Buy and sell, or buy to let and buy?

[Abouttomakethewrongdecision]

I'm not sure whether this belongs here or in money matters. We have a big choice to make and I need more informed views on what we should be considering.

We own a house in London but don't live in it as work has taken us elsewhere - we've rented it out to the same tenant for a long time and he is happy to stay there as long as we are willing to rent it to him. The rent covers the mortgage but doesn't make profit.

Meanwhile we have rented ourselves; our current lease is finite and is ending soon, and rental costs have gone up by about 30% since we last rented. To rent a not particularly nice house now will cost us double our mortgage. House prices here are obscene (higher than London - we're not in the UK) and continuing to rise but we have a decent income and could get a mortgage to buy.

We know we won't live here forever, and it's entirely possible that work will take us back to London. I'm worried that selling our house in London would mean we could never buy there again, particularly as our UK salaries will be less than our current ones and debt may be less cheap.

For complicated reasons we don't have loads of equity in our London house, but enough if we sold to fund the deposit on a house here.

Our options are:

1. Re-mortgage the London house as buy to let (currently residential with a permission-to-let), which, after much faffing too boring to explain, would leave us with 25% equity left in it, and a small deposit to buy here requiring an enormous mortgage. But we would 'own'/have a stake in two houses.

1. Sell the London house and buy here with a decent deposit and smaller mortgage, but risk not being able to buy in London again.

My worst case scenario is that London prices will rise and we will eventually head back there, need to remortgage from the buy to let, and find we can't actually afford to get a mortgage to 'buy' our house back anyway. Could this happen? It also feels like the two house option leaves us with two small amounts of equity and two large mortgages, whatever the benefits of retaining a stake in both might be.

But is it silly to say we don't want a stake in both houses if prices will rise and our equity in both increases? If, say, both houses go up 50k in value, we get a bigger return by having stakes in both than in just one.

My head is hurting as I feel we must be missing something or planning something stupid. Advice from anyone experienced in this stuff is very welcome.

Tl:dr - my diamond shoes are too tight.

I should add that we are pretty confident we're not about to get any big bills from our London house, but could cover the odd thing eg new boiler if needed.

Remember owning something means looking after it too. Organising works, trades, regular checks. Are you familiar with how that works and how much it can cost in your current location? What about associated costs when you sell (EA fees, SDLT equivalent, capital tax?). Think these need to be listed for people to help you decide.

Based on what you’ve said, you don’t sound committed to your current location, I would not buy an asset there. You are committed to London, so don’t compromise your asset there. The rent increase doesn’t sound too bad, and the “premium” of rent is the flexibility. When you did decide to sell up in your current location, you’d probably have to compromise on price because of time and chain constraints with moving countries and jobs across borders.

Maybe thinking of how the eventual move back to London will look whether you’re owning/renting in current location will help you decide more easily than what’s cheaper now?

Thank you - some points to think about.

Buying here would involve stamp duty, selling in London involve CGT and agents' fees, so all costs. When we sold here we'd have agents fees and some legal fees but nothing else. On the other hand, renting here for two years would cost more than all of them put together and double it, so there are arguments on both sides.

The cost of living here is expensive so maintenance is also expensive, but we partly know that because here tenants are responsible for things we have to do as landlords in the UK, so we are already paying for them (so paying twice already).

The rent increase doesn’t sound too bad, and the “premium” of rent is the flexibility.

The increase takes our monthly rent for an uninspiring three bed house from 3k to 4k so it's a big jump, and leases here are usually a two-year minimum so it's less flexible than owning, which is a big reason for considering buying to be honest. Jobs in our field are not frequent, and work permissions mean that we all need to leave if one of us gets a job elsewhere, so we're currently constrained in job hunts to the periods around ends of leases.

It's also possible that we would get jobs somewhere other than London given the scarcity of them. I worry that I'm bending all our finances into pieces for some sentimental attachment to London that I need to get over, rather than practicalities.

This person is really good for taking emotion out of asset purchase. Which is what your question really is. behaviorgap.com/

Practically, my advice is list all costs, your OP seems to only consider equity growth. My opinion is long term asset purchase in country you are committed to long term is wisest - but that’s an opinion!

Have you investigated the buy to let in any detail? Usually BTL mortgages are interest only, and so your mortgage would be significantly lower than if you are currently paying a residential mortgage (presuming that it is a repayment mortgage, not interest only).

