I want to trade up but keep my first home. Can I get around the 20% rule?

W

What the

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Hi,

We are looking to buy a new home and the banks insist on the 20% for non first time buyers rule.

Age 45, Married with 3 kids.

I currently live in a house Value €350k Mortgage €55k (Our only borrowings) and we want to move house while at the same time keeping our current home. The monthly payment is €450 and the rental income would be €2k per month minimum so It would contribute towards the new house mortgage while it would also become decent pension income when I am retired.

We have seen a house we would like to move into and it costs €500k. We have savings of €75K. If I go into a calculator they tell me I can borrow €500k but as I understand it banks only loan money to non first time buyers with 20% deposits.

Are there options available to us to be able to buy this home in our current position.
 
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Banks are allowed to lend a proportion of new mortgages outside of the requirements.

Banks and other lenders have the freedom to lend a certain amount above these limits. In any one calendar year they can give an allowance to:
  • Up to 20% of the value of mortgages to second and subsequent buyers
The above is taken from

A low existing mortgage coupled with high potential rental income won't hurt your case at all. Kids will be seen as a potential negative on your income.

As a general rule of you're looking for an exemption on the LTV front they might not give you one on the LTI front.

Your best bet is go talk to a bank the online calculators are limited.
 
I think you need to fully evaluate if keeping the house is the right thing to do.

Just under 7% gross yield. Allow 2k per year insurance and maintenance. Assuming you're higher rate tax payers, and you've roughly 3% net return. So you're borrowing an extra 300k in new PPR at just under 3% to earn a (relatively risky) 3% on the investment property.
It's far more complex of course. @Sarenco did a key post on the topic with a template that might help tease it out for you.

Key Post - Keep Apartment as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...
www.askaboutmoney.com

Now, re deposit. If it makes sense, banks are open to granting exemptions. The latest I've heard is they all have scope to grant exemptions currently.
 
Thanks Skrooge, I have set up a call with our current bank to start with and will go to a broker when this virus chaos is over.

I see what you are saying red onion on the return yields but I think if I can rent it out for 2k and have that to paid directly into the new PPR mortgage quickly the borrowing costs over 10 years could be fairly manageable and at that stage I would have 2 mortgage free homes. My retirement pension pot is not great and I am only now maximising my contributions. This rental house will allow me to either cash in while I am in my 60s (to give me 10 years of spending money) or continue to recieve the going rental rates thereby supplementing my pension.

The last point is that if I sold my present house I think I would end up buying a much more expensive house as a €75k Mortgage (500-350-75) on a €500k house would be seen as small and very manageable by the powers that be in my home. I would probably end up buying a 700k house and still finsh the day owing €300k but without any additional income.
 
Hi What

This is a very interesting question.

First compare keeping the house and selling the house while buying a house for €500k

Option 1 – Buy new house and keep old house

Current houseNew house
Value€350k€500k
Mortgage€ 55k€ 430k
Equity€300k€70k

Option 2 – Buy new house for €500k and sell old house

New house
Value€500k
Equity from first house€ 300k
Cash€70k
Mortgage€ 130k

It's clear to me that selling your current home is the right financial idea. You will have a relatively small mortgage. You can stuff your pension fund with cash, which is a far better return than borrowing to invest directly in residential property.

It will be much lower risk as you will have €500k in the property market instead of €850k in the property market.

You don't need to sell first. You can buy your new home. Get a big cash back mortgage. And then when you sell your existing home, reduce the mortgage.
 
Now let's compare buying a €500k house with buying a €700k house

Option 2 – Buy new house for €500k and sell old house

New house
Value€500k
Equity from first house€ 300k
Cash€70k
Mortgage€ 130k

Option 3 Sell and trade up to a better house for €700k

Value€700k
Equity from first house€300k
Cash€ 70k
Mortgage€ 330k

if, you think that you might be trading up again after a few years, then you would be far better off trading up the whole hog now. You will have only one set of trade up hassles and trade up costs.

What the said:
I would probably end up buying a 700k house and still finsh the day owing €300k but without any additional income.
Click to expand...

But you will have a better house. A bigger house. Or maybe a house in a location which involves lower transport costs. So you will be getting the "tax-free benefit" of an additional €200k worth of house.

So how much will this cost you ? You lose about €20k a year in rental income after costs, or about €10k net after tax.

The interest on the additional €200k @ 3% would be €6,000 a year. (The repayments would be higher but you would be paying down the mortgage.)

A larger house will have higher running costs and higher Local Property Tax.

Any capital gains on your former family home now become taxable. Any capital gains on the €200k of extra house are not taxable.

I think it's well worth looking at the option. Don't reject it out of hand. A lot depends on what you can afford.

Brendan
 
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Thanks for your input Brendan. I do see the absolute sense in selling to reduce debt. It is something which I had not considered until I posted this. I just saw one house paying for a decent proportion of the other over time.

A few points on my side:

I am already optimising pension contributions now at the maximum allowable cap.

I thought my current house was forever so who knows. I think it would be.

I bought my house in 2007 and spent about €100k upgrading it. It is about 130K away from any capital gain consideration and if they get a handle on the housing crisis prices will probably fall as opposed to rise.

I figure while I have the cash I can afford the mortgage and if things get hairy I always have the option to sell if things get tough.

I also see €20k per year once retired. That is €400 a week. I should hopefully decent income from a DC pension and the old age pension on top we should be relatively secure. I would also have the option to sell then using the cash as a slush fund to retire earlier than 68.
 
What the said:
I bought my house in 2007 and spent about €100k upgrading it. It is about 130K away from any capital gain consideration and if they get a handle on the housing crisis prices will probably fall as opposed to rise.
Click to expand...

OK. That is a good point. If you are in negative equity, maybe it's tax efficient to hold onto a property until it escapes negative equity.

But if you are expecting house prices to fall, then you should sell.

Brendan
 
What the said:
I also see €20k per year once retired. That is €400 a week.
Click to expand...

But you will have that in some form or other? You will have a smaller or no mortgage on your home. You will have put the money saved into some form of investment.

There is no doubt that keeping the house and rent of €2,000 a month, is better than burning the house down and having no rent, which seems to be the comparison you are making.

Brendan
 
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