I probably need a UK-based Mustachian!

[Freckles080808]

I pay into a pension and a stocks and shares ISA and have a mortgage. The mortgage is £780 a month at 2.04% interest. My soon-to-be husband and I normally over-pay the mortgage by 100% but we've stopped while we pay for the wedding (not very mustachian, I know, but it is what it is). We live in a 1-bed flat in London (zone 3) and I earn £65k which isn't loads for London but we try to live frugally. He earns about half that.

The Q is: should we buy a bigger house? There is plenty of equity in the flat (I had a good deposit and have been in it for 4 years now - not overpaying the mortgage all of that time, though).  An American mustachian I'm almost certain would say no. A UK mustachian... I'm not so sure. We're not planning to have a family so we don't need more space, it's simply an investment decision.

If anyone has any thoughts I'd be grateful. I'm beginner mustachian! Thanks!

[marty998]

Do you get any tax benefits from mortgage interest deductions?

In the US you do, in Australia you don't (for a main residence). What's the rule in the UK?

Can you lock in a low rate for a long time, or is that 2.04% fixed for the life of the loan?

[Freckles080808]

No tax benefits (I wish!) and the rate is locked in for the next 2 years after which time I'll remortgage and will hopefully get a rate at least as good or better.

[Rewdoalb]

TL:DR. But...There is now a forum section for meeting single mustachians




/s  had to

[Linea_Norway]

If you don't need more space and you don't get a tax reduction, it makes more sense to stay in your current flat. It will likely go just as much up in price as a bigger house would do. And if the current house prices turn out to be a bubble that will soon burst, you'd better have stayed in your small flat.
Money that is invested in a house cannot be invested into a fund and will not generate money, unless you manage to rent out some of the extra space. I found that out just after we bought a very big house. I regret it. The big house is also a lot more cleaning work.

[jade]

If you don't need more space and you don't get a tax reduction, it makes more sense to stay in your current flat. It will likely go just as much up in price as a bigger house would do. And if the current house prices turn out to be a bubble that will soon burst, you'd better have stayed in your small flat.
Money that is invested in a house cannot be invested into a fund and will not generate money, unless you manage to rent out some of the extra space. I found that out just after we bought a very big house. I regret it. The big house is also a lot more cleaning work.

Hiya Freckles080808

I'm UK based and agree with the quote above based on what you've told us.
But I guess it comes down your risk tolerance, preference about how to invest, if you'd enjoy a larger home more (and if this would be worth it for you), when you'd need to release equity on the larger house etc.
As Linda_Norway said, a larger house won't generate more income so you'll only access any extra equity on selling it.
might be worth doing a case study to give and get more info and your long term goals.
Congrats on the wedding too :)

[MostlyBearded]

Hi Freckles,

I wouldn't do it personally. London property prices seriously scare me, as does having a huge amount of money and debt tied to a single asset!

Good luck whatever you choose.

[Freckles080808]

Thanks everyone! Much appreciated.

Really interesting to me that it's (so far) a unanimous "no". I've always assumed that everyone in the UK is property-obsessed and that most people are reliant on appreciating property for being able to afford retirement - hence it makes sense to have as big a property as you can afford and release the equity by downsizing on retirement. But I guess it's not everyone!

The follow-up question, I suppose, is: What do you do with the spare money, then? If the tax-free bit of your ISA is maxed out, what are your options? Pay more into your company pension? I have some cash in a peer-to-peer lending scheme but I'm not super keen on expanding that. Sorry if the answer is obvious - all the UK personal finance websites seem to talk about is pensions and ISAs. I assume you can pay more into your ISA than the £15k-odd but doesn't that get messy for tax reasons?

(And yes, London property prices are insane).

[jade]

Thanks everyone! Much appreciated.

Really interesting to me that it's (so far) a unanimous "no". I've always assumed that everyone in the UK is property-obsessed and that most people are reliant on appreciating property for being able to afford retirement - hence it makes sense to have as big a property as you can afford and release the equity by downsizing on retirement. But I guess it's not everyone!

