Sell vs Rent Decisions

[MajorTom]

Hi

Have any posters recently gone through the process of leaving their existing home to a new property where they were in negative equity and had to consider whether to sell the existing property (trade up negative equity mortgage) or rent it out instead (and then obtained a brand new mortgage) ?

I'm currently in a situation where my existing home is in negative equity, but I have a site where I would like to build a new home for more space for a growing family etc. What considerations should I be taking into account when deciding whether to cut my losses on the existing property or hold onto it and take rental income ? I was recently in to see BOI and they said they would give approval for a neg equity movers mortgage, current tracker rate + 1% for 5 years or a new mortgage and let me keep existing home.

High level figures are as follows :

Current Mortgage O/s = 200,000 and 27 yrs remaining
Rate = ECB +1.1% so 1.15%
House Value = Approx 150,000
Neg Equity = 50,000

Combined income of myself and spouse = 100,000 pa (both PAYE workers)
Savings = 50,000

We're looking to borrow 200,000 to build the new house so I guess at a basic level, the scenarios are :

Option 1

Sell house, use savings to write off a big portion of the neg equity and then roll
mortgage onto new build at a rate of 2.15% for first 5 years. This leaves less overall exposure and also removes the headache of managing a rental property.

Option 2

Keep existing house as an investment as tracker rate is so low. Monthly payment is currently 740 per month and rental income would be expected at 700 per month currently. Put savings against new build and have a reduced mortgage although at a higher rate. Based on LTV, we might get somewhere in the region of 3.5% at the moment. This option leaves us with an increased overall mortage exposure but allows for rental income to wind down the neg equity over a period of a few years and also the potential of house price growth/investment property.

Has anyone gone through anything similar recently ? Just interested in your views and final decision if you have. I've been mulling over this for a while.

Thanks

 

[Sarenco]

Hi MajorTom

I can see why you have been mulling over this decision for a while - your two options look relatively finely balanced.

If I was in your position, and I had to make the decision today, I would personally take option 1 and port the tracker.

The spread between the projected net yield on your current home and the rate at which the purchase of that property is being financed would fall some way short of what I would consider an acceptable level of compensation for the risks involved. Also, you really need to have a decent cash reserve or buffer in place before entering the property rental business and there appears to be significant other demands on your savings at the moment.

Having said that, I think I would try and delay the decision for a while if at all possible. The low rate on your tracker presumably puts you in a good position to add to your cash savings and hopefully you will continue to reduce your negative equity position as you continue to make principal repayments on your mortgage.

Are you currently receiving mortgage interest relief? You may well have two years worth of relief left if you hold off making the move so, if relevant, I would include that in your deliberations.

 

[sparkles]

We're in the process of trying to get a NE Tracker Portability mortgage. We've sale agreed our house but lender has warned us that we cannot close on the sale until we have a new house to buy. We were close to sale agreeing a house recently and they pulled the rug at the last minute. We've approx €48k NE and owe €387k on our current home. Our 10% deposit would clear our NE but then we'd have to have 20% deposit for the new house. Have a another meeting with them next week to clarify the situation.

 

[MajorTom]

Hi MajorTom

I can see why you have been mulling over this decision for a while - your two options look relatively finely balanced.

If I was in your position, and I had to make the decision today, I would personally take option 1 and port the tracker.

The spread between the projected net yield on your current home and the rate at which the purchase of that property is being financed would fall some way short of what I would consider an acceptable level of compensation for the risks involved. Also, you really need to have a decent cash reserve or buffer in place before entering the property rental business and there appears to be significant other demands on your savings at the moment.

Having said that, I think I would try and delay the decision for a while if at all possible. The low rate on your tracker presumably puts you in a good position to add to your cash savings and hopefully you will continue to reduce your negative equity position as you continue to make principal repayments on your mortgage.

Are you currently receiving mortgage interest relief? You may well have two years worth of relief left if you hold off making the move so, if relevant, I would include that in your deliberations.

Hi Sarenco, thanks for your reply back last November. Indeed, we have put a delay on this and now plan to build next year 2017. I've met with BOI who have given approval in principle to a negative equity mover mortgage and also EBS who have given approval in principle to a new mortgage to build.

Our budget for the new build is 250k and we will be putting in 50k cash so require new borrowings of 200k.

I'm still very unsure about whether to rent or sell existing house. Rents are making 750 per month now in our estate and mortgage interest rate is 1.1%. So to keep it simple, it will be going with the movers mortgage and have an overall mortgage of 250k (200k at 2.1% & 50k at SVR) or have two mortgages for 200k (one rental at 1.1% and new build at 3.5%)

Would you be still of the opinion to bite the bullet and sell existing house ? Will be difficult to walk away after 10 years paying mortgage with nothing to show for it !

Thanks

 

[Sarenco]

Hi Major Tom

The increased potential monthly rent certainly moves the dial further in favour of keeping your current house as a rental. If I had to make your decision today, I would probably still sell and port the mortgage but it's a close call either way.

I would definitely keep this under review - new lending rates could certainly fall further over the coming months, which would obviously reduce the relative value of BOI's tracker mover product.