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Mortgage or pay cash
morris neson
Posted: 07 April 2018 21:42:21(UTC)
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Can anyone answer this query?. I have just retired my wife is still working, she is self employed
and will be working for another 4 years. We don't have a mortgage on our present home. We are considering
buying a bungalow, which we will move into in about 10 years time. In the mean time we will rent it out.
We could afford to pay cash for the bungalow by using about 60% of our ISA savings. This is now my question
Do I use all cash for the purchase or get a BTL mortgage. Any advice/comments most welcome
Alan Selwood
Posted: 07 April 2018 22:59:40(UTC)
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morris neson;60317 wrote:
Can anyone answer this query?. I have just retired my wife is still working, she is self employed
and will be working for another 4 years. We don't have a mortgage on our present home. We are considering
buying a bungalow, which we will move into in about 10 years time. In the mean time we will rent it out.
We could afford to pay cash for the bungalow by using about 60% of our ISA savings. This is now my question
Do I use all cash for the purchase or get a BTL mortgage. Any advice/comments most welcome


I personally would not gear up on residential property at this stage in the mortgage market. I can well imagine that interest rates would go higher (by how much I don't know), causing greater cost or lower rental profit, while if rates rise, house prices tend to fall because houses become less affordable if mortgage rates rise.

A second home will incur the 3% extra stamp duty.
It will also reduce flexibility of moving cash around swiftly if needed.
The second home will almost certainly be subject to CGT if it does go up, whereas the money in the ISA is exempt.

The time to buy houses is at or near the bottom of a slump in demand for them, not after a prolonged rise in demand and price.

But that's just my opinion.
3 users thanked Alan Selwood for this post.
gillyann on 08/04/2018(UTC), Tim D on 08/04/2018(UTC), morris neson on 08/04/2018(UTC)
Mr Helpful
Posted: 08 April 2018 07:15:42(UTC)
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morris neson;60317 wrote:
We don't have a mortgage on our present home. We are considering buying a bungalow, which we will move into in about 10 years time. In the mean time we will rent it out. Do I use all cash for the purchase or get a BTL mortgage. Any advice/comments most welcome comments most welcome

Valuations seem quite heady on both Stocks & Residential Real Estate. Whether to add borrowings might depend on how the overall portfolio is to be shaped (Stocks/Fixed Income/Real Estate/Cash).
Mortgages are a relatively cheap way to leverage a portfolio.
Maybe half and half if in doubt; if determined to buy that bungalow?
P.S. What happens to the present house in about 10 years time?
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morris neson on 08/04/2018(UTC)
philip gosling
Posted: 08 April 2018 07:16:02(UTC)
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morris neson;60317 wrote:
Can anyone answer this query?. I have just retired my wife is still working, she is self employed
and will be working for another 4 years. We don't have a mortgage on our present home. We are considering
buying a bungalow, which we will move into in about 10 years time. In the mean time we will rent it out.
We could afford to pay cash for the bungalow by using about 60% of our ISA savings. This is now my question
Do I use all cash for the purchase or get a BTL mortgage. Any advice/comments most welcome



