A risk too far?

[Amarillo]

In 1990 I bought my first home: £57,000 with £17,000 deposit and £40,000 mortgage.
By 2005 the mortgage had been repaid, and I had 6 years of glorious mortgage free living.
In 2011 Clare and I bought a house together. £348,000, with £120,000 from a buy-to-let mortgage on my first home and a £228,000 mortgage on the house we bought. Clare had her own flat which she also rented out. We both worked full time and we each had rental incomes.
Rental income on my old flat and rental income from Clare's flat more or less covered both mortgages.

We are now in the fortunate position where we might go mortgage free again in three or four years time.

Can we risk repeating the trick to buy our dream home for retirement?

Mortgage our current home with a 60% buy-to-let loan.
Use that 60% as a 40% deposit on a Retirement Interest Only (RIO) mortgage for our dream seafront retreat.

For illustration: if our current home is valued at £700,000 we could borrow £420,000, and use that as a deposit on a home worth up to £1,050,000 by taking out a 60% RIO mortgage of £630,000.

Or is this too much of a risk at our stage of life?

Borrowing a total of £1,050,000 at 3% would incur interest payments of £2,625 per month, broadly in line with our expected *gross* rental income from our current family home.

But interest rates are at a record low - the only way is up. 6% would double the interest payments; 9% would triple them; 12% would quadruple them; and 15% (I was paying 15.75% in 1990) would quintuple them to £13,125 per month. We can mitigate the risk for a limited period with a fixed rate mortgage, and have the escape route of selling both our current home and my original flat to repay both mortgages in full at current estimated values.

So the risk would come from high interest rates *and* falling house prices. Is this a risk too far for a dream home for retirement? I have about four years to work this out. There are four substantially identical houses, all in a row, that we have our eyes on.

 

[Lightning]

I know nothing about this, so do your own research, but I saw somewhere that the futures market in the states is predicting very high inflation on many commodities.

 

[Amarillo]

I know nothing about this, so do your own research, but I saw somewhere that the futures market in the states is predicting very high inflation on many commodities.

That would, of course, feed through to rising inflation rates and, presumably, higher interest rates to dampen inflation.

 

[Lightning]

You could try to get a very long term fix, if you don’t intend to move.

 

[WelshGas]

That would, of course, feed through to rising inflation rates and, presumably, higher interest rates to dampen inflation.

I don't think anyone can forsee the future 12months on let alone 4 yrs.
Your calculations seem plausible But Covid 19 has its own agenda which we are not privy to.
Set up your financial spreadsheet and update it every 6 months to get a feel of what might be possible.

 

[Amarillo]

You could try to get a very long term fix, if you don’t intend to move.

We are four years into a ten year fix on our current home. It has cost us 1.11% in rates (2.49% instead of the 1.38% we were on), but given the still low fixed rate and certainty it gives, worthwhile. Is is hard to get more than a 5 year fix on a BTL. RIO mortgages can come with 10 year fixes, but at a cost.

RIO mortgages are designed to be repaid on death. We would hope to repay chunks annually, and most RIO products allow up to 10% to be repaid annually without penalty.

 

[Lightning]

We are four years into a ten year fix on our current home. It has cost us 1.11% in rates (2.49% instead of the 1.38% we were on), but given the still low fixed rate and certainty it gives, worthwhile. Is is hard to get more than a 5 year fix on a BTL. RIO mortgages can come with 10 year fixes, but at a cost.

RIO mortgages are designed to be repaid on death. We would hope to repay chunks annually, and most RIO products allow up to 10% to be repaid annually without penalty.

You have another 6 years before you find out if it you list out on your current deal. 2.5% still sounds good to me, I can’t believe how cheap borrowing is.

 

[jimmywease]

Always review the current and potential future CGT position on rented property, even if your intention is to keep them forever. While let-to-buy is much more CGT-efficient than buy-to-let, reliefs are being reduced over time and there may be future measures, to further tax multiple-property owners.

Even if you never intend to sell, it is worth keeping abreast of your tax liability, rather than assuming that your total equity is a guaranteed source of funds, if needed.

I’m not suggesting that you haven’t already considered the above. A chat with an IFA might be worthwhile, as there’s so much to consider.

 

[Amarillo]

You have another 6 years before you find out if it you list out on your current deal. 2.5% still sounds good to me, I can’t believe how cheap borrowing is.

