Financial plan for moving to bigger house

[vand]

We have decided the time is right that our family (mom, pop, 2yo, cats x3) moves to a bigger home.

Currently we live in a 650sqft 2br flat which we fully own, and are planning to move up to a house double the size with its own garden. While we appreciate that buying more house than you might need does not fall into the a Mustachian school of doing things, we feel that this is a "one and done" move and so are not going to skimp. We lived well below our means for many years now, and its time we lived right up to our means in terms of housing at least.

So what's our plan? We are planning to "Let To Buy", ie, we'll keep out existing property and take out a BTL mortgage on it to fund the deposit on the new house. This is quite a common thing these days, so we're far from unique in that regard.

Current figures:

Age: 44 & 43
£136k joint salary
£400k value of existing flat
£825k value of new house

£420k in pensions
£24k in ISAs
£60k liquid cash (for stamp duty & other buying costs)

We currently manage a saving rate of about 58% between us. The ideal scenario, of course, will be to use leverage to try to keep this saving rate as high as possible while also having higher consumption via living in the bigger house. We're  putting as much onto Interest-Only as possible (normal lenders will lend up to 50% on IO basis and the rest of repayment basis) to keep mortgage costs as low as possible, then invest the rest to pay it off.

The numbers will look like this:

Borrow £268k (67%) of the value of the flat mortgage @ 2.02%, fixed for 5 years
The interest-only cost on this mortgage will be £451pm

Borrow £557k (67%) of the value of new house. Together with £268k equity released by the BTL mortgage takes us to the £825k valuation.

The £557k is broken up into 2 parts:
£412.5k interest-only @ 1.38%, fixed for 3 years - £474pm
£144.5k repayment @ 1.38%, fixed for 3 years - £570pm
Both parts = £1045pm


So, outgoing-wise we will have £1045+451 = £1495pm in new outgoing.

Incoming-wise, we are confident we can get £1400pm gross in rental income. With taxes and other costs, we are estimating this will be roughly £1000pm net income.

So, we'll have additional new net outgoing of roughly +£495pm to live in bigger house, all other things being equal.

But things, of course, are never equal.

We'll be seeing an eye-watering increase in Council tax, we'll need to budget in a new residents parking permit from the local council, and of course we can expect to see our utility bill usage go up.

So extra costs I estimate will be +£200pm

However, OTOH, the new situation will have some savings too, the biggest for us being in childcare:

Nurseries are considerably cheaper in our new area; we currently pay £1600pm for daycare for our 2yo, and estimate that we'll save between £200-£300pm for the next 12 months due to cheaper nursery cost. Let's pencil it in at the lower end and say £200pm. This handily offsets the other higher living costs of the new home. It gets even better though, as the new house is in the catchment area of an (amost) free local pre-school, so from September 2021 when she is 3yo we would expect to see another saving in childcare costs of roughly £700pm - ie, a roughly a £900 monthly reduction to what we are currently spending.


So,

for 2021:
+£1000pm rental income
-£1495pm mortgage outgoings
-£200pm higher costs
+£200pm childcare savings

= £495pm higher monthly outgoings
 
 
And from 2022 onwards:
+£1000pm rental income
-£1495pm mortgage outgoings
-£200pm higher costs
+£900pm childcare savings

= £205pm lower month outgoings

So over 2 years before our little one starts school we would basically expect to spend a net additional £3000 in costs. To me this seems very reasonable to be able to live in the bigger house. Once you factor in the capital repayment on the £144.5k repayment portion of the main mortgage (which should amount to about £5000pa in the first few years) we actually manage to slightly increase our savings rate.


Obviously we need to provision for how we are eventually going to pay off the interest-only mortgages, but I am very comfortably in us taking charge of this ourselves and using our ISA allowances to continue investing rather than pay off mortgage principle. It just doesn't make any sense at all to attack your mortgage when in so doing your money is going to be working at only 1.38% or 2.02%. I'm very confident that our investments will nominally return considerably more than those numbers, or whatever rates will be whenever remortgages are due. If rates rise considerably then we'll have to think about moving a larger chunk to repayment basis.

