‘BIG’ financial decisions

[Dadof2]

Longtime lurker on the whole forum and this subgroup, lots of useful info, thanks. Signed up with a different username for (semi) obvious reasons

Next year I have a few £ things coming to a head and with brexit uncertainty etc.. I am unclear how to act. BUT I need to make some decisions.

Household income £5600 a month after two contributory pensions. Additional, £240 a month into a seperate pension (Virgin) mainly to offset BTL income and gain the tax advantage.
2 kids (5 and 4)

House £600k, £220k outstanding, 18 years remaining from end of fixed rate (Santander 2.95%) May 2019. £1400 a month payment. I expect to drop the APR when I remortgage. e.g. Nationwide 5yr fix 1.89%
Cash, £40k, ISA £30k, Kids ISAs £16k and 12k.
Asset BTL (no mortgage) £125k, rented £475pcm uf, tenant of 12 years vacating at Xmas time (needs a refurb to be worth £125k but there is a bit more in the rental if I refurb and re-let).
No car payments, loans, outstanding debt etc.. apart from a 0% credit card I could pay off if I wanted (£3k).

So, I have quite a ‘risk adverse’ portfolio, should I take more risks?

Aim would be to clear domestic mortgage asap but also I don’t want to just lump everything I have into one thing, ie my house.
I feel like going the other way and continuing the steady payment off my domestic mortgage upping the payment to £1500 PCM and reducing the APR and therefore term
Taking a BTL mortgage on the rental property and reletting (easy re-let) and buying another BTL.
I am comfortable with giving the capital of the rental properties to my girls at some point but want protection on this (set up a trust until they are 25?) and use the income for their education expenses (currently both in good state school) university etc… or set them up in business if they wish. i.e. the capital is locked until they are 25?

Jobs secure as they can be, both doing well, would love more time with the kids etc... but can't see an easy way out of that without selling the house and buying a cheaper one etc...

So I need to:
- Remortgage the house to avoid SVR
- Relet or sell the rental property
- Decide what to do with the capital
- Long term IHT financial planning

Thoughts welcomed. I know I will end up going to an IFA but this is more likely to release a ‘spread’ of opinions!

[JulianPH]

Dadof2 said:

Longtime lurker on the whole forum and this subgroup, lots of useful info, thanks. Signed up with a different username for (semi) obvious reasons

Next year I have a few £ things coming to a head and with brexit uncertainty etc.. I am unclear how to act. BUT I need to make some decisions.

Household income £5600 a month after two contributory pensions. Additional, £240 a month into a seperate pension (Virgin) mainly to offset BTL income and gain the tax advantage.
2 kids (5 and 4)

House £600k, £220k outstanding, 18 years remaining from end of fixed rate (Santander 2.95%) May 2019. £1400 a month payment. I expect to drop the APR when I remortgage. e.g. Nationwide 5yr fix 1.89%
Cash, £40k, ISA £30k, Kids ISAs £16k and 12k.
Asset BTL (no mortgage) £125k, rented £475pcm uf, tenant of 12 years vacating at Xmas time (needs a refurb to be worth £125k but there is a bit more in the rental if I refurb and re-let).
No car payments, loans, outstanding debt etc.. apart from a 0% credit card I could pay off if I wanted (£3k).

So, I have quite a ‘risk adverse’ portfolio, should I take more risks?

Aim would be to clear domestic mortgage asap but also I don’t want to just lump everything I have into one thing, ie my house.
I feel like going the other way and continuing the steady payment off my domestic mortgage upping the payment to £1500 PCM and reducing the APR and therefore term
Taking a BTL mortgage on the rental property and reletting (easy re-let) and buying another BTL.
I am comfortable with giving the capital of the rental properties to my girls at some point but want protection on this (set up a trust until they are 25?) and use the income for their education expenses (currently both in good state school) university etc… or set them up in business if they wish. i.e. the capital is locked until they are 25?

Jobs secure as they can be, both doing well, would love more time with the kids etc... but can't see an easy way out of that without selling the house and buying a cheaper one etc...

So I need to:
- Remortgage the house to avoid SVR
- Relet or sell the rental property
- Decide what to do with the capital
- Long term IHT financial planning

Thoughts welcomed. I know I will end up going to an IFA but this is more likely to release a ‘spread’ of opinions!

You don't mention you age, but given your kid's ages I am guessing 30's to early 40's max. You also don't mention any pension or ISA provision. This may be very important.

Finally, you don't mention your aims/requirements and time frames for these.

Given the very clear picture you have painted with regard to everything else, these factors are important in addressing matters.

• Re-mortgage - Speak to Sarnie
• Re-let of sell BTL - Depends upon what you require from this investment
• What to do with capital - As above
• IHT planning - Pensions, trusts, gifts, etc. Lots of options

Let us know the above and we can better assist!

