Pay off existing mortgage or save for the next one

I

interested21

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I'm currently in a position where I could pay off half my mortgage today, and pay off the remaining half over the course of next year. I'll be looking to trade up in the next 2-3 years, and I'd be building up a deposit for that at a rate of roughly 10% of house value per year. Here's some rough numbers to illustrate this:

Existing mortgage: 200k @ 2.6% (fixed for another 2.5 years)
Cash available: 100k
Saving rate: 100k per year
New house value: 1m

I'm keen to avoid a chain by buying the new house before selling my own. I think this will massively reduce the stress of the whole process. So I see myself as having two options:
  1. Pay off my existing mortgage by the end of 2022. Save the 200k deposit for the new house over the course of '22 and '23
    • Advantage: My money isn't just sitting in my account, its reducing the interest I'm paying on my existing mortgage (this is probably mostly psychological though, the interest bill is small and I'll have some fees to pay for overpaying). Also, I'll be mortgage free going for the next mortgage, so that might make things less complicated
    • Disadvantage: It'll be 2024 before I'm in a position to purchase
  2. Keep building cash for the deposit
    • Advantage: I'll have the deposit ready a year earlier
    • Disadvantage: Existing mortgage will reduce the max size of the new mortgage (I think?). The cash will be burning a hole in my pocket sitting in my account instead of offsetting my interest bill
I'd be really interested to get the thoughts of the great minds of this forum. I appreciate I'm in a very fortunate position, so I'm keen to make the right decision. I'm leaning towards option 1 because it makes me feel like I'm putting my money to work on the mortgage, but maybe I'm getting blinkered by that and not appreciating that its less flexible and gets me to where I want to be a year later.

Something that I think would really change the outlook would be if I could get an exemption from having to have the full 20% deposit. That would make option 1 the obvious choice to me, as it would mean I'd be mortgage free and able to purchase in '23. How common are exemptions for 2nd time buyers, or are these usually reserved for FTBs? I'd like to think I'd be a good candidate for the bank, seeing as I'd be paying off a large chunk of the mortgage once I'd sold my current house.
 
OK, why are you waiting for two or three years to trade up?

Why not sooner? Indeed, why not now?

Look at the big picture.
You are buying a house for €1m.
If house prices rise or fall before you sell and buy, you could easily be €100k better off or worse off.

If you keep €100k cash in your bank account instead of paying off your bank account, it will cost you €2,600 a year.

€2,600 is small beer in relation to the figures you are talking about.

It is well worth paying this price for the flexibility it will give you.

Brendan
 
interested21 said:
I'm keen to avoid a chain by buying the new house before selling my own. I think this will massively reduce the stress of the whole process.
Click to expand...

I fully agree with this. So this should be your objective.

Again, this argues for keeping the cash on hand.

Brendan
 
interested21 said:
Keep building cash for the deposit
  • Advantage: I'll have the deposit ready a year earlier
  • Disadvantage: Existing mortgage will reduce the max size of the new mortgage (I think?).
Click to expand...

Keeping cash will not reduce your purchasing power. If you hold onto €100k cash instead of paying off your mortgage, you might qualify for a smaller mortgage, but, you will have €100k more cash!
 
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In the New Year, you should do a dry run. Talk to your existing lender first.

With your €100k apply for a mortgage of €900k to buy a house.
Tell them it is your intention to sell your existing house and pay down the mortgage with the proceeds.

The banks can give more generous exceptions to second time buyers.

Up to 20% of the second time mortgages can exceed the 80% LTV limit.
Up to 10% of the second time mortgages can exceed the LTI limit.

It sounds as if you are the perfect candidate for these exceptions.

Brendan
 
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But building up cash has too many advantages.

1) You won't need an exception - so you would be able to get a mortgage from Avant which does not do exceptions.

2) 80% LTV mortgages are cheaper. And 70% mortgages are cheaper again.

Brendan
 
There’s no way you’d use the €100k to pay down the existing mortgage.