Basically we've doing a complete 180 and going from a situtation where we live well within our means but with no leverage, to using a considerable amount of mortgage leverage. Our family situation coupled with the record low borrowing rates provide strong incentives for us to do so. And of course, although we want a bigger house, it's important that we don't do it at the expense of derailing our existing plan which is on a good trajectory. Of course the biggest risk is that interest rates will shoot up in the coming years - we do have contingency plans for if that happens.
 
Comments, critiques welcomed

[former player]

There are bigger risks than mortgage rates going up, including death, disability and job loss.  What are your plans for those?

Going interest-only extends the period of highest risk for years.  Something being a "common thing" doesn't make it a good thing.  I remember when endowment-backed interest only mortgages were a "common thing" and it ended in a big mess.  You are basically proposing to do the same thing, so perhaps you might like to read up on that?

Given the high transaction costs on a move like this you need to be absolutely, positively sure that there is nothing about this house, its immediate position or its wider location that you are going to find unsatisfactory at any point in the next few years.

The math on keeping and leveraging the flat doesn't look particularly good to me. You need to remember that a rented-out flat is relatively losing value over time, particularly if it starts out as relatively high value, because it becomes outdated as well as being subject to wear and tear (and dealing with updating and wear and tear usually means void periods). You will be very heavily invested in real estate as a proportion of your overall wealth and with two full-time jobs and a toddler you will be time-crunched on maintaining it.

All that said, I did make a lot of money on property, although without ever the degree of leverage and risk you are proposing.

[vand]

There are bigger risks than mortgage rates going up, including death, disability and job loss.  What are your plans for those?

Going interest-only extends the period of highest risk for years.  Something being a "common thing" doesn't make it a good thing.  I remember when endowment-backed interest only mortgages were a "common thing" and it ended in a big mess.  You are basically proposing to do the same thing, so perhaps you might like to read up on that?

Given the high transaction costs on a move like this you need to be absolutely, positively sure that there is nothing about this house, its immediate position or its wider location that you are going to find unsatisfactory at any point in the next few years.

The math on keeping and leveraging the flat doesn't look particularly good to me. You need to remember that a rented-out flat is relatively losing value over time, particularly if it starts out as relatively high value, because it becomes outdated as well as being subject to wear and tear (and dealing with updating and wear and tear usually means void periods). You will be very heavily invested in real estate as a proportion of your overall wealth and with two full-time jobs and a toddler you will be time-crunched on maintaining it.

All that said, I did make a lot of money on property, although without ever the degree of leverage and risk you are proposing.

Thanks for your thoughts. Yes, I do agree that we are taking on considerable risk, at least until we have built up our ISA funds to a few years worth of savings.  As you say, job loss, inability to work or even death are all possibilities.  My wife, who is the higher earner has insurance on disability/death through her work, and once once our child is in school we would be able to survive on one income. The risks are real, but we think they are acceptable, and you don't get anywhere in life without taking on calculated risks, right?

If we found ourselves struggling the options for a backup plan include taking on a lodger, moving back to the old flat and renting out the new home (OK, it would be a faff with rearranging the mortgages, but doable) or just liquidating and selling up the old flat.

We also have the option to extend the kitchen in the new house (I know, I know, yet more of our money poured into property) but it would increase the value of the home by far more than the cost to build it, so that is an option which would increase its rental value if we found ourselves having to do the swap-back.

Going interest only obviously keeps our monthly costs lower - so in this respect I see it as actually lower risk in the short term in the event of a reduction in household income. Over the medium to longer term hopefully our continual stash building will increasingly offset the short term risks.


I'm aware of the misselling of endowment mortgages. I don't see this happening to us as I will be be closely tracking the exact the state of our finances and if we need to be adding more to comfortably meet our targets.  We are not starting from scratch and have been building our net worth steadily for a while now. Yes, initially this move will mean a lot of our wealth will be in property, but we'll continue to buy financial assets too. I actually see eventually owning the investment property as a useful diversification from having all your eggs in a basket of stocks/bonds.

