Can pay off negative equity, but should I?

Unfortunately moving now is a necessity as 2 lively kids of 2 years old in a small two-bed with no garden isn't a runner anymore. In addition we both work from home so more space is essential and also with our level of salaries we feel we can justify a bigger house - the plan was never to be in the 2-bed forever (yes, our timing sucked as did many others')
Definitely prefer having a tax bill of 4/5k pa rather than pay out a whopping 100k now - again 100k less to go towards new property of which mortage will be a higher rate. I suppose we could consider this a 'negative equity mortgage ' of sorts as I'm trying to put taking the 100k hit on hold until we get our ultimate living arrangements sorted.
 
Howitzer said:
Would the home stack up as an investment property in it's own right. You're paying ECB +.5%. What rate would you be paying after changing to an investor rate? What will that cost you in interest on an annual basis? What rent can you reasonably achieve? In a blue sky scenario, assuming no taxes, rental voids or maintenance costs does the rent exceed the interest?

If not then it's not a good investment. In fact it's a terrible investment as you WOULD be losing money, just on a more gradual basis.
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This is the key issue. Remember the old accounting principal of sunken costs. It really doesn't matter how you got here. What matters now is where you go from here. If it doesn't stand up as an investment, get out.
 
Complainer said:
This is the key issue. Remember the old accounting principal of sunken costs. It really doesn't matter how you got here. What matters now is where you go from here. If it doesn't stand up as an investment, get out.
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Thats true but the OP is correct too in taking into account that the alternative to a "bad" investment might be an even worse option of taking an immediate 100k hit.
 
purely as an investment it is viable - rental yield is 4.5% and cost of financing is only 1.5%
 
TRipley said:
purely as an investment it is viable - rental yield is 4.5% and cost of financing is only 1.5%
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But that cost of financing is the current rate, the OP would probably have to move to some higher "investment" rate. Interest rates can only go north so that would have to be considered too.
 
Howitzer said:
More bit sized chunks?
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Ultimately yes. If I use that100k towards the new house now, I will need less of a mortgage, and as this new mortgage will be perhaps double the interest rate, it 'seems' preferable to use it in this way. My priority is to get my next house sorted, pay lump sums into the higher costing finance and get that down to a manageable level before I ultimately decide what to do with the old house. To be honest, I'm not looking at it as in investment as such, just trying to avoid taking the hit at this point.

I've tried crunching the numbers and given the lower interest rate it does seem to stack up on paper, but without knowing if prices go even lower I really can't say. If we stay put, any savings I keep building up will be negated by the price drop so there's no winning really.
 
the mortgage most likely will stay at the same rate - this is specific to whatever terms the OP has with their bank with obviously - yes of course interest rates can go up but then as an investment it should be reviewed again then, right now it's OK.
 
TRipley said:
the mortgage most likely will stay at the same rate - this is specific to whatever terms the OP has with their bank with obviously - yes of course interest rates can go up but then as an investment it should be reviewed again then, right now it's OK.
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It will stay at the same rate if you dont tell the bank or if they dont find out. Given that the bank probably has an insurable interest in the property then once the OP takes out nwe house insurance to cover it as an investment property then will the bank find out that way?

I think the OP has to assume that they will be moved to a higher investment rate.
 
no rental yield is the annual rental income (1300X12=15600) / property value (350k) = 4.5%
 
just because you tell the bank it's an investment property doesn't mean the bank will go to a investment rate. The yield is 4.5% not 3.5%.
 
TRipley said:
no rental yield is the annual rental income (1300X12=15600) / property value (350k) = 4.5%
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Urghh, the "value" of 350K makes no odds to the OP as they have an outsatnding mortgage of 440K. What year is this, 2006? A big sense of deja vu over these rental yield calcs.
 
TRipley said:
just because you tell the bank it's an investment property doesn't mean the bank will go to a investment rate. The yield is 4.5% not 3.5%.
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So the banks will just ignore the T&C's in the mortgage contracts? I doubt the bank will be doing people any favours like that.
 
Howitzer said:
And doubling your property exposure doesn't have the same effect?
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I know. It's nervewracking either way, because if sell the property, take the 100k hit now, get a new mortgage on another house of 600k and prices drop again, I've lost again. Only difference is I'm living in the property that's ultimately my home so by rights I shouldnt care but I'm paying double the interest rate on that 100k that was only costing me 1.5 or whatever the investor rate will be.
I don't know the answer and I'm not saying its the right option, but it's the one that feels right just now.
 
yes let's not get into a yield calculation debate - normally the property value is used but there are lots of other ways of expressing it.....

it's up to the T&Cs obviously but everyone seems to think here that a bank will automatically change to an investment rate - they won't
 
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