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REAL ESTATE 60% LTV or 100% Cash

RichieG

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We are currently in a position where we have a property ( not our main residence ). It is rented to us by my Father In Law and he won't be moving out. He is 72 and there for the rest of his life. We will then sell.

The property value is now approx 160,000 and we have an outstanding mortgage of 96,000. So we have 40% equity in the house as a buffer. We currently don't have enough cash to pay off the remainder of the mortgage.

The rent covers the mortgage and maintenance is covered by him.

So the options are: ( forgetbhe is family!)

- Do we sell and pocket 64,000 minus taxes and have no debt at all
- Save 96,000 asap and pay off the mortgage
- Continue as we are. Paying the mortage with the rent and save the remainder owed on the mortgage so we have in theory no debt ( just an asset with cash to pay if we need to )

We currently rent and have an absolute steal. The mortgage on this property would cost 50% more so we are happy with this deal

Look forward to hearing the fastlane thoughts on here.
 

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biophase

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I don't understand.

How can one option be to sell? You going to sell and have the new owner kick your 72yo father in law out?

You didn't mention what rate your mortgage is at.
 

Jaden Jones

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Im well versed in real estate, but i will definitely need some clarity on your question. What are you trying to do and who lives where?
 
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RichieG

RichieG

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I don't understand.

How can one option be to sell? You going to sell and have the new owner kick your 72yo father in law out?

You didn't mention what rate your mortgage is at.
Ok. The father in law does have options so please lets not worry about that. It's more to do with the financial side/fast lane/security/best option

The rate is currently 2 years at 1.94%
 
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RichieG

RichieG

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Im well versed in real estate, but i will definitely need some clarity on your question. What are you trying to do and who lives where?
Ok. We live in a rented house which we are more than happy with. Our old house is still ours but is rented out and covers the mortgage.

At the back of my mind I don't want any major debt around our necks but as we have 40% equity and only a 60% loan is this enough breathing space. Especially if we get the cash on one side to cover the mortgage. When that is the case we are wondering if we are best too stay liquid with the cash or pay off the mortgage. ( currently 2years @ 1.94 % and 18 years left )
 

biophase

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Ok. The father in law does have options so please lets not worry about that. It's more to do with the financial side/fast lane/security/best option

The rate is currently 2 years at 1.94%
What is it after 2 years?
 
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RichieG

RichieG

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What is it after 2 years?
Not sure how it works in the US but in the UK all interests are driven from the Bank of England Base Rate which is currently set at 0.75%. Lending companies then work off this. Consumers then choose to have 1,2,3,5 or 10 year mortgages with a set rate. The longer the period the more expensive the rate as you have security of that rate but not much flexibility. So after 2 years we will have to see where the base rate is and what is being offered.

The main point I am trying to get to is:

- are we best to sell so we have zero debt? or is this type of debt ok? what if the market crashes ( we have 40% equity ( is that enough? ) - what if interest rates go higher? - or do we save in the fastlane and pay off asap
 

biophase

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Not sure how it works in the US but in the UK all interests are driven from the Bank of England Base Rate which is currently set at 0.75%. Lending companies then work off this. Consumers then choose to have 1,2,3,5 or 10 year mortgages with a set rate. The longer the period the more expensive the rate as you have security of that rate but not much flexibility. So after 2 years we will have to see where the base rate is and what is being offered.

The main point I am trying to get to is:

- are we best to sell so we have zero debt? or is this type of debt ok? what if the market crashes ( we have 40% equity ( is that enough? ) - what if interest rates go higher? - or do we save in the fastlane and pay off asap
Here's the problem, you can't get an answer that question without knowing how your rate adjusts.

If you rate goes from 1.9% to 8% in year 3, then the answer is obvious. If you rate goes from 1.9% to 0.9% in year 3, then the answer is obvious also. But what if your rate goes from 1.9% to 2.9% in year 3?

Can you see why that matters so much now?

Why are you acting like you don't know what the rate will adjust to, like it's a random number? You have an idea, or a range. You need to figure this out.

Find out:
1) What percentage is added to the base rate to calculate your new rate
2) How often it adjusts, 6 months, 1 years?
3) If you have a cap on how far it can move on each adjustment
4) If you have a maximum and minimum cap on the rate
 

mikey3times

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There are entirely too many variables for anyone here to give you an answer. We can help you consider different options, but asking what you should do “to be fastlane” isn’t how it works.

My response to every question above is, “it depends on what makes you comfortable.”