[vand]

The alternative to keeping the flat is of course to sell it, which would change the financial picture like this:

Stamp duty on the new home drops by 25k from 41k to 16k
Additional £4k selling agent fee
Additional £1.5k selling conveyancing fee

Up front saving: £19.5k

We move the £400k equity to the new house, and take out the remaining £412.5k on interest-only basis and can cover the last 12.5k with the savings from stamp duty.

New monthly cashflow would then be just an additional £474pm (instead of £495) in mortgage interest in the first year with a slightly smaller commitment to a capital repayment vehicle in place to eventualy pay off the £412.5k principle.

After 25 years, same as in the Let-to-buy scenario, we hopefully amassed a large enough ISA fund to more than pay off any principles outstanding, but without the original flat to go alongside it, so forgoing that stream of income.

Yea, it's definitely a pretty sound lower risk option. However, we've decided that we're committed to keeping the flat. The transaction costs being what they are mean that you can't just slip in and out of the market, and you had better be very sure that you want to sell before doing so. We like the flat - it's in a good location, it's low maintenance purpose built job, and should be a doddle to rent out.

[Manchester]

It seems like a good plan to me.  My critiques as someone who has only ever owned one property are:

- Landlording is stressful
- Landlording is time-consuming
- Your investments will be very 'property heavy'
- A change in legislation could ruin your plans (heavier landlord tax)

Also, the new area you're moving to - is it well connected to your place of work, or are you home workers?  Remember to calculate the added commuting costs (both time and money) if you're moving further afield.

I like a KISS (keep it simple, stupid) approach to fire, I feel that there are possibly more tax-efficient and stress-free avenues you could use to reach FIRE.  I'm a naturally apprehensive person, so perhaps you're better suited to landlording than I am.

Also, wherever you are, property prices are ridiculous!  Move up north and you'd get a mansion for £800k lol.

[talltexan]

I'm an America, so not familiar with the mortgage products you have available. But--even if you sell the old property outright--you're going to be in a situation in which 2/3 of your asset balance is in a single property. That's pretty un-diversified.

It sounds like you have a high savings rate, so I'd vote for those savings to go towards assets away from properties, ie stock investments.

[vand]

It seems like a good plan to me.  My critiques as someone who has only ever owned one property are:

- Landlording is stressful
- Landlording is time-consuming
- Your investments will be very 'property heavy'
- A change in legislation could ruin your plans (heavier landlord tax)

Also, the new area you're moving to - is it well connected to your place of work, or are you home workers?  Remember to calculate the added commuting costs (both time and money) if you're moving further afield.

I like a KISS (keep it simple, stupid) approach to fire, I feel that there are possibly more tax-efficient and stress-free avenues you could use to reach FIRE.  I'm a naturally apprehensive person, so perhaps you're better suited to landlording than I am.

Also, wherever you are, property prices are ridiculous!  Move up north and you'd get a mansion for £800k lol.

Yes, all true, however this is about more than just reaching FIRE which we are on a path to currently - we are choosing to effectively increase our consumption to meet our needs in the here now.

I'm prepared to do my own letting and landlording to save on agent fees. I've never been a landlord before but hopefully we can find a nice, quiet low maintenance professional couple who never need a thing from their landlord lol. Regardless, the flat is very low maintenance besides having to change the odd lightbulb or flip a circuit breaker. 

I'm an America, so not familiar with the mortgage products you have available. But--even if you sell the old property outright--you're going to be in a situation in which 2/3 of your asset balance is in a single property. That's pretty un-diversified.

It sounds like you have a high savings rate, so I'd vote for those savings to go towards assets away from properties, ie stock investments.

We have almost £450k invested and a paid off home (£400k equity) right now.  Over time we're still building our investments - this is why I'm keen to go interest-only, so we can invest rather than paying down mortgage capital. I agree that on the day we move we'll have an overallocation of our wealth in property, but we'll just continue to build our investments over the coming years in relation to the amount of wealth we have in property.  3 years after we move we'd have built up our stash to about ~£700k, so I feel that the rebalancing would happen quite quickly at our current saving rate, and by that time we would not be so heavily leveraged compared to our total net wealth.

