Buy second home or extend

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maggieO

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Hi - we have a three bed semi with a current mortgage of 158000 at 3.9% for the next 21 years - the house is worth maybe 110,000. The area isn't great and we would like more space. We earn around 90000 a year - we have two kids so childcare is a factor. I recently inherited around 90000 and am weighing up my options.
1) stay where I am - spend 40000 on an extension to the kitchen, pay 20000 off the mortgage and retain 30000 towards a deposit in the future. This option is the least hassel, if I didn't move our mortgage would be reduced to 17 years... But what if the area disimproves greatly and we find it very hard to sell in the future
2) I have seen a nice 4 Bed in a good area for 180000 - it needs a good bit of mainly cosmetic work . The plan would be 50000 deposit on that (mortgage of 130000) 30000 to do up our house for rental and the new house - keep 10000 for emergencys - our new mortgage would be covered by rent on the old house. I get a bigger house in a good area but this plan hinges on us getting good tenants and no costly disasters occurring - we would try to sell as soon as we could break even on the old house. It's risky but I could get great tenants and you achieve very little without risking something.
3) do nothing - sit on my money and see how it goes

The house is small but it doesn't bother us too much - we find it hard to have people over for dinner due to space and I would like if I had more space so my family could visit more often but it's livable with just about. The area is bad but saying that nothing has happened to us personally although my neighbour has had windows smashed and has been threatened.

I am very unsure of what to do - I don't want to make a decision that puts us in major financial hardship but I don't want to miss my chance to move. We are both 40 so feel we need to make a decision one way or another in the next few years

I say mainly I as my husband is very safe and thinks we should stay but if I listened to him we would still be in the first dingy apartment we lived in!!!
 
Who is your mortgage with?

You should sell your home and apply for a mortgage to buy a new one . As you are currently in negative equity, and you will not be in negative equity after the move, they should be happy to lend you the money.

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maggieO said:
we would try to sell as soon as we could break even on the old house.
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Although a lot of people think like this, it actually makes no sense at all. At the moment you have a property worth €110k. After the move, you will have a property worth €180k. Think of it like adding an extension costing €70k to your new house. It is exactly the same result.

Brendan
 
Hi Brendan - thanks for your reply - i am very uncomfortable with the option of selling before buying a second property - there is very little available to buy that is suitable and in my price range in the area im looking at so I would be nervous I would sell and then not be able to find a suitable property with possible rising prices. If I spent my 90000 in this way 50 goes towards the negative equity (in my mind its buying fresh air for 50000 - I just cant stomach it at all) and we would require 36000 for 20% deposit which would leave 4000 - this is not taking solicitors costs/stamp duty etc... into consideration - any decent property at that price would require quite a bit of work.

I know the new rules dont include those in negative equity but I dont really see how that works. Our mortgage is with AIB - we are on standard variable rate at present but can fix for 3.9 for three years
 
Forget about money for a second. You've said you'd like more room and the area is not the best. Therefore why would you want to do your existing house up?

Secondly, do you want to be a landlord with all the hassle that can bring? Do you want to be called around at 4pm on a Saturday afternoon to fix a leak in your rented house?

Thirdly and on negative equity on your existing house, I know it is a blow but so what? Are you looking to buy a home that is best for you and your family or a financial asset?

Some practical advice
  • Are you going to have any issues with your current mortgage provider if you rent your house?
  • Do the maths on rents, what kind of rent would you receive, can you rent the house and who are the likely kind of tenants you will get in that area. What are the tax implications, are you letting furnished/unfurnished, what will you need to invest in your house to make it suitable for renting? You've given it some thought already but if you are going to rent the house, do a proper business plan for it.
  • get your existing house valued properly
  • Do you have any other financial assets you could realize to reduce mortgage costs

remember as well, as the value of your existing house rises (hopefully) so will the value of any house you want to buy elsewhere.
 
maggieO said:
Our mortgage is with AIB - we are on standard variable rate at present but can fix for 3.9 for three years
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You absolutely must not fix your mortgage rate. If you do, you will be stuck for three years and you will pay a penalty to get out.

Stay flexible.

Brendan
 
maggieO said:
If I spent my 90000 in this way 50 goes towards the negative equity (in my mind its buying fresh air for 50000 - I just cant stomach it at all)
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This is another example for my forthcoming book on "How to think clearly about money"

It's very hard to explain why this is just plain wrong.

Say, you have a house worth €110k and a mortgage of €160k and you live in Dublin.
You want to move to Cork and you can swap your €110k house for a house worth €110k in Cork. AIB doesn't mind and transfers the €160k mortgage to the property in Cork.

How would you feel? Could you stomach that?
 
Thanks Thedaddyman - I have a fair idea of rents in the area, I would need to invest a bit in the house so we could get good tenants - but no really we dont want to be landlords at all. Houses are not really selling at all where I live - very little is coming on to the market and only very good properties priced to sell are selling. We could be waiting years to sell ours and then be waiting again to find a decent place to buy.

If we stay put we will be in a much better financial position long term - my husband likes the extension idea and we would hope it would add value. There are a few dodgy houses in my estate (all rented out - landlords don't care to who) but there are a lot of lovely families too - our residents association isn't great, it's left up to a few people. The one house in particular which is the most problematic is apparently owned by people being investigated by CAB so if that gets sorted the street would improve a lot. I think there are probably problem houses in most estates - we just got one on our doorstep. So part of me thinks stop being a snob - suck it up and make the best of where we live but the other part of me thinks we are on a good wage, have a bit of capital behind us and we could probably do better - but its just a risk. I think if my husband was on board about moving it would be so much easier but he will take a bit of convincing.

Thanks Brendan - the Cork example is a good one - I just have to get my head around it a little more.
 
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