How to accurately calculate mortgage interest?

[matt3001]

I want to do a spot of modelling in Excel....

Currently debating whether to continue renting in London and move back up North in a year or two, or to stay a bit longer in London and buy.

Whilst I have all of the freedom arguments and the awful savings rates etc in mind, what I would like to really nail down is the 'actual' extra cost of renting....

Numbers are illustrative for simplicity.

Current deposit saved - £50k. I want to ignore SDLT as this would be payable on a future purchase as well.

Scenario 1 (continue renting):
24 months of rent @ £1k a month = £24k
Saving @ £1k a month = £24k
Deposit in 24 months time - £74k.

Scenario 2 (buy in London/2 bed flat at £350k):
Mortgage of £300k over 25 years at 3% - what is the 'finance cost' of the first 24 months?
Removal costs - £500
Survey - £500??
Legals - £1000?

I guess what I am trying to establish is that whilst rent is dead money, if the equivilant 'finance' cost for the same period on a £350k flat is say £15-£18k, then the extra premium paid is probably worth the hassle free renting situation.

I know there any many other variables such as capital appreciation on the asset etc, but I want to strip all of that back and purely focus on the interest cost vs. rental cost.

[illmonkey]

£1435/month @ 3.0% repayment. But ~£700 of that is actually paying the mortgage off, where as renting you're paying your landlords mortgage off.

Plenty of calculators online:

http://www.bbc.co.uk/homes/property/mortgagecalcul...
http://www.nationwide.co.uk/mortgages/calculators/...

I'd hate to pay stamp duty twice in a short period of time (yes I know you've excluded it, but it ain't cheap!).

Edited by illmonkey on Wednesday 3rd April 11:35

[matt3001]

Ah I had tried to google already but couldn't find anything of use. So at 3% the interest portion is £750 a month or £18k over the period. And like you said there would be SDLT to pay twice...

By the time you have included the maintence of the property (rather than just calling the landlord to fix issues) and life insurance and buildings insurance the gap to rent is actually quite small, so in my scenario renting may actually be only slightly more expensive than buying.

Based on zero capital appreciation in the asset...

[illmonkey]

matt3001 said:

Ah I had tried to google already but couldn't find anything of use. So at 3% the interest portion is £750 a month or £18k over the period. And like you said there would be SDLT to pay twice...

By the time you have included the maintence of the property (rather than just calling the landlord to fix issues) and life insurance and buildings insurance the gap to rent is actually quite small, so in my scenario renting may actually be only slightly more expensive than buying.

Based on zero capital appreciation in the asset...

I just edited to add the figure you put!

In the short term you're better off renting, saving up a larger deposit (reducing your mortgage requirement) and just buying once in a few years. If you were going to buy and stay put in LANDAN then you can do it either way.

Yes, there are downsides to owning, but there are up sides too. You can paint it what ever colour you want!

[Sarnie]

You won't get a 3% rate at just over 85% LTV, more like circa 4%.

At say 4.09% you would have paid £38,363 in payments over 24 months of which £23,984 would be interest and £14,379 would have came off your balance.

[matt3001]

Thanks guys - makes sense.

Sarnie I still need to email you back (been meaning to do it for a week or so!)

[matt3001]

I guess the 3rd option is to buy in the North, rent that out and we continue to rent in London and move to the one up North when we are ready to come back...

But then unless you want to risk it with a lender (in the sense that you took a FTB mortgage) then the BTL packages need huge deposits?

[illmonkey]

matt3001 said:

I guess the 3rd option is to buy in the North, rent that out and we continue to rent in London and move to the one up North when we are ready to come back...

But then unless you want to risk it with a lender (in the sense that you took a FTB mortgage) then the BTL packages need huge deposits?

Maximum is probably 75% LTV, more likely is 60-65% LTV.

You could buy under the £250k SDLT bracket, so £200k, rent it out, to clear some of the mortgage down and then live in in for a year or 2, then make the move to a bigger house. Stamp duty will be £2000 rather than £9k on the first property. But I doubt you'd clear enough profit to justify it in the first place, you also need to find tenants, insurance etc.

[sideways sid]

4th option is to buy the place in London and retain it (rent it out) when you move back up North.

However if your annual rental cost in London is c.3% of the value of the property (£12k pa on £350k), with no certainty that capital growth will exceed purchase and sales costs, its probably better to continue to rent, and find a decent return on your deposit for subsequent purchase elsewhere.

[mcflurry]

The one piece you can't know is the future house price.
A house price crash or rise could change the calculation hugely, as could an unexpected bill such as a new boiler..

[fido]

mcflurry said:

The one piece you can't know is the future house price.
A house price crash or rise could change the calculation hugely, as could an unexpected bill such as a new boiler..

And correlated to underlying prices will be interest rates .. though it seems they may stay low for a while. But you never know what might happen.

[illmonkey]

Best move IMO too.

What about salaries? I imagine you're earning more in London than you can t'North? If so, you can ram extra money into the mortgage. You'll also get a better rate with a higher salary.

[Froomee]

Use the guardian finance calculator, really useful for stuff like this

[Evo141n]

I've an excel calculator pick up from MSE or some similar forum, pm if you need a copy.