The follow-up question, I suppose, is: What do you do with the spare money, then? If the tax-free bit of your ISA is maxed out, what are your options? Pay more into your company pension? I have some cash in a peer-to-peer lending scheme but I'm not super keen on expanding that. Sorry if the answer is obvious - all the UK personal finance websites seem to talk about is pensions and ISAs. I assume you can pay more into your ISA than the £15k-odd but doesn't that get messy for tax reasons?

(And yes, London property prices are insane).

Hiya Freckles,

I guess us UK peeps here have been MMM'd! :)
But now you've said about having maxed out (both?) your ISAs (the increase to 20k each per year from 5 Apr will help a little too)  I can understand more about your thinking of buying a larger property.
There may be more options than I'm aware of that others might suggest but I guess with larger property vs stocks and shares outside an ISA you'd need to weigh up the pros and cons of both for your needs. Though you wouldn't get the tax advantages outside the ISA, how does that compare to maintenance costs, stamp duty etc. of the bigger property?
Also, the pension, if that's more favourable could be another avenue. I have a little in peer to peer too but like you not mad on it and will withdraw the money after a year.
I think it's also important to think about how you like to do things and what suits your lifestyle as well as financial returns. Myself and my hubby decided against buy to let as we knew we'd worry about tenants, costs etc. whereas stocks and shares was more "set and forget" and suits our personalities.

[Freckles080808]

Hiya Freckles,

I guess us UK peeps here have been MMM'd! :)
But now you've said about having maxed out (both?) your ISAs (the increase to 20k each per year from 5 Apr will help a little too)  I can understand more about your thinking of buying a larger property.
There may be more options than I'm aware of that others might suggest but I guess with larger property vs stocks and shares outside an ISA you'd need to weigh up the pros and cons of both for your needs. Though you wouldn't get the tax advantages outside the ISA, how does that compare to maintenance costs, stamp duty etc. of the bigger property?
Also, the pension, if that's more favourable could be another avenue. I have a little in peer to peer too but like you not mad on it and will withdraw the money after a year.
I think it's also important to think about how you like to do things and what suits your lifestyle as well as financial returns. Myself and my hubby decided against buy to let as we knew we'd worry about tenants, costs etc. whereas stocks and shares was more "set and forget" and suits our personalities.

You can have both a cash ISA and a stocks and shares one?! See, I did not know that! I've avoided cash ISAs because the rates have been so bad for so long (unless you put your money in the Bank of Cyprus, or something). And I also didn't know the limit is going up to £20k. That's quite a big jump. I'm like you re: buy to let. Not sure I want to have to think about something that much.

I guess it's time to start (another!) spreadsheet! Thanks Jade :-)

[jade]

Hiya Freckles,

I guess us UK peeps here have been MMM'd! :)
But now you've said about having maxed out (both?) your ISAs (the increase to 20k each per year from 5 Apr will help a little too)  I can understand more about your thinking of buying a larger property.
There may be more options than I'm aware of that others might suggest but I guess with larger property vs stocks and shares outside an ISA you'd need to weigh up the pros and cons of both for your needs. Though you wouldn't get the tax advantages outside the ISA, how does that compare to maintenance costs, stamp duty etc. of the bigger property?
Also, the pension, if that's more favourable could be another avenue. I have a little in peer to peer too but like you not mad on it and will withdraw the money after a year.
I think it's also important to think about how you like to do things and what suits your lifestyle as well as financial returns. Myself and my hubby decided against buy to let as we knew we'd worry about tenants, costs etc. whereas stocks and shares was more "set and forget" and suits our personalities.

You can have both a cash ISA and a stocks and shares one?! See, I did not know that! I've avoided cash ISAs because the rates have been so bad for so long (unless you put your money in the Bank of Cyprus, or something). And I also didn't know the limit is going up to £20k. That's quite a big jump. I'm like you re: buy to let. Not sure I want to have to think about something that much.

I guess it's time to start (another!) spreadsheet! Thanks Jade :-)

Hi again

You can have both ISAs but the limit still applies to both (i.e. Up to 15k+ this year and 20k from 5 April across both) so as you say the stocks and shares one is more attractive in terms of growth.

Sorry, what I meant was, are you and your fiancé both maxing each of your ISAs?

Yeh, the increase to 20k per year each is a bonus!

