How to finance a holiday home?

[anonymous-user]

Hi, ever since our first visit 20 years ago, we've been looking to move over to the Isle of Man. Sadly there never seemed to be enough employment opportunity in my line of work to make it work and the roles that did come up, didn't pay very well.

Anyway, the ambition is still as strong as ever and we will probably end up retiring there but in the meantime, we have enough equity, we think to afford a second home. Our main home is worth about £470k with about 45% left on the mortgage (so about £258k equity). If I'm doing this right, I should be able to borrow up to 85% against my house, releasing about £220k which I can spend on the new holiday home.

We live in England and have no plan at present to rent it although we may lend it to family and friends just to ensure it gets lived in.

My question is, does this sound like the sensible way to go or should we consider getting a second mortgage for the new house? If we go this route I'm told we need to approach an Isle of Man bank which may prove more hassle and my current lender will probably give us a better rate.

Assuming we do release equity, do we tell our lender that we intend to buy a holiday home which we plan to let or not? I guess they will look on our application more favourably if there's the prospect of an income from the new house?

Thanks in advance.

[Ozzie Osmond]

Sounds as though you like debt!

[walm]

Ozzie Osmond said:

Sounds as though you like debt!

His balance sheet won't change from a net perspective though.

My initial thought would be that at 85% LTV he is going to miss out on the very best interest rates which seem to need nearly 40% equity these days.

And of course without renting it, OP needs to be sure he can cover the additional mortgage cost.

In any case... Sarnie!

[dodgydave]

Adding 40% to your mortgage gives you £188K not £220K.

[supercommuter]

How long until you retire?

[sideways sid]

Ozzie Osmond said:

Sounds as though you like debt!

There's nothing wrong with serviceable debt used to buy an appreciating asset!

[supercommuter]

sideways sid said:

Ozzie Osmond said:

Sounds as though you like debt!

There's nothing wrong with serviceable debt used to buy an appreciating asset!

Exactly.

[anonymous-user]

Ozzie Osmond said:

Sounds as though you like debt!

What's not to like? Interest rates are low, it's an appreciating asset and I have the spare cash to cover the extra on the mortgage every month (I won't extend the term to cover it). Also, the new tax rules on BTL don't apply to holiday homes. I could let it through an agency but haven't decided yet.

dodgydave said:

Adding 40% to your mortgage gives you £188K not £220K.

I stand corrected, It was early and I mentally calculated 85% of the equity!

supercommuter said:

How long until you retire?

God knows but I'm 45 now so a fair while.

[Ozzie Osmond]

supercommuter said:

sideways sid said:

Ozzie Osmond said:

Sounds as though you like debt!

There's nothing wrong with serviceable debt used to buy an appreciating asset!

Exactly.

And if it doesn't appreciate as hoped? Or if interest rates rocket? In the worst case you end up without the asset and still with the debt!

• Debt is not for me in personal finances.
• Debt is perfect within a limited company where, if the company goes bust, it takes the debt with it. Interest tax deductible too.

The BHS fiasco is a fine example. No doubt everyone believed the £1.3Bn of debt was "safe as houses". Sure, BHS isn't a property company but it's left its landlords (property companies) well screwed as well as leaving the banks utterly screwed.

[kentlad]

Ozzie Osmond said:

And if it doesn't appreciate as hoped? Or if interest rates rocket? In the worst case you end up without the asset and still with the debt!

• Debt is not for me in personal finances.
• Debt is perfect within a limited company where, if the company goes bust, it takes the debt with it. Interest tax deductible too.

The BHS fiasco is a fine example. No doubt everyone believed the £1.3Bn of debt was "safe as houses". Sure, BHS isn't a property company but it's left its landlords (property companies) well screwed as well as leaving the banks utterly screwed.

So you've never had any personal debt? Must be nice being able to buy your house outright with cash.

Ignore the above, it has no relevance to your situation. But I'd seriously consider letting the place out while it's not being used. Covers at least a part of the new mortgage? And keeps the house lived in as your original post?

[supercommuter]

Ozzie Osmond said:

supercommuter said:

sideways sid said:

Ozzie Osmond said:

Sounds as though you like debt!

There's nothing wrong with serviceable debt used to buy an appreciating asset!

Exactly.

And if it doesn't appreciate as hoped? Or if interest rates rocket? In the worst case you end up without the asset and still with the debt!