The original mortgage was until 2031. When we took out the 10 year fix, I adjusted payments to pay it off by 2028. More recently I have adjusted repayments so the mortgage will be paid off by November 2024. I've been able to do this and avoid future early redemption charges. The reason for our proposed move around that time is that it is when our eldest son moves from primary to secondary school (September 2025).

Yes, rates are astonishingly cheap *so long as you hold substantial equity in your home*. It is one of the ways the rich are getting richer and the poor lack that advantage.

Back when rates were 15% or more, a 2% saving for a large deposit made little impact for the rich. Now it can halve or better interest payments.

Example
A Barclays 5 year fix with a 10% deposit is 3.72% (no fees)
A Barclays 5 year fix with a 40% deposit is 1.40% (£999 fee)

 

[CALI FATE]

all i can say is thank goodness for brexit - its amazing that we feel so confident and positive about the future that we are considering such exciting investments. I too am looking at a lovely opportunity and feel that UKPLC is poised and ready to bounce back economy wise - ahead of the pack and without the EU shackles restricting ideas and innovation. Go for it

 

[GrumpyGranddad]

Go for it @Amarillo, you only live once.

We’re at the opposite stage in life where we are gradually divesting ourselves of assets over the years. Gifting to children and grandchildren, spending some cash reserves (i.e. our Cali), and possibly downsizing our property at some point. We’ve seen several people compete to be the richest in the graveyard only to have Care Home fees and Inheritance Tax bleed their estate dry. It’s a changing landscape but when making plans Trust Funds are still worth exploring. As @jimmywease says worth talking to an IFA.

 

[Amarillo]

Always review the current and potential future CGT position on rented property, even if your intention is to keep them forever. While let-to-buy is much more CGT-efficient than buy-to-let, reliefs are being reduced over time and there may be future measures, to further tax multiple-property owners.

Even if you never intend to sell, it is worth keeping abreast of your tax liability, rather than assuming that your total equity is a guaranteed source of funds, if needed.

I’m not suggesting that you haven’t already considered the above. A chat with an IFA might be worthwhile, as there’s so much to consider.

Thank you for reminding me. CGT is something I am aware of, but often neglect to include with my calculations.

From memory, this is how it is calculated for a part main property and part rental property, using my first flat as an example.

May 1990 £57,000
May 2021 £385,000 (zoopla estimate)
Capital gain £328,000
Owned for 372 months
Main residence May 1990 to August 2011: 255 months
Add grace period of 6 months: 261 months
Taxable capital gain (372-261)/372 X £328,000 = £97,871
Lower rate 18% CGT = £17,616
Higher rate 28% CGT = £27,404
Less CGT allowance of £12,300
As a lower rate taxpayer I would pay £5,316
As a higher rate taxpayer I would pay £15,104

 

[OGII]

The factors are will house prices rise. Yes, longer term, they always do. Are we set for a market correction soon? Probably not, although it's hard to see how this is being avoided, the market seems overheated.

Interest rates. Talk of rate rises in medium term. Will they happen? They've been low for a long time.

Worst case can you sell a rental to cover all or part of the new loan? Or better to keep the rentals on to provide income to service the loans. As long as you don't have long voids in the rentals you ought to be able to keep the houses of cards stacked up.

 

[B J G]

Unknown factor now is how, when and at what level the Government will recoup the huge Covid related depts. Also increasing political pressure to move London centred financing out to the remainder of the UK, especially in the run up to next Election.

Disposable incomes may well shrink considerably making Property and Morgages very high risk from a speculation angle.

There is also an unknown bubble of unpaid rents that could well see a glut of Buy to Rent Properties come onto the Market when evictions are permitted.

 

[The Blue Merle]

The gov have been very slowly taxing 2nd home owners and the buy to let market, now that they have run up huges amounts on the COVID relief bills I’m sure this is one of the first places that with claw back.
Bigger or more isn’t always better just involves more headaches/costs!

Don’t forget you’ve got the rising costs/demands of them kids

 

[jimmywease]

Thank you for reminding me. CGT is something I am aware of, but often neglect to include with my calculations.

From memory, this is how it is calculated for a part main property and part rental property, using my first flat as an example.

May 1990 £57,000
May 2021 £385,000 (zoopla estimate)
Capital gain £328,000
Owned for 372 months
Main residence May 1990 to August 2011: 255 months
Add grace period of 6 months: 261 months
Taxable capital gain (372-261)/372 X £328,000 = £97,871
Lower rate 18% CGT = £17,616
Higher rate 28% CGT = £27,404
Less CGT allowance of £12,300
As a lower rate taxpayer I would pay £5,316
As a higher rate taxpayer I would pay £15,104

Yes, something like that but repeat the calculation to forecast for 2025, 2030, 2035 etc. Then guess the known-unknown changes to the cgt regime!