[former player]

Make sure your lease specifies that tenants are responsible for lightbulbs, and leave a thorough "book of the house" with details of fuses and stopcocks, full instructions for appliances and central heating, and emergency numbers.  Make sure you've got contact details for all the local trades you are likely to need as well, if possible ones you've already established relationships with.

[vand]

Make sure your lease specifies that tenants are responsible for lightbulbs, and leave a thorough "book of the house" with details of fuses and stopcocks, full instructions for appliances and central heating, and emergency numbers.  Make sure you've got contact details for all the local trades you are likely to need as well, if possible ones you've already established relationships with.

thanks.. we're going to make sure we do everything needed, dotting all i's and crossing the t's. I have just finished the audiobook of "How To Be A Landlord" by Propertyhub's Rob Dix, which I have to say is an excellent primer on the ins and outs of managing your own rental. I'll definitely listen to it again closer to the time when things are much closer to completion.

[PhilB]

We like the flat - it's in a good location, it's low maintenance purpose built job, and should be a doddle to rent out.

The important question is do you like the rental yield?  4.2% gross, 3% net doesn't strike me as hugely attractive given the hassles involved in being a landlord.  I would suggest that you ask yourself if you would buy it as a rental investment based on those numbers.  If the answer is no then you shouldn't keep it just because you already own it - particularly given the increased up front cost of buying it because of the stamp duty hike on the big property.

If you are set on being a landlord then research the market thoroughly to see if there aren't other options out there that would give a better return.  Avoiding 3% stamp duty of £400k odd would pay the costs involved in buying a specifically chosen investment property rather than the one you just happen to already have.

[Dicey]

Make sure your lease specifies that tenants are responsible for lightbulbs, and leave a thorough "book of the house" with details of fuses and stopcocks, full instructions for appliances and central heating, and emergency numbers.  Make sure you've got contact details for all the local trades you are likely to need as well, if possible ones you've already established relationships with.

thanks.. we're going to make sure we do everything needed, dotting all i's and crossing the t's. I have just finished the audiobook of "How To Be A Landlord" by Propertyhub's Rob Dix, which I have to say is an excellent primer on the ins and outs of managing your own rental. I'll definitely listen to it again closer to the time when things are much closer to completion.

When I hear nightmare tenant stories, and I dig into the back story, it becomes obvious that there were going to be problems. The single most important thing you can do is thoroughly vet your tenants. Two recent examples: I noticed one applicant was an AU on his mother's account. That red flag (thanks to this forum) made me dig deeper into his financials. What a glossed-over disaster! Another looked good on paper, even said she was an author. My Spidey Sense told me to google her and surprise, she was a total con artist, including current litigation by her existing LL (apparently for plenty of cause). Do the research and listen to your gut.

[vand]

We like the flat - it's in a good location, it's low maintenance purpose built job, and should be a doddle to rent out.

The important question is do you like the rental yield?  4.2% gross, 3% net doesn't strike me as hugely attractive given the hassles involved in being a landlord.  I would suggest that you ask yourself if you would buy it as a rental investment based on those numbers.  If the answer is no then you shouldn't keep it just because you already own it - particularly given the increased up front cost of buying it because of the stamp duty hike on the big property.

If you are set on being a landlord then research the market thoroughly to see if there aren't other options out there that would give a better return.  Avoiding 3% stamp duty of £400k odd would pay the costs involved in buying a specifically chosen investment property rather than the one you just happen to already have.

You are right, the rental yield is quite poor, although it is in line with typical yields for a London property.  In an ideal world we'd sell it, save the wedge of extra stamp duty on the large house and then only once its all completed look to invest in some properties with higher yields whereever they can be found - typically in more Northern cities.

Keeping this flat does have some pros that might not be apparent at first. As previously touched on, it does offer us the chance to downsize and move back to the old home that we are familiar with and like should things go very pear shaped. Also, not selling it immediately leaves us chain free, and that put us in a very good position to move on the big house as the seller is not involved in an upward chain and was looking for a chain-free sale. I'm not going to say that being chain-free secured us the house, but it was definitely one of those factors that played in our favour and we believe that we're getting a pretty good deal for £825k.

