circumstances drastically change or rates go up we may not be able to afford the repayments - which is why I was trying to calculate this.

You profit is the hypothetical increase in value e.g. £100k based on an increase from £600k to £700k. Less costs: stamp duty, removal / legal / surveyor's fees and interest paid.

But it's a very odd way to look at things. If you like this house and can afford it then there is no need for and exit plan.

I totally understand. We were very cautious too when buying. I insisted that we won't borrow more than we can pay from 1 salary in case of jobloss (2010 middle of bad recession). It was a good decision as within 18 months of buying we were both unemployed for 6 months. In hindsight maybe it would have worked out OK if we had pushed ourselves a bit more but it would have meant much more stress for sure. 1800 is a quite high repayment commitment, any potential to make the mandatory repayment lower and overpay? Our repayment is 1300 but we have arranged pay 1900 per month. If something happens, we can cancel the 600 overpay with just a few days notice.

I was given the advice of pushing myself as much as possible (within reason) for first house.I think that’s fairly sound advice. Your earnings are more likely to go up than down.

If you have a fair amount of frivolous spend....take outs etc. Stopping that for a couple of years builds up a buffer.

You are more likely to be in nicer house that’s easier to sell....