Best way to move up the ladder in London? Max out or Invest

[zsazsamore]

We are in the process of hunting for our first flat in London. Will be 90% mortgage 10% deposit. We can buy something decent for about £600k. The cheapest one beds in areas we’d want to live in are £450k. Our maximum amount we could borrow is roughly £1 million.

Dh and I are young (26 & 27). We don’t plan on having kids for another 10 years, maybe slightly longer. Long term goal is to have a 3-4 bedroom flat in a mansion block rather than a house.

What’s the most realistic way of moving up the ladder? Should we buy an expensive DIY project? Or buy one property in London and save towards a buy to let outside of London? Or is it better to go for a cheaper place just to live and aggressively invest in another form?

Given the costs of moving, and if you can afford it, can you get your mansion block flat now if you can borrow £1million? Gives you 10 years to make a serious dent in your LTV before you have kids, and you get the benefit of living in a nicer place.

If you are a higher rate taxpayer, BTL is not great value and it can be a right pain in the arse. The “safest” way would probably buy a cheap flat, and then mix between aggressive saving/investing and paying down your mortgage. The risk then is timing when you pull your savings out for the next big house purchase.

I second the above - buy the best you can afford right now. Even if it needs work.

We have made the mistake (in London) of buying a beautiful flat in an area we loved instead of a fixer upper house nearby, but not quite as lovely a spot (still a good spot though. I’m not personally fan of buying in a shit place just for a house - I need to love where I live).

The house would have been the better investment and meant we wouldn’t have had to move a couple of times. Plus the house area is now very cool and we had (and still have) a bunch of friends there.

So get the fixer upper rather than the polished thing and the best “potential” place you can.

We bought a more affordable 2 bed house in a popular area of SW London (where we wanted to stay long term) where we could add value by doing work. We also made massive overpayments to put a serious dent in the mortgage which then meant we could buy our "family home" with a 50% LTV before we were 30, and before kids. We have just remortgaged so are paying a higher rate (we were previously on 1.87% fixed for 5 years) but continue to make significant overpayments and will still have paid it off in a few years (ie before we are 40) just slightly longer than we thought due to the interest rate hike.

From our experience I'd say don't max max out on the mortgage at any point because you don't know what will happen in your life and it makes things easier if you can ring fence surplus income for mortgage overpayments rather than HAVING to have the same figure as repayment each month. I had an out of the blue cancer diagnosis shortly after we'd bought the first house which changed our timelines. We got married before I had surgery in case it went wrong, had a child earlier as I was likely going to end up infertile after chemo etc. All of this took an emotional toll where we were happy that we could continue to make overpayments even when my salary was reduced as I ended up taking two years off work. Had we really stretched ourselves on the upfront mortgage then it would have been trickier as we had a reduced monthly income for a year and it would have been much more stressful for my husband in particular even though we have critical illness and life assurance policies etc.

That said I don't know whether it will be different if you're looking at buying a mansion block flat as your "goal" as I don't know the central London flat market as well, other than knowing that fewer people want to buy smaller flats post covid so you might want to skip the smaller one incase you struggle to resell and go all in on a bigger one if you can, which makes the above advice meaningless...!!

To add to the above, we have considered getting some BTL properties in the north where we are from but at the moment it's more hassle than it's worth from a tax perspective, so we are just managing our savings spread, putting as much as we can into pensions, ISAs, LISAs etc to make our tax bill more efficient.

Agree entirely with @cardboard33 ‘s point about making overpayments rather than maxing out commitments on a mortgage. We took out a longer term mortgage but overpaid by £500 each month during the baby and nursery years, which meant that if we needed to, we had much lower monthly commitments (at the expense of a longer mortgage). We never needed to use that extra money, so had pretty much paid off the mortgage on the first house before we moved to our larger, more permanent family home.

There are no “get rich quick” schemes. Don’t confuse people getting lucky with BTL and other property as a sure fire thing!

Are you in careers where you can expect bonuses?

Personally if I were in that position I'd max out the mortgage. BTL is full of pitfalls and not tax efficient. Other investing is mostly not tax efficient unless you max out ISAs (which is a decent allowance for 2 of you, but still limited compared to the leverage you can get on property, and good ISA returns can be more volatile than London property).

If you get a larger property than you need at present you always have the option to get lodgers if you need it (tax free up to a.certain amount). So you could make use of the asset that way. And most professionals need more bedrooms than people now to use as a wfh office.
A doer upper would not be for me but that's a personal choice as I couldn't face the disruption and project management. Financially it's something to get good estimates on because the cost of renovation is high and it's hard to get the labour.

With that kind of budget surely just buy your “forever” flat now?

I agree with pps - buy the nicest flat you can afford now. BTL is a hassle and not the money making venture it once was. Moving is so expensive what with stamp duty and all the other costs that it would make sense to buy somewhere that you will be happy living in for some years. One bed flats are a hard sell and in my experience haven’t increased in value since 2015.
If you can afford to overpay the mortgage and still pay into your pension / ISAs in the pre children years then that would be a solid investment. Plus you get to live in a nicer flat in the meantime.

I would say buy the forever home now if you can, that’s what we did. Also gives you the option of children earlier if you decide as well, this is an unpopular option and I’ll probably get told to mind my own business, but if you are in position to try for kids before the age of 37 and you want them, then go for it if you have the big house already 🤷‍♀️

Also, with BTL properties, unless you buy them through a specifically set up company, if you do try and upsize you're liable for an increased amount of stamp duty.

Honestly, BTL is a massive hassle; we're hoping to get out of it shortly. If I were in your position I would max out my borrowing, and buy something as close to what I want now. Your earnings are likely to go up and if you're not planning a family for ten years you can put a serious dent in the debt in the meantime. We're ten years ahead of you and our household income has more than doubled in that time - despite having had two children during that period.

What matters is not the mortgage amount but the monthly repayments... Let's say you borrow 900k, that would be 45k interest payment a year at current floating rates of 5%, or just under 4k per month. How comfortable are you servicing this amount? What happens if you or your partner happen to lose your job? Your ability to service the debt under downside scenarios is what matters most.

I wouldn’t buy the cheapest flat at 450k but I wouldn’t max out either at your young ages where you presumably want a good social life, holidays etc.

I would buy a nice 2 bed flat as it’s always good to have a spare room for guests or working from home. They can easily cost 800k in good areas of London. An area that is still in the process of being gentrified is a good investment.

Looks like you can already afford your ‘target property’ so why not do it now instead of spending years faffing around with improving/renovating and then moving which makes no sense with stamp duty and selling/moving/renovating costs.
Unless you want to buy a flat in a mansion block in Kensington, there are a lot of 3/4 bedroom mansion block flats floating around for around 900/950k in very good areas.