Q My family and I are planning to leave London and move north. Ultimately we want to own a house in the place we move to, but we are planning on renting for the first year whilst we get established.
Ten years ago we bought a two-bedroom flat in East Dulwich on part-rent part-buy scheme for key workers. At the time we could afford to buy a 25% share of the flat which was valued at £240,000. Later on, we purchased a further 50% when the value was £350,000, then bought the final 25% when the value was £415,000. Our current mortgage loan stands at about £300,000 and the flat is now valued at £500,000.
I am dismayed to realise that if we had taken an interest-only mortgage right at the start, not only would we have been able to afford to buy the whole place then, but we would actually own a greater percentage of the current value, despite our paying off some capital with our repayment mortgage.
I’m wondering if we should just switch to an interest-only mortgage now, save the difference towards a deposit on a new place, then rent it out when we leave to help us fund another property to live in. Does this seem crazy? I’ve always thought paying off the mortgage was essential, but now I feel like it has been a bit pointless.
Any advice gratefully received. RH
A I am totally flummoxed by your reasoning. First, if you could have afforded to buy your flat outright for £240,000, you would not have been eligible for the shared ownership scheme which enabled you to buy your original 25% share.
You would be right in thinking that if you had been able to buy the property outright at the outset it would have been cheaper than buying it in stages. Based on your figures, by “staircasing” – which you seem to have done by increasing your mortgage each time – you have paid £338,750 for 100% of the property rather than £240,000. You are also right that because the size of your mortgage has increased, you have less equity in the property than you would have had if you had taken out a mortgage of £240,000 in the first place (not that a 100% mortgage is a viable option).
But the reason that you have less equity is not because you had a repayment mortgage rather than an interest-only loan but because you have borrowed more than the £60,000 I assume you borrowed to buy your original 25% share in the flat. It is also wrong to say that an interest-only loan would have meant that you would have been able “to afford to buy the whole place”. Assuming an interest-rate of 5%, a £60,000 repayment mortgage would have cost you £350 a month but more like £1,000 with a £240,000 interest-only deal which doesn’t seem more affordable to me.
To answer your final question, yes it does seem crazy to switch to an interest-only mortgage now to save up for a deposit on a new place when you move to the north. Assuming that you will fund a new home by renting your current flat out after you leave also seems a bit bizarre as the bulk of any rent you get is likely to be needed to pay the mortgage interest. A more straightforward option would be to forget about letting the property from afar – or paying a letting agent to do it for you – and instead sell the flat and clear the £300,000 mortgage. That would leave you with about £200,000 to put towards your next permanent home.