[RobERE]

What you're proposing isn't at all mustachian. In fact, hasn't Pete documented terrible times when he rented out the speculative homes he developed but couldn't sell?

I have been reviewing my fixed monthly outgoings and I can't do anything about the £300/month Council Tax, the £187 utilities bill or the £17/month insurance – all based on the size of our home. We did what you are proposing now, 25 years ago and I have to tell you that if I could wind back time I wouldn't do the same again. Owning a larger home is a bind, there are always jobs to be done and costs to incur.

And that's before we have even started on the risks of letting to tenants. Remember, they leave without notice or paying their dues, they damage your property (sometimes to spite you) and they call you demanding fixes at the most inconvenient times. Your numbers for rental yield don't stack up and you're deluding yourself – as @PhilB writes, you should evaluate that project as if you would invest on those terms (I wouldn't). If you want to be a BTL landlord then look at Darlington, Durham or Hull where the yields are respectable!

You have a 'smart' arithmetical plan but I don't see any evaluation in terms of your quality of life, reducing complexity and potential for catastrophes, or stress reduction. It appears to me that you are viewing the whole complex transaction sequence through very rose-tinted spectacles. I'm not convinced that you have run the pessimistic scenarios around interest rates, inflation, voids, repairs, credit squeezes or negative equity. Your investment would be highly geared and undiversified.

If you took a fresh sheet of paper and optimised according to Jacob Lund Fisker's principles (minimise home, transport and food costs) i.e. buy no more home than you need located within walking/cycling distance of work and shops, what would your ideal home look like and cost? Then work through selling your current flat and buying your minimal home and enjoy the savings and cashflow.

[Borgo Panigale]

Hi Vand,

I adopted a similar plan albeit on where the first home was in Northern england and the second in Switzerland.  There does seem to be a bit of a rose-tinted vie of the numbers on this.  Maintaining a second home is expensive, the best researched tenants will let you down, normal rational people will become unreasonable over night with strange expectations on maintenance and fix times and level. Our scenario was different because we could "sweat" a lot of equity into the Swiss house and benefited from massive  house price inflation in the Arc Lemanais (we bought there in 2006), growth I don't think will be repeated in Switzerland or London for that matter.
The solution you're proposing is one more recommended for the very wealthy.  I mean this with all due respect but your salary is decent for London but still not at the right level to manage the potential risk.  Voids, admin and repairs will sap your funds and time (especially if you don't appoint an agent) and you need to factor in what your investment level will need to be monthly to clear the capital.

Buying the flexibility you are looking for is possible, but comes at a high price.  I would have another very hard look at whether you want to be a landlord with your family responsibilities.

Hope this helps.

[vand]

Thanks for your constructive comments, @RobERE and @Borgo Panigale

I do appreciate there are considerable risks with this plan. 

We're actually increasingly confident with how our new cashflow situation would look. Only today we went to visit an alternative Nursery that we liked and was cheaper than the first we looked at, so we could be potentially be looking at our childcare costs savings of £600pm rather than £200pm which I had originally thought possible, which basically gives us even slightly improved cashflow that our current situation straight off the bat.


The contention I feel is with keeping the flat with the poor rental yield. I admit that I definitely see why people have highlighted this, and in an ideal world we would be able to easily transport all that equity into another property 200 miles north where we can get a 7% yield rather than a 4% yield to give us an extra £700-800/month net cashflow. I totally understand why from a cold business perspective that would be a much more preferable thing to do. But this in itself introduces at least 2 extra property transactions which each carry their own short term risk, and the fact that we don't know much about communities in Liverpool and Newcastle means we would be moving outside of our comfort zone by doing this. We're definitely up for that challenge if we were to expand with further investment properties, but for now in getting our teeth cut at this landlording stuff we're taking the lower risk & lower return option.

[vand]

Here's an update:

We proceeded with the original plan and everything is now just about in place. We have been moved into the new place since the start of November, and have tenants moving into the old flat this week.