Apply in the New Year as Brendan suggests.

And use a broker to access the best rates.
 
You want to:

1. Maximise your purchasing potential while
2. Minimising the impact of existing liabilities.

To maximise your borrowing potential you want to have as a minimum 20% of the future purchase price in cash as a deposit. This will help unlock bank leverage. Assume you can borrow 3.5 your income that means the 20% deposit requirement world equate to 87.5% of your income.

If you're savings are below this then every euro you save unlocks an extra 4 in potential borrowings i.e., 4:1

A secondary consideration is minimising your liabilities - it will act as a drag on your purchasing potential. However reducing your mortgage by a euro only increases your purchasing power by the same amount. I.e., 1:1.

The other factor to consider is what your existing mortgage costs are versus potential rental income. If you've sufficient headroom lenders may be happy to exclude your existing mortgage from their calculations - In effect viewing your existing mortgage as a BTL.

Personally I'd mainly focus on 1 as it gives you more flexibility to react if you see a property you like.
 
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Thanks for the great replies all. It's great to get unanimous agreement on an approach

I think I've been caught up in the idea of being mortgage free on the existing house just because its a nice goal and it is achievable in the short-term, but its clear from the replies that it does actually get me further away from my next goal of trading up.

I'm getting married in 2022, so that'll be enough stress for one year I think! I totally get where you're coming from though. I know that prices are only going up these days, but houses like my current one seem to be appreciating in value a lot since its a very competitive price-point in an area that's rapidly gentrifying. I'm hoping the movements at the 1m mark will be less drastic over the coming year or two.

Brendan Burgess said:
The banks can give more generous exceptions to second time buyers.

Up to 20% of the second time mortgages can exceed the 80% LTV limit.
Up to 10% of the second time mortgages can exceed the LTI limit.
Click to expand...
This is great to know. There's loads of information about this for FTBs but I've not seen much for 2nd timers. Thank you.
Brendan Burgess said:
80% LTV mortgages are cheaper. And 70% mortgages are cheaper again.
Click to expand...
I'm not overly concerned with the LTV of the mortgage when I take it out. I know it will be a large mortgage to begin with, but all going well I should be able to sell the existing house a few months after taking out the new mortgage, and use the equity that that releases to bring down the LTV on my new mortgage. I may even switch at that point to go with the likes of Avant. I'll definitely be going with a broker for advice on this bit anyway.
Keeping the current house and renting it out is something I've considered, but the rental income it'd generate just doesn't interest me enough at this point for the amount of increased debt and potential hassle I'd be taking on.
 
interested21 said:
Keeping the current house and renting it out is something I've considered, but the rental income it'd generate just doesn't interest me enough at this point for the amount of increased debt and potential hassle I'd be taking on.
Click to expand...

And you're probably right too. The point was more to highlight that at some stage there is a sweet spot where your existing mortgage will no longer count against you for future borrowing.

Just because you can show it's got good rental potential doesn't mean you have to rent it out.
 
interested21 said:
I'm getting married in 2022, so that'll be enough stress for one year I think!
Click to expand...

Just one more point for the checklist. Has your intended a clean credit record?

It occasionally happens that a woman who could get a good mortgage on her own, can't get a mortgage with a husband who has a bad credit record.

In the unlikely event that this is the case then you should buy the house before you get married.

Brendan
 
I am in a similar position of not wanting to be in a chain… I applied for second mortgage and advised I would rent out my current house. As potiental rental income was nearly 3 times current mortgage repayments it covered that outgoing expense so bank approved me for second mortgage based on full amount of my income as in 3.5 times etc…. No other expenses. Most likely I will sell my current home rather than rent so will have period of time of 2 mortgage repayments but to me that was worth hassle of not being in chain and also increase standing for buying new one
 

Thanks for sharing. It's interesting to hear about people's experiences. Which lender did you go with? Are both loans with the same lender? If you stayed with the same lender did it impact the mortgage rate?
 
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