Buying my first home advice

[spursman17]

So I'm thinking of buying my first property.

I have the following plan and wish to know peoples advice on the matter if you have a few moments to spare.

I have a deposit saved at around £50k. I'm planning to purchase a property with my sister and brother. Our price range is in the region of £220-240k.

My plan is to rent the property while my siblings and I are going to overpay the mortgage to reduce it and get it paid off within 5 years. Combined monthly lay would be £3700 which would include the rental income of around £1300 a month.

At the end of the 5 year term we should have a fully paid freehold property with a value of around £250k (with property expected to rise 20% in the next 5 years).

That would leave us with with around £80k each for deposits on our own places or if we wish to do somthing similar to the above but on 2 properties.

Do you think this is the best way of going about it? Someone said to buy to let and just take the profit from when the property increases in price over time but this to me is a far longer plan.

Any advice would be really appreciated.

 

[Boonie]

You have to factor in your agents fees, repair costs, possible time without tenants. All in all though, it seems like a good plan. The other option would be to pool your resources as you are planning and buy 2 lower cost properties and implement the same plan. This would probably nett you a better profit down the line. You also have the fall back option of keeping one as a cash generator and while selling the other should the market really improve!

Just my 2 pence.

 

[Gifter]

I'm not sure about what is best, but I know the math don't add up from what you intimate.

You have £50K

Your cost will be £800 per month (from what you said £3700 - £1300 Rent = £2400/3 = £800 each), which is £9600 a year, or £48K over five years.

You would have £98K if you just banked the £9,600 per year. £18K more than your £80K target?!

Or are you going to be paying less because you have a higher deposit (or is this a pooled deposit?). Or, is that to rent part of it out and you live in part to save on your rent?

You have done well to save £50K, if you did, my wife and I had about £55K for our place (I'd saved £40K the wife was given £15K by parents) and it cost more than the £10K we thought would suffice for Fees and furnishings (we mostly bought everything new though as we had hand me downs before and wanted it to be special feeling).

I like the accelerated payment though, we have paid off small extra chunks of our mortgage (probably £15K I guess over the past 6years), just from doing that (and keeping our payments at the original level) our mortgage will finish in 15years rather than 19years (as it stands) and if we overpay again the rate of acceleration on the finish date speeds up due to compounding (I'd hoped to have paid it off in 10, but then lost about £15K of my yearly income the year after we bought, so that plan bit the dust!).

You are certainly on the right track though, if you get on well enough with your family.

 

[Gifter]

Actually I think you have been snide in the past to me.

So I think you should buy some money beans I have, which are (almost) guaranteed to sprout into £100K in 2years, you can have them for £50K which is fair I think. Or invest in Zimbabwean currency.

 

[Gordinho]

Unless your family have the same up front deposit as you then I'd nail them down in writing to ensure that your enhanced deposit is reflected and appropriated correctly in any future sell on.

£50K is a decent deposit, have you considered going into it alone?

PS. While I don't pretend to be a financial genius or high achiever I am worth about £12bn more than Detroit, give or take a penny or two.

 

[spursman17]

I'm not sure about what is best, but I know the math don't add up from what you intimate.

You have £50K

Your cost will be £800 per month (from what you said £3700 - £1300 Rent = £2400/3 = £800 each), which is £9600 a year, or £48K over five years.

You would have £98K if you just banked the £9,600 per year. £18K more than your £80K target?!

Or are you going to be paying less because you have a higher deposit (or is this a pooled deposit?). Or, is that to rent part of it out and you live in part to save on your rent?

You have done well to save £50K, if you did, my wife and I had about £55K for our place (I'd saved £40K the wife was given £15K by parents) and it cost more than the £10K we thought would suffice for Fees and furnishings (we mostly bought everything new though as we had hand me downs before and wanted it to be special feeling).

I like the accelerated payment though, we have paid off small extra chunks of our mortgage (probably £15K I guess over the past 6years), just from doing that (and keeping our payments at the original level) our mortgage will finish in 15years rather than 19years (as it stands) and if we overpay again the rate of acceleration on the finish date speeds up due to compounding (I'd hoped to have paid it off in 10, but then lost about £15K of my yearly income the year after we bought, so that plan bit the dust!).

You are certainly on the right track though, if you get on well enough with your family.

£1300 would be what we will be renting it for plus the combined income of £800 each so £3700 x 12 = £44,400 a year.

 

[spursman17]

Actually I think you have been snide in the past to me.

So I think you should buy some money beans I have, which are (almost) guaranteed to sprout into £100K in 2years, you can have them for £50K which is fair I think. Or invest in Zimbabwean currency.

Not snide I just think you have a few screws loose with your conspiracy theories. I noticed you left a comment on the investment thread stating gold is controlled by a powerful small group of people that controls the worlds prices... guess your beliefs are still going strong.

 

[spursman17]

Unless your family have the same up front deposit as you then I'd nail them down in writing to ensure that your enhanced deposit is reflected and appropriated correctly in any future sell on.

£50K is a decent deposit, have you considered going into it alone?

PS. While I don't pretend to be a financial genius or high achiever I am worth about £12bn more than Detroit, give or take a penny or two.

The 50k is a combined sum between us so we will all be in it together. I agree with the Detroit statement lol.

 

[Gordinho]

The 50k is a combined sum between us so we will all be in it together. I agree with the Detroit statement lol.

Right, fair enough, just make it a matter of record that your individual returns are proportionate to your original investment. I hope I'm not teaching you to suck eggs here so I assume you already have this in hand.

