Trading up without mortgage

[Hmm5673]

I currently live in an area I really like (and which is unfortunately very expensive…), but my house is on the small side, and has no room for an extension or anything. It’s basically fine for now, and it’s just me, but if I’m going to be here for the next 40 years, or if I end up with a partner, in an ideal world I’d like something a bit bigger. A bigger house just down the road has just come up for sale, and I’m potentially interested, as a ‘forever home’. I think I can afford it, but I’m not sure what the best way to go about buying either it, or any other house, is. Hadn’t really thought about trading up before, and I’m a bit lost.

Some quick facts.

Age: 39
Salary: 140k + 15-20% bonus + equity
Current house: guessing 600-700k (a similar-ish one sold recently for 700k, but it was in slightly better condition and had off-street parking, so conservatively let’s say 600k). No mortgage.
Potential new house: 900k.

Assets:
125k cash
350k in an ETF (about 20k exit tax due if I sold this)
I’m currently selling shares in my employer; should land in the next few weeks and will come to about 520k after tax (this is completely coincidental timing; wasn’t even looking at houses when I decided to do that).
Pension (not really relevant here)
No debt
Total in cash and cash-like things: 975k

So, I think I could clearly afford the 300k gap. I’m not really sure what the best way to do it is, though.

Options:
Sell current house and buy new house as part of a chain, using cash to make up the deficit - this seems like the simplest approach, but maybe puts me at a disadvantage vs buyers who don’t have a chain? I’m not sure how big a deal this is in practice - never done this before.

Buy for cash, then sell current house - this seems like it might actually be doable, assuming it doesn’t get bid up much, but would involve selling the ETF and paying exit tax now. This might be more of a psychological barrier, though.

Buy with ~all the cash, but not the ETF money, plus short-ish term mortgage (would be ~300k), sell old house - I think I’d get the mortgage fairly easily, but this would leave me with a mortgage that I don’t really want, and I assume the bank wouldn’t be a fan of the idea of me then immediately paying it off.

Buy with all the cash but not the ETF money, plus a bridging loan (these seem to be available again now), sell old house - This seems like the kind of situation bridging loans are designed for, but I have it in my head that they’re a scary Celtic Tiger-era thing. Maybe risky if the market collapses right as I’m doing all this. Not sure how rational I’m being here.

Maybe something I’ve missed?

Any thoughts on what the best approach is?

 

[skrooge]

If the ultimate aim is to move house and be debt free after the dust settles, then you're in a good position to start.

There are a couple of routes to get there. Given your financial position I'd be inclined to focus on giving yourself as much flexibility to get what you want.

While you might be able to do it based on liquid assets alone why limit yourself. I'd explore the mortgage option. Even a small mortgage will give you some capacity should the price get bid up.

Buy with all the cash but not the ETF money, plus a bridging loan (these seem to be available again now), sell old house - This seems like the kind of situation bridging loans are designed

As you've no outstanding mortgage I don't see any reason to consider a bridging loan - they'll be expensive and won't give you anything a mortgage product won't offer.

I assume the bank wouldn’t be a fan of the idea of me then immediately paying it off.

Will the bank like it that pay it back in the short term? No, but that's their problem not yours. You don't have to tell them your full plan. Of course plans might change. Personally, I'd hold back some of your funds in case the new house needs any work done. You never know what issues there might be until you're in. Yes it will be a little more expensive in the short term but think of it like an insurance premium. Though I appreciate your other assets should cover this any way it does provide greater flexibility.

On the mortgage front I'd be focusing on those providers that offer cashback. Given your strong financial position and the short nature of the loan you might actually turn a small profit from the mortgage.

As I see it another advantage of going with a mortgage is it providers some indication of how sellable the house might be if you ever want to move. You might be lucky enough to not need a mortgage but the chances are if you sell the next buyer will need one. If there are any issues a future lender might have with a property why not find out now.

 

[skrooge]

Sell current house and buy new house as part of a chain, using cash to make up the deficit - this seems like the simplest approach, but maybe puts me at a disadvantage vs buyers who don’t have a chain

Personally, in your financial position, I'd be inclined to save yourself the headache of doing this. The logistics of coordinating selling and buying at the same time can be tricky. Other people do it because they have to, you don't.

 

[skrooge]

selling the ETF and paying exit tax now. This might be more of a psychological barrier, though.

What's the plan for this money if not to pay for the house? Don't let the tail wag the dog. I'm not a tax expert but it's going to be hard/impossible to not have to pay that tax so don't get hung up on it.

It doesn't make sense to have a mortgage and investment at the same time. One option would be to sell the ETF pay off any future mortgage and then use to proceeds from selling your current house to reinvent.

Remember when ordering/timing transactions that any capital gain on your current PPR is tax free. However, it stops being your PPR when you move into the second property. Revenue give you 12 months to get your proverbial house though.

Principal Private Residence (PPR) Relief

This page outlines Principal Private Residence (PPR) Relief

www.revenue.ie

So while you have time after your purchase 12 months can tick by relatively quickly. So don't let it slip.

 

[skrooge]

Pension (not really relevant here)

While you might not think it's relevant for this specific transaction retirement planning casts a long shadow over a persons life.

I don't think it would change much of the above but the more info you provide the better the advice.

(Besides you're 90% of the way to doing a money makeover post as it is.... And I'm nosey!)

 

[Zenith63]

Sell current house and buy new house as part of a chain, using cash to make up the deficit - this seems like the simplest approach, but maybe puts me at a disadvantage vs buyers who don’t have a chain? I’m not sure how big a deal this is in practice - never done this before.

It can become an issue if you’re down to two bidders at similar prices and the vendor has to make a decision who to sell to based on nothing more than one being a cash bidder and one being in an (infamous) chain.

You have the cash to prove you could be a cash buyer, so that is what you should be telling the vendor/estate agent regardless of how your plans develop.

I was in the same position a few years ago. I got mortgage approval as a backup plan but ultimately paid cash then sold the original house. Did not even consider getting into a chain. I’d strongly recommend this approach as you have the option, it takes quite a bit of stress out of a very stressful situation.

 

[Brendan Burgess]

So the overall plan should be
1) Buy the new house
2) Sell your old house after you have moved in.

Skrooge is absolutely correct that trying to sell your own house before you buy the other house is very difficult and messy and stressful.

If you are happy with the ETF investment, I see no reason to sell it now as you will be able to fund the purchase with your other cash and a mortgage.

So get mortgage approval for €500k which should be easy enough. And get it from a cash back lender

1) Buy the house with your cash and the mortgage.
2) Move in.
3) Sell your existing house
4) Clear the mortgage.

 

[Brendan Burgess]

You could sell the ETF and then you would be a cash buyer.

No complications with drawing down a mortgage.
No need for unnecessary mortgage protection insurance
No valuation required from the lender

If there are two similar offers the estate agent will recommend the one who is a cash buyer.

So show the estate agent your current account with €900k in it and I think he will be very happy to do business with you.

 

[Brendan Burgess]

I’m currently selling shares in my employer; should land in the next few weeks and will come to about 520k after tax

How much tax and when is it due? If it's a large amount and not due until November, then it's a bit like a free loan which you can clear from the sale of your existing house.