• Debt is not for me in personal finances.
• Debt is perfect within a limited company where, if the company goes bust, it takes the debt with it. Interest tax deductible too.

The BHS fiasco is a fine example. No doubt everyone believed the £1.3Bn of debt was "safe as houses". Sure, BHS isn't a property company but it's left its landlords (property companies) well screwed as well as leaving the banks utterly screwed.

Quite a few very wealthy people do not share your view.

Each to their own.

[Ozzie Osmond]

supercommuter said:

Quite a few very wealthy people do not share your view.

And clearly all the people who've gone bankrupt didn't share it either.

supercommuter said:

Each to their own.

Yes, indeed!

[jonny996]

Ozzie, please advise how you have managed to obtain a nice house and live your dream of a holiday house without debt. Or how the OP could manage it

[Ozzie Osmond]

• Be successful in your job so that you aren't having to spend every penny every month just to get by.
• Do up your own home and sell. Very income-tax efficient and very capital-tax efficient.
• Pay down debt asap. It feels slow at first but accelerates as less debt means less interest means more capital repaid.
• Invest in global stock market funds with costs kept to a minimum. Hold tight for the ride, it can get bumpy.
• Invest a bit in private companies which people you trust are running. Hard to find, high risk and exit timing uncertain.
• Manage your tax situation very carefully. The rules keep changing so try to stay flexible.

Buying a decent house and living in it while investing in funds can be incredibly efficient.
- Tax free returns in ISA etc.
- No enhanced Stamp Duty
- No Capital Gains Tax
- No managing agent
- No bad tenants
- No repairs
- No routine electrical inspections
- No estate agent
- No solicitor

[walm]

Ozzie Osmond said:

• Do up your own home and sell. Very income-tax efficient and very capital-tax efficient.

How do you have your "own home" without a mortgage?
Average house would take over 10x average household income so even if by some bizarre miracle you managed to survive without spending a penny for 10 years the average family STILL couldn't buy a house with cash.

[anonymous-user]

walm said:

How do you have your "own home" without a mortgage?
Average house would take over 10x average household income so even if by some bizarre miracle you managed to survive without spending a penny for 10 years the average family STILL couldn't buy a house with cash.

I am not answering for Ozzie but many start in a fortunate position.

For the rest debt is a fact of life.

If I loved a place and got to use it regularly i'd have no problem using debt. And loads of it.

[Wacky Racer]

Think very carefully about moving there full time.

I know several people who have done and regretted it after two years because there is not a great deal to do.

Yes, it's certainly nice for a holiday.....(If the weather is kind)

Not saying don't go....just be 100% sure.

[anonymous-user]

Ozzie Osmond said:

* Be successful in your job so that you aren't having to spend every penny every month just to get by.

• Do up your own home and sell. Very income-tax efficient and very capital-tax efficient.
• Pay down debt asap. It feels slow at first but accelerates as less debt means less interest means more capital repaid.
• Invest in global stock market funds with costs kept to a minimum. Hold tight for the ride, it can get bumpy.
• Invest a bit in private companies which people you trust are running. Hard to find, high risk and exit timing uncertain.
• Manage your tax situation very carefully. The rules keep changing so try to stay flexible.

Buying a decent house and living in it while investing in funds can be incredibly efficient.
- Tax free returns in ISA etc.
- No enhanced Stamp Duty
- No Capital Gains Tax
- No managing agent
- No bad tenants
- No repairs
- No routine electrical inspections
- No estate agent
- No solicitor

With respect, you aren't helping so stop polluting my thread. Thank you.

[Trabi601]

Seems like a big gamble, and quite a stressful life of hoping rates don't increase, hoping the job situation doesn't change and hoping property continues to appreciate. All to have a holiday home on a largely desolate island in the middle of the North Sea.

[anonymous-user]

Wacky Racer said:

Think very carefully about moving there full time.

I know several people who have done and regretted it after two years because there is not a great deal to do.

Yes, it's certainly nice for a holiday.....(If the weather is kind)

Not saying don't go....just be 100% sure.

Thanks for the concern. Been going there for 3 weeks every year for the past 19 years so it's like a second home. I'd like to go there more and have more flexible arrangements around TT & MGP time. We are also good friends with a couple who moved there from Manchester years ago and say they love it. This is a toe in the water and when the mortgage is paid off on our main house I can add it to my pension portfolio and move to the holiday home forever! Or that's the plan