Buying a home - Borrow now or Later ?

[FranknMine]

Hi all,
My first post to this great forum...
After selling our previous home we're about to buy again. We have also recently received a lump sum from an inheritance. We have sufficient funds to buy our new home for cash. Within the next year or so we also intend to purchase an investment property for which we will need to borrow. I am wondering should we take out the mortgage now at the time of purchase or do this later when we need the funds for the investment property. While I can see that it does not make sense to borrow the money now since we do not really need it, I'm wondering are there any pitfalls or disadvantage in taking out a mortgage at a later date than at the time of purchase ?

 

[Brendan Burgess]

If you borrow now to buy your family home, you will get a rate of around 3.5% depending on the Loan to Value.

If you borrow when you buy the investment property, you will pay a rate of around 4.5% (Check this rate.)
However, you will get tax relief on 75% of the interest you pay, so the effective rate will be

Gross rate 4.5%
Tax relief 1.7% (50%@75% @4.5%)
Net rate: 2.8%

So based on these figures, it makes sense to borrow when you buy the investment property. You also save the interest paid from now until you buy the investment.

I have assumed a home mortgage rate of 3.5% and a buy to let rate of 4.5%. What happens if the gap between the rates is bigger?

Say the home rate falls to 3%

Gross rate: 5%
Tax relief:1.875 (50% x 75% @5%)
Net rate: 3.1%

Now it doesn't matter that much.

I have also assumed that you intend to buy a residential investment property. If you are buying a commercial investment property, the rate will be higher, but you will get full tax relief on the interest.

The bigger question is whether you should borrow at 2.8% to buy an investment property when you already own a residential property. It seems like a lot of risk and a lot of work for a very uncertain return.