 

[Richie]

Where will you and your siblings be living during this time period? Obviously I don't know the circumstances of each person but if your combined rents are more than £1300, you would be better off moving in to the house together.

This would also be advantageous because buy to let mortgages are (I believe) more expensive than standard mortgages for residence, or at the very least much harder to obtain.

Also remember house prices do go down as well as up. After 5 years your house could be worth £150k. Remember house prices didn't really fall as far as they perhaps should have done after 2008 in the UK. Combine that with Osbournes new scheme to get more people on the housing ladder, I smell another bubble coming on. Not likely in such a small time period, but possibly.

There's also worrys about interest rates going up. Ben Bernanke hinted at the end of QE a few weeks ago. Mark Carney said that he has no plans to raise the BoE Interest Rate in the next few years so it might be a good time to buy if you can pay if off before rates go up to normal levels.

As others have said, you need to factor in time without a tennant, agents fees etc...

 

[Richie]

Also, it's harder to get a mortgage but if you can you should find a brickhole you can fix up. Kitchens/Bathrooms can be done with mostly DIY if you're confident and will save you a fortune, especially if you are renting it out.

 

[Thebarbarian]

You need to seriously consider the medium to long term motives behind this plan. If this is an investment property then you should maximise the loan, pay no principal and claim all interest deductions through tax as well as depreciation. If his is a stepping stone to actually using it as a main residence for tax then your plan is sound, accelerating payments can save many thousands over a standard 25 year mortgage.

Think about the longer term plan, then decide on the process. I'm no expert but I am an accountant and have worked for investment property builders, make it work for your own cash flow, not the bank.

 

[spursman17]

Thanks for the replies.

Barbarian can you explain what you mean as I'm not understanding what you've said completley from a tax viewpoint.

The plan is more short term. It's a 5 year plan with the aim of paying the mortgage off asap. By doing so I'm hoping to minimise interest due on the mortgage. When the 5 years are up (and hopefully the mortgage paid off) my brother and sister and I plan to do one of the following; a) sell the house and divide it in 3 to use as deposits for our own places. b) Maintain the propery and split the monthly income between us. c) Buy an additional property and use the two rental incomes plus the combined monthly income set aside from us three to pay of the next mortgage even faster.

 

[Thebarbarian]

Sure spursman, for an investment you would want to maximise your allowable deductions for tax, having interest only loan together with the ability to maybe claim depreciation and maintenance costs should allow a negative geared investment ( rent income less than monthly costs ) to become positive for tax. Your plan now brings capital gains into the equation if you sell it as you are not claiming it to be your main residence. I would seriously get advice from a reputable financial planner or accountant that you know.

 

[scaramanga]

Thanks for the replies.

Barbarian can you explain what you mean as I'm not understanding what you've said completley from a tax viewpoint.

The plan is more short term. It's a 5 year plan with the aim of paying the mortgage off asap. By doing so I'm hoping to minimise interest due on the mortgage. When the 5 years are up (and hopefully the mortgage paid off) my brother and sister and I plan to do one of the following; a) sell the house and divide it in 3 to use as deposits for our own places. b) Maintain the propery and split the monthly income between us. c) Buy an additional property and use the two rental incomes plus the combined monthly income set aside from us three to pay of the next mortgage even faster.

Very briefly, if the home is your main residence you don't pay any capital gains tax. If it's purely an investment then any gain over your annual allowance will be taxed (and quite heavily if you're a higher rate tax payer).

You should all get an allowance (unless the others have capital gains in the year) which will be about £10K but depending on how much you make, it may be better if one of you is a lower rate tax payer for it all to be in their name (obv you would have to trust your siblings a lot).

It all gets quite complicated when you're trying to calculate it for uncertain returns like property, so you really should factor in a chunk for a decent accountant to try and minimise your tax losses which could easily come to £15K-£20K between you on what you've suggested.

**EDIT**

Beaten to it!

 

[SpursLodge]

I can't see much of a gain here, if you buy the place, pay the majority of the mortgage off yourselves and then sell it surely all you are getting back is your own money plus the small amount of the mortgage that the tenant paid minus any fees, taxes, interest or other costs.

Surely once you've paid it off the best bet would be to keep renting it and taking the full rent as income?

I don't see property as short term like this unless you are buying and renovating. Am I missing something?

 

[P.D.]

I agree and why overpay so quickly, you would be better off putting that additional money into buying up a 2nd property and starting up a portfolio. Plus if you want to repay it that quickly then you need to make sure you get a mortgage with a low term e.g. 10-15 years as generally you can only pay off an additional 10% of the outstanding balance per year without incurring a penalty.

 

[THFC]

If you are considering this you might want to consider an offset mortgage that allows unlimited overpayments without penalty.

 

[THFC]

However bare in mind some lenders might not give you a residential rate if you are saying you are purely letting this out, as someone as said, it is very hard to give generic advice on finances as many lenders have varying criteria and if unsure you might need to consider a whole of market broker.

 

[spursman17]

Thanks for the advice people.

I'm a little shady when it comes to understanding the tax as this will be my first big purchase and my only dealings with tax are that which are automatically taken from my monthly earnings.

Spurslodge I can see your point in not gaining much but I also think its a good way to save as the interest (if left to run the full term) is a good motivator to pay it off asap. I'm also hoping for the property to increase in price over the 5 year term and also the rental income should help with the payments.

Another option I was thinking of was to pay this first property off and then use the rental income of the first property to help pay towards a second property which also shall be rented. That would give a monthly income of around £5000 towards the mortgage and would pay it off even quicker... confused :$