And it's a valuable opinion, which I'm thankful for.

The costs are all vaguely obscene so I'm reluctant to list them. I keep having to make myself think of what we can afford to repay given the cheap debt on offer at nice fixed rates, with secure jobs like we have, rather than the bigger picture of actual debt.

Either option will reduce our monthly outgoings from the status quo and mean we're not wasting money on rent, so I think we need to choose one of them. But argh, maybe even that is silly.

How long do you think you will have to stay abroad?

Most of our friends who have worked abroad have kept their houses in the UK for the reasons you outline above. But they all knew they were coming back

@Brakebackcyclebot

Have you investigated the buy to let in any detail? Usually BTL mortgages are interest only, and so your mortgage would be significantly lower than if you are currently paying a residential mortgage (presuming that it is a repayment mortgage, not interest only).

The BTL mortgage is an expat one and even on a capital repayment basis is less than the rent we can charge, so in effect, other than ongoing maintenance demands, it's cost-free. The interest-only vehicle would give us a (taxable) profit from the rent.

@TheFunBus

How long do you think you will have to stay abroad?

Most of our friends who have worked abroad have kept their houses in the UK for the reasons you outline above. But they all knew they were coming back

We don't know. We could stay here forever if we wanted to, but neither of us want that. We've been away six years already and our children are very settled here but work options are limited. I'd say at least two more years though.

If we just sold and bought here we could sell again and easily buy something in the UK. It just might not be in the part of London that's home to us. Maybe that just doesn't matter.

It’s tricky isn’t it, we are living abroad, (only since last year) we sold our uk house as we knew we wouldn’t want to go back to it (in the countryside) but it’s been really difficult not having a uk base.
I’m currently back in uk in the process of buying a house in London, we’ve been pushed out to an area that is not our idea location due to price, it’s very hard getting back on the London property ladder, but I’m happy to be buying something, it feels reassuring that I know we could easily come back easily and in the long run London property has always been a good investment.
We have also considered buying where we are living abroad (Canada) as our rent is high, but prices are rising so quickly there, I think we may have been priced out and we know we won’t stay long term.
Renting does feel like wasted money to me, so I would prefer to buy really.

We have also considered buying where we are living abroad (Canada) as our rent is high, but prices are rising so quickly there, I think we may have been priced out and we know we won’t stay long term.

I hear you. Prices here have risen over 15% in the last year so it feels like our last chance to buy. What if we're here another decade because that's what life does, and we end up unable to ever buy, living in ever more expensive rentals? We've found a house in our price range that we like and it's honestly the first one I've seen in months I would actually want to live in for the price they cost! But rental is just as bad.

I know I've talked about equity stakes but I guess that feels like my financial security. I really don't want to make a misstep that could have been avoided. I know property ownership carries a risk in itself but I am not someone who takes bigger risks than necessary.

I have thought of a plus of the buy/sell option which is that we'd have a bit more spare cash to improve the house we might buy here. The re-mortgaging option would give us just enough to do the basics but not improve much (would like new kitchen, enclosing car port to make garage for storage, garden room for an office as the house is open plan). The house is lovely, and we could just live in pretty happily though if we had to (kitchen the only thing I'd really want to sort and the easiest to get done).

Oh for sure, I meant list them for yourself. But I still don’t think you’re thinking of all the costs. I totally understand about sentimentality confusing these decisions. I’m going to list another few “points” for your consideration.

Politics: I don’t know where you are (and you don’t need to share) but what are the politics around housing where you are? In the UK, the conservative government has seen a huge rise in house prices and very low interest rates, and if they stay in government this will likely continue. Worth comparing to your current location.

Sentimentality: think need to separate “home”, where you live, from the asset you put your money to. You’re talking about returning to same part of London, but really your choice is between asset in UK versus asset in current country. The size of the value you have at the end will open up or limit your choices at the time you want to make them - not where that asset is. Thinking optimistically, if you end up with more £$ in current country you could come back to your part of London and buy a better house!