 

[GrumpyGranddad]

Read somewhere last that the Chancellor is already looking at CGT reforms to claw back some dosh.

 

[jimmywease]

Read somewhere last that the Chancellor is already looking at CGT reforms to claw back some dosh.

Yeah - maybe taper-off the personal allowance and ‘grace period’ for the forecasts!

And then never sell!

Also have a long hard look at the RIO mortgage terms, to ensure that they are fair with the asset after your departure!

 

[Amarillo]

The gov have been very slowly taxing 2nd home owners and the buy to let market, now that they have run up huges amounts on the COVID relief bills I’m sure this is one of the first places that with claw back.
Bigger or more isn’t always better just involves more headaches/costs!

Don’t forget you’ve got the rising costs/demands of them kids

We already have five BTLs and to be honest we have barely been touched by the tax increases, which have been targeted at those who have least equity in their properties (it has been the poorest second home owners who have suffered most from the withdrawal of mortgage interest tax relief). And a new home would be our primary residence, so, I think, no 3% stamp duty surcharge. What I don't know is if changing our current home to a rental home would incur the 3% stamp duty surcharge. It is not something I've considered and shall look into.

We have considered, and are still considering liquidating our BTLs and stuffing the money into equities which are much more lightly taxed. But there is something more tangible about owning property.

 

[Amarillo]

Yeah - maybe taper-off the personal allowance and ‘grace period’ for the forecasts!

And then never sell!

Also have a long hard look at the RIO mortgage terms, to ensure that they are fair with the asset after your departure!

The grace period has already dropped from 2 years to six months. I think it is unlikely to drop further. Essentially this grace period is to protect those people who buy a new primary residence with a bridging loan from having to pay CGT when they sell their former home.

I think that any changes in taxation will have a marginal effect on us in the grand scheme. The biggest risk remains a property crash combined with sharply rising interest rates.

 

[The Blue Merle]

That’s exactly my point, you’ve been barely touched and now they with need to raise a lot more cash.
I’m great believer in if you want something and can afford it then go for it, the one life live it mantra!
I also believe in working less and enjoying life more (my daughter is all grown up).
Only you and Claire knows what’s best for the family.

 

[jimmywease]

The grace period has already dropped from 2 years to six months. I think it is unlikely to drop further. Essentially this grace period is to protect those people who buy a new primary residence with a bridging loan from having to pay CGT when they sell their former home.

I think that any changes in taxation will have a marginal effect on us in the grand scheme. The biggest risk remains a property crash combined with sharply rising interest rates.

I thought it had reduced from 36 to 18 to 9 months?

 

[Eber123]

Hello Amarillo,

In an advanced age (62) I took the advantage of an arrangement with my employer and left work (still a member of staff, though). The financial hit was big (about 65%), but my wife is a bit younger and therefore still working. That leaves us enough income to keep the wolves from the door.

We could do this because we have a house in the countryside with no mortgage and the car bank loan (for my wife's Toyota Corolla and my VW California) paid off.

Of course it is me, but in these times I am so glad that we have no financial responsibilities. We are happy in the house and with the cars.

My father-in-law past away in 2019. To deal with the estate and see how much goes away in tax, fees and other cost is frightening. The poor man was working his whole life and the only people who benefit is the Taoiseach, other institutions and the solicitor. Learning out of this is we leave the children the house and enough money for our funeral. That's it.

I think it was mentioned before, time is precious. If one loves their job and gives them fulfillment in live ok continue work. But if it is a normal job, I believe the sooner one retires the better. I have now a luxury that is very valuable - I am the master of my time (well, my wife is the master of my time, but you get my train of thoughts).

Happy time available California,
Eberhard

 

[Amarillo]

I thought it had reduced from 36 to 18 to 9 months?

I was working from memory, you might well be right.

There is a limit to how much it can be cut before seriously affecting those who buy before selling a previous home, for example to refurbish.

 

[NessL]

You lived for a year in a Cali with young children. Is a large house with the associated maintenance, really your dream retirement home?
We plan to downsize for retirement and spare cash will most likely assist our children with deposits for their homes.

Also, don’t forget to factor in any possible unforeseen health issues in to your calculations.