Please read this:

GOLD! - Sorry, But the Forum Can't Make Your Life Decisions For You!!
 
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RichieG

RichieG

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Here's the problem, you can't get an answer that question without knowing how your rate adjusts.

If you rate goes from 1.9% to 8% in year 3, then the answer is obvious. If you rate goes from 1.9% to 0.9% in year 3, then the answer is obvious also. But what if your rate goes from 1.9% to 2.9% in year 3?

Can you see why that matters so much now?

Why are you acting like you don't know what the rate will adjust to, like it's a random number? You have an idea, or a range. You need to figure this out.

Find out:
1) What percentage is added to the base rate to calculate your new rate
2) How often it adjusts, 6 months, 1 years?
3) If you have a cap on how far it can move on each adjustment
4) If you have a maximum and minimum cap on the rate
I understand how interest rates work - that isn't my point.

The rate cannot be predicted. At the moment the rate is low as the UK government are trying to encourage spending. If this gets out of hand and we overspend the rate could go to anything. In the 1980's the rates went to 15% without warning and a lot of people lost there houses. So no - it can't be predicted.

The point I am trying to make is it it worth having a mortgage or save up cash and pay outright for the house.

or is a mortggage with 40% equity a suitable long term investment
 
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RichieG

RichieG

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There are entirely too many variables for anyone here to give you an answer. We can help you consider different options, but asking what you should do “to be fastlane” isn’t how it works.

My response to every question above is, “it depends on what makes you comfortable.”

Please read this:

GOLD! - Sorry, But the Forum Can't Make Your Life Decisions For You!!
Thanks for this. I'm not after decisions from here - i'm wondering if people see mortgages as good things. Or do you keep banking cash and pay outright. I may have complicated things but just wanting to paint the details of our situation.
 

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Jaden Jones

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As stated above, there are many variables, and its all about comfort level. So ill tell you what I would do, and you can do what you want with it. Based on history, im going to assume that the interest rate will probably go up, but not a huge amount. Im also going to disregard the "what if the market crashes" comment because you could put so many what ifs. At such a low mortgage rate, I would keep the renters in there, this is extra income. I would also go as far as to refinance the house. Put it up to 80LTV and use that money to invest, you should easily be able to get 5% from investments, so unless the mortgage rate is close to this, your making more money. Unless you have dire need for that lump sump, Selling should be your last choice.
 

biophase

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I understand how interest rates work - that isn't my point.

The rate cannot be predicted. At the moment the rate is low as the UK government are trying to encourage spending. If this gets out of hand and we overspend the rate could go to anything. In the 1980's the rates went to 15% without warning and a lot of people lost there houses. So no - it can't be predicted.

The point I am trying to make is it it worth having a mortgage or save up cash and pay outright for the house.

or is a mortggage with 40% equity a suitable long term investment
Maybe you know how interests rates work. But you don't know how LOANS work.

If you notice, I didn't ask a single question about the actual rate. I asked you about your LOAN. If you don't know this stuff, you aren't financially literate and don't seem to want to learn. Everything I asked you for is in your loan documents.

Find out:
1) What percentage is added to the base rate to calculate your new rate
2) How often it adjusts, 6 months, 1 years?
3) If you have a cap on how far it can move on each adjustment
4) If you have a maximum and minimum cap on the rate

The reason you are asking your question is because you don't understand that ramifications of either option you are putting out there.
 
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RichieG

RichieG

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Sep 27, 2018
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Maybe you know how interests rates work. But you don't know how LOANS work.

If you notice, I didn't ask a single question about the actual rate. I asked you about your LOAN. If you don't know this stuff, you aren't financially literate and don't seem to want to learn. Everything I asked you for is in your loan documents.

Find out:
1) What percentage is added to the base rate to calculate your new rate
2) How often it adjusts, 6 months, 1 years?
3) If you have a cap on how far it can move on each adjustment
4) If you have a maximum and minimum cap on the rate

The reason you are asking your question is because you don't understand that ramifications of either option you are putting out there.
I'm not sure if tthere is a difference between the UK and US mortgages? But the questions you are asking ( which i understand ) don't apply in the UK.

1+2+3+4) The base rate of the bank of england is currently 0.75% but they can move this up or down at any time without warning. Diffeerent lenders add different percentages based on LTV, credit history and other factors. ( please visit here United Kingdom Interest Rate | 1971-2018 | Data | Chart | Calendar and click max to see how interest rates fluctuate )

3) In the UK yoou tie yourself in for X number of years. So we are on a 2 year deal at 1.94% In 2 years if the BofE move the base rate to 2% via gradual increments we will be at approx 3.5% mortgage. If things go badly and they want to slow spending it could be 5% in which case the products available will be pitched at approx 7%. We don;t have increments. The fixed rate is 1.94% but the lenders variable rate is 4.99%

So when you talk about max and min cap it doesn't work like that over here. So maybe look into that before acting on a higher ground.

