Case study Using Savings to Buy Smaller House?

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Kuki

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Hello,
I am looking for some valuable advice re buying a smaller family home whilst keeping original house. This is our situation.

Last year we had to move for work and we are renting out our family home. Its worth 250-300K with a tracker mortgage of approx 72K left with 6 yrs approx to go. Current rent is 800 pm, we make up shortfall of 155 pm. We are renting a smaller property here for 750pm (total outgoings of rent + shortfall of mortgage = 905 pm).

We are keen to put down roots here as we will not be moving back as kids are established in secondary school now.

We have a lump sum of approx 140k to put towards the price of another house here but we are not sure what is the best thing to do. Bank has said if we clear original mortgage we get mortgage at higher variable rate of 160k but we really don't want to take out a big mortgage at this stage of our lives.

We look on the first property as our nest egg and hopefully in 5-6 years time when kids start college (1 son), we could then sell and release equity and build up our savings again with this.

We would need an extra 50-60k to buy house we are looking at but we would not need a loan, family member has agreed to loan us this and we pay it back, so interest free loan it would be.

I know we are in a very enviable position but we spent 3 years of being out of work and we worked hard to get ourselves out of it and sacrificed moving family to other side of country away from friends, family and support networks. We are anxious to settle now. Are we mad to buy now? Our house is in a county where house prices are 50-80k lower than what we would be buying here so we are at a loss in that regard.

Any advice welcome.
 
Forgot to add that we have no other loans or debts, just the mortgage. Hubby earns 55k gross and I will be returning to work next year after taking career break to help family move and settle. Another point is that any savings or investments made in past 2-4 years with various low risk products have lost us money by the way.
 
Hi Kuki

You have €140k cash and equity in a house worth around €200k.

If you had €340k cash what sort of house would you buy where you are now?

I think your first priority is to buy the house you want as you have the money. Forget about the investment aspect for the moment. It will be your home for some time to come.

If you can buy the house you really want for €200k, go for it.
If you would like to buy a house for €250k, you can afford it, so go for it.

At that stage, you will have €500k worth of property. and around €170k of loans. I think that this is too much property and you should probably sell your existing home to reduce your exposure to property and to reduce your borrowings.

There is a potential CGT issue which you need to be aware of. I presume that your existing home is worth a lot more than you paid for it? If so, you will become liable to some CGT if you keep it as an investment for a few years and then sell it.

One reason for keeping the existing home is if you decide to relocate back there after the children have left school.

So in summary
Buy the house you want to live in.
Sell the exisiting home, unless you think you might want to live in it in the future.
Probably invest your cash in a portfolio of shares. That should be less risky and give a better return than cash.
 
Having a cheap tracker of €72k should not really impact your decision that much.

You will save around €2,000 a year this year, but this will reduce as you repay your mortgage over the next six year. So you should ignore this.

Brendan
 
Thanks Brendan,

Regarding CGT liability, the house was built in 2005, cost of site plus build was approx 320k as its on a half acre and 2500 sqft so if we were to sell in the morning we would be making a loss but we are not in negative equity as we owe so little on it at this stage therefore we don't see it as a loss, if you know what I mean. Problem we face is that in the area its in (*Ennis), larger homes like are not selling. Similar houses to ours are, admittedly, priced too high therefore are on the market for over a year. We would be realistic in our pricing and guide price would reflect this.

At this stage, we want a smaller house, with a smaller garden, with option of building on extension so to buy smaller now and have some money left over is a good place to be!
 
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