Timing-wise we got very lucky, because we started looking at houses straight after the summer lockdown, found our new home when everything was still quite depressed and managed to negotiate a good price on the home when the market was still relatively flat before prices took off over Jul/Aug/Sept - we secured it for £826k while the sellers paid £875k for it 4 years ago. If it was relisted as of today I'm pretty confident that it would almost fetch more than the 826k.

We also managed to secure frankly unbelieveable mortgage rates - 1.38% on the main home (3yr fixed) at 70% LTV, and 2.02% on the Rental (5yr fixed) at 70% LTV.  As already pointed out, this does leave us highly leveraged, but we are OK with that.

The rental mortgage is on interest-only basis, while on the main residential mortgage we have 50% interest-only (the max they would allow) and 20% on repayment basis. Putting as much as we could onto interest-only then allows us to keep our mortgage payments as low as possible with minimal capital repayments, and we invest our surplus cash into a multi-asset based portfolio in order to build up the capital pot to eventually repay the mortgage.

As others have mentioned, the yield on the rental is not spectacular by any means - we get about a modest 4.3% gross. That's the reality of home prices in London. OTOH, we did not go through any agents who would have taken at least about 12% in fees, and are self-managing it all ourselves, doing the listing on OpenRent which is an absolutely fabulous resource for budding landlords.  I'm glad I did this, not only to save on Letting Agent fees, but also because I learnt a lot about responsibilities of a landlord, and feel equipped to invest in another rental property at some point in the future.


In terms of out-of-pocket costs, the biggest by far was the stamp duty due on a 826k additional property - even with the current reduced rate we had to stump up £41k of cash for the stamp duty.  Solicitors' fees and moving costs were roughly an additional £3k, and we've splashed a few £ks on new furniture. Additionally, we had to fork out £2k to get the flat into shape to rent, about half of that due to electrical work that the new EICR requirement highlighted, so total costs spend to get us into this position was £50k.. all in all, not cheap.


Cashflow-wise, initially we are left with with about £270/pm less disposable income for the 10 months but the new house falls inside the catchment area of a good local pre-school which will then reduce our childcare costs from next September and actually leave us about £300pm better off - between Oct 2020 to Sept 2021 our childcare will have fallen from £1750pm to about £500pm, which at which point we'll actually be in a better-off position regarding disposable cashflow.  Of course, a good proportion of that cashflow is now earmarked for the investment pot that will be needed to eventually pay off all the outstanding capital.


Quite what all this means in terms of our (more my) FI date is anyone's guess. Undoubtedly it has pushed it further out, but by how many years I have no idea at this point, because it has become a much more complex equation than just trying to build an investment pot to 25 times your annual spending.


One thing that I am very pleased with, however, is that through this whole exercise of moving and planning, my wife is now fully on board with the whole "taking full advantage of the low hanging fruit" thing. She has never been a frualista but over the years we have moved closer together on important finances, and now she maxes her £40k pension allowance and contributes into an ISA too. 

[Playing with Fire UK]

Thanks for the update Vand. Hope you and the family are very happy in the new home.

[skip207]

I think you did the right thing for now, you just need to keep an eye on rates and fees when your deal runs out. 

Land lording is not easy as said but often it’s the personalities involved that causes the problem so keep everything nice and polite but remember it’s a business transaction so record everything ideally in writing. 

I was a let to buy LL for just over two years and when my tenants moved out I decided the best thing was to sell.  That’s because the main issue is wear and tear.  In the two years they were in they Did ,ore wear and tear than we did in 10 plus years.  So bear that in mind.  Bathrooms get the most stick.  I would budget for a refresh every 5 years and kitchen every 10. 

[vand]

Thanks guys.

On the one hand it's scary to think that we're borrowing £865k, but the interest payments on that are only £1144/pm which is completely absurd and entirely covered by the rental income on the flat.

Our plans could be completely buggered if mortgage rate move materially higher in the next 3-5 years time, but frankly I suspect that a lot of people are in the same boat and the political will will be stronger than ever to keep rates as low as possible for as long as possible.

I calculated that we had a before-move savings rate of about 66%. DH has just had a really good pay increase, and together with some rejigging of personal finances we should be operating at around 63-65% saving rate post-move, so almost just as good.