I was onlly trying to get people's view points on buying a house by saving and having on a mortgage with a 40% equity.

It's more to do with risk and tolerance rather than the interest rates and mortgages ( loans ) which I do understand
 

George Appiah

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@RichieG,

From the very beginning, you said:

We are currently in a position where we have a property ( not our main residence ). It is rented to us by my Father In Law and he won't be moving out. He is 72 and there for the rest of his life. We will then sell.
He won't be moving out... for the rest of his life... We will then sell.

So why are you even discussing a sell now?
 
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RichieG

RichieG

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Sep 27, 2018
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@RichieG,

From the very beginning, you said:



He won't be moving out... for the rest of his life... We will then sell.

So why are you even discussing a sell now?
He would have other options so we wouldn't be sending him to the sttreets.

This is why I wanted to gather opinions - I want to build a moat around our finances so we are bullet proof in any scenario (as much as possible )

So if we sell we have zero debt anywhere. We can then save and buy the right property for cash.

or is 40$ equity enough of a cushion
 

mikey3times

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Would you be able to sleep well at night with a 40% cushion? 20%? 0%?

Would you prefer to have no debt?
 

DustinH

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The main point I am trying to get to is:
- are we best to sell so we have zero debt? or is this type of debt ok? what if the market crashes ( we have 40% equity ( is that enough? ) - what if interest rates go higher? - or do we save in the fastlane and pay off asap
I will answer these if this is what you really want to know.

This is type of debt is ok because someone else is paying it off.
It shouldn't matter if the market crashes.
If interest rates go higher then raise the rent or refinance.
Why would you pay want to pay it off? Debt is not taxed but the income from the sale probably would be.
 

biophase

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I'm not sure if tthere is a difference between the UK and US mortgages? But the questions you are asking ( which i understand ) don't apply in the UK.

1+2+3+4) The base rate of the bank of england is currently 0.75% but they can move this up or down at any time without warning. Different lenders add different percentages based on LTV, credit history and other factors. ( please visit here United Kingdom Interest Rate | 1971-2018 | Data | Chart | Calendar and click max to see how interest rates fluctuate )

3) In the UK you tie yourself in for X number of years. So we are on a 2 year deal at 1.94% In 2 years if the BofE move the base rate to 2% via gradual increments we will be at approx 3.5% mortgage. If things go badly and they want to slow spending it could be 5% in which case the products available will be pitched at approx 7%. We don't have increments. The fixed rate is 1.94% but the lenders variable rate is 4.99%

So when you talk about max and min cap it doesn't work like that over here. So maybe look into that before acting on a higher ground.
You have an standard variable rate mortgage which was fixed for 2 years. Same types of loan are available here in the USA, called adjustable rate mortgages, but we have limiting parameters.

So let me ask you some questions.

Once you past the 2 year mark, how often does your interest rate change? If BoE changes every month, is your payment different every month?

If BoE rate goes from .75% to 10% on January 2023, does your mortgage rate go up the month after in February 2023? If it does, does it go up by almost 9%, or does it go up by less, say 5%.

If the BoE rate then goes to 20%, does your mortgage rate go up to 20%, or is their a max rate like 15%?

I find it hard to believe that there are no restrictions on your loan as this would be a dangerous loan to have. There have to be limits on how much it moves.

I was only trying to get people's view points on buying a house by saving and having on a mortgage with a 40% equity.

It's more to do with risk and tolerance rather than the interest rates and mortgages ( loans ) which I do understand
Do you understand that your risk tolerance is directly tied to how much your loan may adjust? That is why I'm probing at your loan. If you had a 10yr fixed rate mortgage then you could easily budget on paying off your loan vs. saving. But the fact is that you don't know what your payment will be in 2 years. So how can we say which is better?

You are asking if you should pay down your mortgage or just keep making payments. The question you should be asking is what are you going to do with the extra money IF you just keep making mortgage payments. That's where you will find your answer.
 
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RichieG

RichieG

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Sep 27, 2018
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You have an standard variable rate mortgage which was fixed for 2 years. Same types of loan are available here in the USA, called adjustable rate mortgages, but we have limiting parameters.

