Originally Posted by JSC
I agree that transaction costs are high especially if you are both buying and selling. However there are benefits to buying IMHO:
- remember even if prices don't move you are repaying the mortgage each month, so £1k of mortage payments is better than £1k of rent (assuming you choose a repayment mortgage) as you are saving about £300 or so that you will get back when you sell
- you may decide to stay longer than 2 years, in which case you have more chance of a capital gain. In contrast if you wait to buy prices could have moved out of reach again (the experience of many 1st time buyers unfortunately)
- you may decide to rent if out after 2 years, it would be a good investment so long as you cover the interest and service charges as effectively you get all the upside in capital without much monthly commitments (although have to factor in rent voids, maintenance, etc)
Of course this is all based on the fact that prices do go up somewhat over 2 years, if not then
Raffles is right there is no real benefit of buying and in fact you lose some of the flexibility of renting. However even if prices go up only 3% pa (inflation) then on a £250k property you would gain £15k, enough to cover your costs. So on balance I think it is worthwhile considering as long as you are prepared to take a longer term view of 3-5 years
Buying a £300k property with a £250K mortgage would cost circa £11,000. The current best rate for a 2 year Fixed mortgage is 4.49%. The table below illustrates the payment schedule over 5 years and the effect on the reducing mortgage. This assumes interest is calculated on an annual rather than daily basis.
At the end of 2 years a £11,531 dent has been made in the mortgage. Assuming the interest rate remains at 4.49% for a further 3 years this would increase to £30,842.
At the end of two years the reduction in the mortgage will equate to the initial outlays. The calculation on whether it is worth it or not will come down to factors such what sort of return could you get on the £50,000 deposit plus difference between paying £1,405 per month for a mortgage and what the rental costs would be for a similar property and costs of running your own property against the costs of someone else paying this costs.
Code:
Loan £250000
Interest Rate 4.49%
Monthly Repayment £1,405.31
Term - Years 25
Year 1 Loan £250000
Interest £11225
Repayments £16863
Year 2 Bal Fwd £244361
Interest £10971
Repayments £16863
Year 3 Bal Fwd £238469
Interest £10707
Repayments £16863
Year 4 Bal Fwd £232312
Interest £10430
Repayments £16863
Year 5 Bal Fwd £225879
Interest £10142
Repayments £16863
Year 6 Bal Fwd £219158