Bungalows are not the obvious purchase for buy to let - 2 bed flats in centres of university cities or terraced /semis most popular.Changes to tax relief & extra legal demands on Landlords for Buy to let are kicking in now so profits are falling and getting none paying tenants out legally is also taking many months (my case 6 months). When mortgage rates rise as they will over next 10 years values will fall and profits from buy to let will fall too. Income from my buy to let pushes me into higher tax bracket reducing profit and tax relief on its way out for BTL mortgages. Hence need to offset by increasing money into my SIPP to offset tax increase. If you pay cash you will lose any tax free growth could have had in ISA and replace it with taxable unknown and uncertain growth in bungalow's value. Choice is finely balanced depends on your view of where the stock market will be over 10 years and where mortgage rates and political climate will be in 10 years (Corbyn?) . If you want the bungalow to retire in and not just to make money then all you need for next 10 years is enough income to cover expenses and mortgage so go with BTL mortgage and hold on to your ISAs - if everything goes wrong you could always sell bungalow and you'd not be any worse off than now.
4 users thanked philip gosling for this post.
gillyann on 08/04/2018(UTC), morris neson on 08/04/2018(UTC), Raj K on 08/04/2018(UTC), Tim D on 08/04/2018(UTC)
Raj K
Posted: 08 April 2018 10:57:02(UTC)
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I would consider the bungalow as an investment as your are not planning to move into it for 10 years. If you consider the numbers carefully there is no reason not to use leverage for the purchase. Once you put cash into a property it may be hard to get it back out if needed when it comes to remortgage time etc.Stress test the figures as to what might happen if interest and mortgage rates rise. Will you still be able to afford the mortgage with the rent coming in and the maintenance costs that go hand in hand with BTL properties. Once you have stressed tested it you can than work out how much leverage is comfortable for you. Of course it also depends on what other assets you have. and how much cash you like to keep as a buffer. There is nothing wrong with using leverage responsibly. It gives options.Remember with most mortgages you can always reduce the mortgage by 10% of its outstanding value per year during the fixed period!.
3 users thanked Raj K for this post.
Tim D on 08/04/2018(UTC), Mr Helpful on 08/04/2018(UTC), morris neson on 08/04/2018(UTC)
Not Risky
Posted: 08 April 2018 13:38:54(UTC)
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My 2 cents....

Financial life is all about leveraging your human capital (in financial terms) in early life (20s or 30s typically by bying a property on leverage) and then paying it off to generate actual capital in lieu of the lost human capital.

Irrespective of the market cycles etc. I would stick to my personal financial life cycle and not leverage up, just as I am in the latter half of spending my human capital. As most ppl with experience far exceeding mine will tell you, leveraging up in old age is extremely dangerous as, unlike when young, there is not much human capital left to depend on i.e. working 2 or indeed 1 job to make up for the money lost.

Hence, I would not risk my ISA money (60%!!) to buy bunglow. I would keep it invested tax free and enjoy the income/growth via reinvestment, untill i need to draw upon it. Given that you are looking to switch a mortgage free home for a mortgage free home (house to bunglow), assuming both are at same price or the bunglow is cheaper than your current residence, it really doesnt matter if the rates go up or down, or if the housing market goes ballistic or tits up, both properties will move in sync, which means you can always make the move when required (and save yourself 3% stamp duty and hassel of finding tenants and maintaining two properties)

I would like to hear views of ppl, especailly with differeing opninon to mine as this is a subject that I need to tackle in my life and hence any debate going fwd on this forum will be great learning experience for me.

regards,
Rishi
1 user thanked Not Risky for this post.
morris neson on 10/04/2018(UTC)
Alan Selwood
Posted: 08 April 2018 17:11:43(UTC)
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Any stress-testing is at risk of producing the wrong answers if circumstances change.

What if we go back to 1990 conditions at some point within the next 10 years?

Will you still be able to avoid the leverage of 'mortgage + 2 properties' if the mortgage rates go back over 10% p.a.? If you think that is an unlikely scenario, talk to those who went into negative equity in 1991-94! Their comments will at least give you a sense of 'probable worst case' for your stress-testing.

As I said before, I would not take on extra gearing at this point by buying a second property. If I ever felt the need, I would review the options between years 7 and 10 and meanwhile keep the ISA holdings - which could always include some property ITs for liquidity and similar market exposure without adding the millstone of debt.
1 user thanked Alan Selwood for this post.
morris neson on 08/04/2018(UTC)
Tom Mozy
Posted: 08 April 2018 17:34:40(UTC)
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Taking un taxable funds (isa) to buy an asset to pay tax seems a little bonkers to me.

4 users thanked Tom Mozy for this post.
morris neson on 08/04/2018(UTC), Captain Slugwash on 08/04/2018(UTC), gillyann on 08/04/2018(UTC), Raj K on 08/04/2018(UTC)
Alan Selwood
Posted: 08 April 2018 19:50:22(UTC)
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Tactfully put, Tom!
1 user thanked Alan Selwood for this post.
morris neson on 09/04/2018(UTC)
morris neson
Posted: 09 April 2018 17:06:39(UTC)
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Thanks for all of the replies.I agree with the most of the comments. Another question how do I tell my wife?.
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