Second property and rent or just one upgraded property?

[holaquetal]

hello all,

hoping you could help us decide what's the best way to go with our situation, using your experience and wisdom

Entry data:
- we own a property that is valuated at around 430-450k now (no mortgage)
- we need a bigger space (+1 bedroom), which is why are looking to upgrade the house/apartment
- we got mortgage approval for 520k
- we are looking into 3 options:

1. buying a second property and keeping the existing one. Getting the mortgage of 520k
2. selling the existing property and buying a bigger property in the same area (+1 bedroom). Getting the mortgage of 30-40k
3. selling the existing property and buying a bigger property in an area closer to work, school and creche (which are unlikely to change in the upcoming 15 years, read = quality of life, no commute) Getting the mortgage of 300-350k

Questions we need to answer (hopefully with your help!):
- If we keep the 1st property, we'd most likely rent it out. While the income would be about 2200-2500 per month, after tax it would be just 1100 - 1200 (would not cover the full cost of mortgage repayments for the second property). Renting a property is a hassle (what if someone does not pay, equipment breaks, additional tax adviser fees etc). Is this income worth the hassle?
- If we sell the 1st property, then, obviously, when we pay out the mortgage on the second property, we'd have less overall assets, than what we'd have with 2 mortgage-free properties. Is the assumption correct, or we are missing something?
- quality of life vs. the cost: is it totally insane to be "paying" for the quality of life (like less commute, bigger garden, more space)?

thanks in advance for all your insights.

 

[4Winds]

Hi. We recently had a very similar choice to make and went for option 3 (rightly or wrongly).

We didnt speak to a financial advisor first and i regret that. One thing I didn't consider properly before we made the move was our pensions. Are your pensions well funded already? Our werent and I didnt really grasp how much more of our montly income we should have been contributing until after we made the move. The larger mortgage repayments are making it difficult for us to contribute the full amount we should be to make up for lost time in building up our pensions and this worries me. We also haven't started a fund for our kids education yet ( they are still tiny tots but still we need to start at some point). I'm uncomfortable with our high mortgage since it's based on 2 incomes, so plan to agressively overpay until we get it down to <350. We'll then start to focus more on pensions and college fund. While this plan is ok in principle, we are definitely having to scrimp and save to make it happen i.e. no family holiday etc. I'm finding this harder than I thought I would :/ I'm also finding that debt is a bit of a noose in that it limits our ability to take as much parental leave as we would like because we have this huge monthly out going we must service.

On the commute issue, we definitely have more time with our kids...an hour a day I'd say, which is worth a lot and was the main driver of the decision for us. We both found commuting stressful and wasteful. We also walk more and now rarely use our car which I see as a long term health benefit for ourselves and kids. I find the environment where we are now (beside the sea) uplifting and positive, where we were before was a little bit grim. So while I am going to have to work hard to pay back this big mortgage, it's somewhere I do want to spend the years ahead.

I have been reflecting a lot on whether we made the right choice - I hope the above is helpful in some way.

 

[Brendan Burgess]

2) is clearly superior to 1). Ask yourself if you had a house with a mortgage of €40k, would you borrow another €430k to buy a residential property. The answer is (should be) clearly no. So this is the position you are in, so the first step is to rule out keeping a mortgage-free house as an investment.

Choosing between 2) and 3) is much more difficult.

4 Winds raises some very valid points. But...

- we got mortgage approval for 520k

Getting the mortgage of 300-350k

If you have approval for €520k , then I would imagine that a mortgage of €350k is very comfortable for you and you will be able to overpay it.

If you can comfortably afford a mortgage of €350k, then you should go for it. The quality of life will be much higher even if it just saves the commute.

You could fix for ten years at 3%. So the interest cost would be about €10k a year or €800 a month. So is the bigger house worth €800 a month? It sounds to me as if it would be. And that is assuming that house prices remain the same. If they increase over the longer term, it has the effect of reducing or even eliminating the cost.

And don't forget the tax advantages of owning your own family home. Any increase in value is not subject to Capital Gains Tax. (If you keep your current home, any increase in value would be subject to CGT.)

Brendan

 

[NoRegretsCoyote]

You are already a high earner paying lots of tax so I would only look at 1) if you really like paying lots of tax

It is only a good move if you have a tracker, which you don't.

Brendan's point about CGT is also relevant. Sell what you have and buy something that you really like - you can afford it.