Worry: I do this too, and what helps me is spreadsheets. In your place, I would do a spreadsheet for ten years in each scenario, how much equity is accrued, project 30% rental increase every 5 years etc. Then at 10 years the cost of the “out”. I’ve done this for leaving/not leaving London - the increased cost of commute, council tax (which I was surprised by outside of London, it’s a lot more! Petrol costs so much, whereas a Z1-Z4 travel card is £200pcm and covers all travel) means the London house prices are worth it. A 200k cheaper house outside was not cheaper in long run. Use these calculators to get actual costs and see equity increase, play around with the % www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/ propillo.com/mortgage-calculators/let-to-buy-calculator/ the interest rates in UK so low I think your repayment mortgage would be acquiring you more equity year on year. Interest rates where you are now might mean you don’t actually acquire as much equity year on year, though you’ll have a “stake”.

Third option: you’ve got yourself into an either/or situation of two things that are actually separate. You are seeing it as London asset versus asset in current location. I think the questions are: should I have an asset in UK and what’s the best way to finance that? @Brakebackcyclebot raised a good point, maybe you should have a BTL mortgage product anyway. Should you have an asset in current location and what’s the best way to finance that?

Again another opinion: do not underestimate having a reliable and secure income through a London property in long term! To me it sounds like in new location you’d be taking on a lot of liabilities and uncertainties for the appearance of certainty and having a “stake” that home ownership can give. It’s all about cash in and cash out each year, not “stakes”.

Good luck!

Thank you - all sensible things to consider.

Politics here very similar, interest rates very similar and likely to more or less do what happens in the UK. The expat element means the cost of borrowing is slightly cheaper.

I'll do lots of thinking. Quite liking the idea of the third option of keeping a toe in London in some way without it being our current house; we don't actually want to return to that house to live long term but we would like to stay in the area.

A big factor for us to consider though is salary. We are both earning substantially more than we would in the UK so it seems silly not to leverage that in some way while we're here, rather than just spend it on ever larger rent payments. While borrowing is so cheap, we feel like we may miss a trick if we don't do something. We are very dull individuals usually who were working towards paying off our London mortgage on a house that is now a bit too small for us - I think we need to shake up our thinking in some way.

Part of the earning more is to cover the increased living costs though, goes hand in hand? I think going ex-pat now (my profession offers similar opportunities) isn’t what it was, if you have to cover school and accommodation yourself, especially with contract T&Cs. The salary is higher but so are the costs so % wise you end up with same quality of life and money left over. I don’t think there is any trick anymore, except to live frugally in cheaper accommodation. Sounds like this ties into bigger questions of where you want to be. My baby is awake now so I’m off, hope you come to something that makes you happy and meets your needs.

The BTL mortgage is an expat one and even on a capital repayment basis is less than the rent we can charge, so in effect, other than ongoing maintenance demands, it's cost-free. The interest-only vehicle would give us a (taxable) profit from the rent.

I was going to say have you thought about the tax and the above is making me wonder if you understand the tax status of your existing rental income. You have to declare the rental income and you can only get a tax deduction for the interest element of your mortgage, and of this only up to 20%. Given your diamond shoes I wonder if you’re a 40% taxpayer? To use numbers:

Rental income: £1000
Mortgage: £995 (say £300 interest £695 repayment)
Cash profit before tax: £5

Taxable income: £1000
Tax profit before mortgage credit: £1000
Tax due before mortgage credit at say 40%: £400
Tax credit on interest only element: £300 x 20% = £60
Tax due 400-60= £340

Cash loss overall: £5-£340= £335 loss

This is specifically to disincentivise BTL and it’s very effective. I make a loss on my BTL solely due to these rules.

But you know this already because you rent your place out now... right??

I do think keeping a house in London is usually worth it, we moved out 8 years ago and could not afford to buy our old house now despite earning more and making a good profit on our last move, we would have made more money if we’d just stayed put, but life isn’t like that and we’ve had fun.
I’m happy now to have our capital tied up in a London property (fingers crossed it all goes through) but would also prefer to buy where we are now living, I don’t really like renting as we are serial renovators so find not being able to do anything frustrating, but I’m not sure if all the taxes involved in buying and selling would wipe out any gains we would make ( if it was a short term thing), but the politics and price rises are similar in Canada to UK.

OP I think if you are planning to be wherever you are for a while I would buy, but I would also try and keep the London property is that doable?

Also don’t forget that if you decide to sell your London house to buy something smaller/cheaper in london you will have a lot of costs, EA fees, solicitor on sale, stamp duty and Solicitor on purchase, it all adds up and eats in to a lot of profit.