So let me ask you some questions.

Once you past the 2 year mark, how often does your interest rate change? If BoE changes every month, is your payment different every month?

If BoE rate goes from .75% to 10% on January 2023, does your mortgage rate go up the month after in February 2023? If it does, does it go up by almost 9%, or does it go up by less, say 5%.

If the BoE rate then goes to 20%, does your mortgage rate go up to 20%, or is their a max rate like 15%?

I find it hard to believe that there are no restrictions on your loan as this would be a dangerous loan to have. There have to be limits on how much it moves.



Do you understand that your risk tolerance is directly tied to how much your loan may adjust? That is why I'm probing at your loan. If you had a 10yr fixed rate mortgage then you could easily budget on paying off your loan vs. saving. But the fact is that you don't know what your payment will be in 2 years. So how can we say which is better?

You are asking if you should pay down your mortgage or just keep making payments. The question you should be asking is what are you going to do with the extra money IF you just keep making mortgage payments. That's where you will find your answer.

Hi Biophase

I looked at what we both saying and you definitely seem like a knowledgable person so I had a very quick look intoo UK & US mortgages. Not really looked into tthe detail yet but iit seems you guys are locked in at a steadier rate for a long time and may well have increments eiither side to help manage future expenditure.

We are definitely set up to be more volatile. Would be interested too hear yoou thoughts on paying for a house v cash or with a mortgage in the UK with this extra potentiial volatility

So as of today we pay 1.94%. The Standard Variable Rate is 4.99%. So if our deal finished in 2 years time we would switch to 4.99% unless we lock in another deal. However, in those 2 years depending on what th B of E do that SVR could be anything........the more I think of thisn the crazier it seems and maybe why I want too sell!

Mortgages and monetary policy in the US and UK - Bond Vigilantes
 

Davejemmolly

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As like most things, it seems like this question is a directly tied to your own opinion regarding of debt vs risk, but its also a question that can only be answered with an actual understanding of how the housing market in the uk works. ie - in australia we have negative gearing, however I'm pretty sure you guys dont.

What are chances property prices will increase over the next 2 years, and if so, by how much?
If they move 5%, do you have a plan to do something with the $64k that will return greater than 5%?
Is the property costing you a lot to hold?

Unless you have a better plan for the money, and the current rent covers the mortgage, I'd hold it, that said, that comes with massive caveat of having no idea about your current market conditions...

In summary, you have all the information (far more than us) you could need to make the decision, so you just need to make one!
 

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biophase

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Hi Biophase
So as of today we pay 1.94%. The Standard Variable Rate is 4.99%. So if our deal finished in 2 years time we would switch to 4.99% unless we lock in another deal. However, in those 2 years depending on what th B of E do that SVR could be anything........the more I think of this the crazier it seems and maybe why I want too sell!
So you have to look at your risk as if my payment is $1000 today, what happens if it goes up to $1400 in 2 years. If you can easily afford this increase, then that's good.

Whenever you ask a question about pay off my mortgage or keep a loan, it comes down to the time value of your money and its potential in your hands.

If I had $100,000 earning 1% in the bank and a $100,000 loan at 1.9%, then I'm losing 0.9% of $100,000 each year that I keep paying the loan right?

In a vacuum this is an easy answer, you pay the mortgage off and save 0.9% x $100,000.

However, you have to take into account a couple things.
1) Do you need the $100,000 to be liquid for emergencies? Once you pay the mortgage off, you can't get back the $100,000.
2) Can I do something else with the $100,000. If I could invest it and get 5% return, then paying the mortgage off would cost be 3.1% x $100,000 a year.
3) What makes me relax more? Does having $100,000 in the bank as a safety net knowing that I'm losing 0.9% a year feel better than, owning a home free and clear but having no money in the bank for emergencies?

The answer is probably somewhere in the middle of #3's extremes.

The one question you haven't talked about is can you pay off the mortgage today with cash? Or are you talking about making larger payments to pay the mortgage off easier?

And in case you are wondering, I have several pieces of real estate and all are paid off. I just paid off my last two mortgages last week. But, you can't just follow what I did, because I'm in a totally different place than you.
 

DustinH

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So as of today we pay 1.94%. The Standard Variable Rate is 4.99%. So if our deal finished in 2 years time we would switch to 4.99% unless we lock in another deal. However, in those 2 years depending on what the B of E do that SVR could be anything........the more I think of thisn the crazier it seems and maybe why I want too sell!
Are there no options to refinance the mortgage into a fixed rate loan?
 

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