All the best :)

[dreams_and_discoveries]

As you are a higher rate taxpayer, and want to save for retirement (am I interpreting that correctly?) - I'd fill up both you & partner's ISA's £40k from next year, then your pension - you can pay up to £40k in. Any extra could go into a taxable account, in low cost trackers.

Or you could go for a bigger/better area property, increasing your monthly costs  - the main benefit in property as a main residence is the capital gains tax exemption when you sell. From your salaries/current mortgage it looks like you could borrow another £150k-£230k ish, but this would tie you both to your jobs, as you'd struggle to cover a larger mortgage on one income, especially your partners.

So I suppose the question you are thinking of is, would the property appreciate more than the stock market? London property has outperformed the FTSE lately, but with brexit etc will it continue to do so?

I'd tend towards not buying, unless you get a fixer upper at a great price.

[former player]

As others have said, between you and your fiancé from April 2017 you can put £40k a year into a stocks and shares ISA. 

You can also get £5k a year in tax-free dividends from stocks and shares held outside an ISA (this reduces to £2k from April 2018), which means that you would be paying capital gains tax only - and that only kicks in if you sell, not if you hold.

I agree with others about property investing.  I think a lot of that is a hold-over from the days before the government sell-off of the utilities and the "big bang" in the City, when it was a lot more difficult and expensive for individuals to invest in shares and relatively few people did it, whereas there has been a thriving property market since the 1960s.  I also suspect that things are swinging back again - that it will become relatively more common for people to hold shares through ISAs at a time when property ownership is becoming less universal.

[MostlyBearded]

Ok, I'm going to sort of echo the points already made. Didn't realise you were already maxing the ISA, great work!

The balance of how much to put into your pension vs ISA depends on lots of factors, when your FIRE date is planned for etc. and that's a whole other can of worms.

Buy to let is an option, but I suppose it depends on your tolerance for landlording, it's not for everyone and the recent changes in taxation are not favourable. I've never done it, but it sounds like a headache! If you're thinking of upsizing and you don't mind having a lodger the increase in the rent a room scheme allowance is up to something around £7,500 a year which is pretty nice and could mitigate some of the risks of buying in (what seems to me like) an expensive market.

I have a friend who bought a 4 bed townhouse in Peckham recently with his fiancée for c. 600k and they rent out a whole floor to another couple for 80% of the monthly mortgage cost!

Sounds like you are miles ahead of me if you are already maxing your ISA every year. I'm a bit newer to the game but trying to play catch up!

[jade]

+1 to the other suggestions.
Another thought I just had for you was that you could also continue over paying your mortgage too once the wedding is paid for, especially if you've maxed all the tax advantaged accounts. Going for fully mortgage free in your current flat be another way to go and open up more options and increase financial security (though at around 2% interest rate some would say invest instead).

[AnswerIs42]

If you earn £65k, then you're well into the nasty 40% higher rate tax band. Pension has to be the way to go - every £1000 you put into a pension will only cost you £600 (in practice, this works like: pay in £800 net, get £200 added to the pension by HMRC, and get a £200 refund when you do your tax return).

It's hard to beat that. You can invest in the same things (like index funds) that you can in a S&S ISA.

Downsides are you won't be able to access it ''til 55+, and you'll have to pay tax on 3/4 of it when you draw it down. Still very much worth doing, though.

[Freckles080808]

I'm a bit newer to the game but trying to play catch up!

Tell me about it! I'm 34, this will be the first year I've maxed out my ISA. I feel like everyone here is 25, earning well over $100k a year and has been saving the way they should have their whole lives. I didn't realise that personal finance was really a thing until I found MMM a couple of years ago. Yes, I used to buy lunch on a regular basis ;-).

Thanks for all the advice, everyone. I feel like I have a lot of options now and it's just a case of prioritisation and diversification.

:-)

[MostlyBearded]

I'm a bit newer to the game but trying to play catch up!

Tell me about it! I'm 34, this will be the first year I've maxed out my ISA.

Yes, I'm 31 and have fairly recently cleared all my non-mortgage debt and hoping to be maxing an ISA by 34! Even if we're behind the curve for MMM forum members, we are still way, way ahead of everyone else. I'm aiming to be FI by 45 and semi RE soon after!

Keep us updated on what you decide to do!