@FudgeSundae

The BTL mortgage is an expat one and even on a capital repayment basis is less than the rent we can charge, so in effect, other than ongoing maintenance demands, it's cost-free. The interest-only vehicle would give us a (taxable) profit from the rent.

I was going to say have you thought about the tax and the above is making me wonder if you understand the tax status of your existing rental income. You have to declare the rental income and you can only get a tax deduction for the interest element of your mortgage, and of this only up to 20%. Given your diamond shoes I wonder if you’re a 40% taxpayer? To use numbers:

Rental income: £1000
Mortgage: £995 (say £300 interest £695 repayment)
Cash profit before tax: £5

Taxable income: £1000
Tax profit before mortgage credit: £1000
Tax due before mortgage credit at say 40%: £400
Tax credit on interest only element: £300 x 20% = £60
Tax due 400-60= £340

Cash loss overall: £5-£340= £335 loss

This is specifically to disincentivise BTL and it’s very effective. I make a loss on my BTL solely due to these rules.

But you know this already because you rent your place out now... right??

Yes, we currently make a small loss on renting out our house. We’re not looking to make money on this from rental income, just more or less cover the mortgage. Currently our income from rent mostly falls into our personal allowances so is tax free, but we lose because we also have to pay maintenance costs out of our current income.

@Itscoldouthere

Also don’t forget that if you decide to sell your London house to buy something smaller/cheaper in london you will have a lot of costs, EA fees, solicitor on sale, stamp duty and Solicitor on purchase, it all adds up and eats in to a lot of profit.

Yes, definitely a disincentive.

@BakeOffRewatch

Part of the earning more is to cover the increased living costs though, goes hand in hand? I think going ex-pat now (my profession offers similar opportunities) isn’t what it was, if you have to cover school and accommodation yourself, especially with contract T&Cs. The salary is higher but so are the costs so % wise you end up with same quality of life and money left over. I don’t think there is any trick anymore, except to live frugally in cheaper accommodation. Sounds like this ties into bigger questions of where you want to be. My baby is awake now so I’m off, hope you come to something that makes you happy and meets your needs.

We’re not that sort of expats. Just technically expats in mortgage terms simply because we don’t live in the UK at the moment. The cost of living is higher here but we earn well in excess of the difference and our kids are in state schools etc. We are public sector permanent staff, not contractors. So I’ve probably given a false impression of us!

Thanks for all your suggestions.

@Itscoldouthere

I do think keeping a house in London is usually worth it, we moved out 8 years ago and could not afford to buy our old house now despite earning more and making a good profit on our last move, we would have made more money if we’d just stayed put, but life isn’t like that and we’ve had fun. I’m happy now to have our capital tied up in a London property (fingers crossed it all goes through) but would also prefer to buy where we are now living, I don’t really like renting as we are serial renovators so find not being able to do anything frustrating, but I’m not sure if all the taxes involved in buying and selling would wipe out any gains we would make ( if it was a short term thing), but the politics and price rises are similar in Canada to UK.

OP I think if you are planning to be wherever you are for a while I would buy, but I would also try and keep the London property is that doable?

I’m increasingly not sure it will be possible. It would be a giant stretch as opposed to a fairly comfortable extension of borrowing if we sell and buy.

I also think if we enable ourselves to improve the house with some additional funds we stand to make a decent profit even in two years given the madness of the local market at the moment, which might mean getting back into London if necessary is less challenging.

I really am going to do some very hard thinking and some maths to work through the ideas on here.

What was the outcome? I'm really interested to know what decisions you made. Hope it all worked out.

Many are like you OP. I myself moved away many years ago.

I think remortgaging the London house as a buy to let makes sense in your situation.

As a couple you share 25,140 personal allowance so your first 25K rental income (after expenses) is tax free. I think you have a rather large buffer before the 40% rate comes in - use a non-resident landlord income tax simulator to confirm. More so, you would still be able to maintain a reasonable buffer even if they completely remove the 20% tax credit on mortgage interests, assuming there are two of you, and no other UK income. Instead releasing equity to purchase one property, it is possible to add a bit more to the portfolio.

Lastly older tenancies should be reviewed and rental has to go up with inflation every 2-3 years.