[Dadof2]

Apol's I had more info in and then cut down the waffle but left out some info
Both 'just' under 40. Both have contributory pensions (mine public sector, circa £700 PCM from me, and same from 'them'). Wife has a teacher pension arrangements. I have an additional pension also (small only started 2 years ago).
ISA (cash) around £30k. Kids are maxed, - 1 year each (mat leave impact).
I have more cash to pay off the main mortgage should I choose (not to 'invest in a 911....)
Would like to be mortgage free in 15 years and can do this with the remortgage (assuming staying in same house, no reason not to).So question really, is what do I do with the rest?
How do I grow the capital I have 'best', how do I invest for the kids future, on the basis they will have sig isa holdings anyway?
Our pension arrangements I think are 'fine'?
Or do I just buy them better holidays and faster cars to go to school in 'now'.

[bmwmike]

Sounds like you're on the right path tbh,steady as she goes..?

[anonymous-user]

Dadof2 said:

So, I have quite a ‘risk averse’ portfolio,

I'm not convinced about that. You look significantly geared for a punt on one asset class - UK residential property.

Would you borrow money against your main family home to invest in the stock market? If the answer is "no", then ask yourself why you're doing that to invest in UK property (with no tax relief).

[JulianPH]

From a professional viewpoint (and trying to not be too technical about matters) then I would have to say that a 911 (particularly a turbo) is a very good choice sir. So that brings matter to a swift end!

On a more serious note, you both have very good pension provision but I would (given your ages) consider looking at a stocks and shares ISA for a higher long term return on capital.

I assume the kid's have S&S ISAs, if not then consider looking at this for them too.

I am an advocate of paying off debt unless it makes no sense to do so. In the current economic climate this hangs in the balance. A well managed global portfolio "should" deliver higher returns. Paying down debt, however, will guarantee certainty. That is worth a lot.

You can certainly be mortgage free in 15 years. I would focus on this first.

What do I do with the rest = my point above!

You pension arrangements are as good as they get. It sould only be just at the point of retirement that you should review these again.

If you are enjoying holidays together your kids will only remember this, regardless of how much you spend on them.

Basically, if paying down the mortgage to become mortgage free is important the exchange the (taxable) rental yield for a lump sum to go towards this. If you are looking for capital accumulation then keep the property.

For IHT planning (and I addressed this a few years ago at the same age you are now) you can't go wrong with gifts, personal pension and trusts to cover any assets over the threshold.

As bmwmike has said, you are already on the right path, just ensure you keep diversified

[JulianPH]

rockin said:

Dadof2 said:

So, I have quite a ‘risk averse’ portfolio,

I'm not convinced about that. You look significantly geared for a punt on one asset class - UK residential property.

Would you borrow money against your main family home to invest in the stock market? If the answer is "no", then ask yourself why you're doing that to invest in UK property (with no tax relief).

I agree Steve, I would not take on any further debt if I wanted to become mortgage free. The OP doesn't have to and in my opinion (for what it is worth) he shouldn't.

[springfan62]

I would sell the BTL and pay off half the mortgage. I would then pay enough to pay off the balance over your 15 year timeline.

The saving on current mortgage payments I would invest in passive S&S Isa's on a monthly basis.

Then all your investments are tax free and well balanced between residential property and equities.

[Derek Chevalier]

Dadof2 said:

I know I will end up going to an IFA

I think that's best

[Dadof2]

Thanks
The btl was never planned and I’ve done little with it as I’ve had one tennant all along, so now he’s leaving I think ‘what next?’ I could have got more return but not much £50-75 pcm which wasn’t worth it for a bad tenant/voids etc. Value as is around £100k needs new kitchen, flooring and bathroom to max value.
My first thought was ‘get another’ using some cash or equity but this thread has made me rethink. I am keen on retaining some capital and not putting all my eggs in one basket eg the house I live in.
I like the idea of still owning another property when my main mortgage is paid off for income or to sell to gift half to my daughters. So I might think about focusing on selling that property to buy something more profitable
I also like the idea of dialling back on work at some point or working differently eg not ‘on salary’
I see me as risk averse as I am holding a lot of cash in isas and cash, my only stock exposure is through (managed by others) pensions. So adding s&s to the isa portfolio would help
We both work 60hr plus weeks so I don’t have a huge amount of time and want to focus that on/with the kids
So my list is now:
- remortgage the main house in January when I can and decide how much cash to put in/how much to reduce the term too
- take a good look at the rental when it’s vacant and think about refurb and sell or sell as is
- consider cash to s&s isa and what ‘blend’ of this?

Ifa useful but this spread of opinions is useful. I’ve worked hard to get to this position so want to maximise where i am. Thanks for your input

[will_]

Dadof2 said:

Thanks
The btl was never planned and I’ve done little with it as I’ve had one tennant all along, so now he’s leaving I think ‘what next?’ I could have got more return but not much £50-75 pcm which wasn’t worth it for a bad tenant/voids etc. Value as is around £100k needs new kitchen, flooring and bathroom to max value.
My first thought was ‘get another’ using some cash or equity but this thread has made me rethink. I am keen on retaining some capital and not putting all my eggs in one basket eg the house I live in.
I like the idea of still owning another property when my main mortgage is paid off for income or to sell to gift half to my daughters. So I might think about focusing on selling that property to buy something more profitable
I also like the idea of dialling back on work at some point or working differently eg not ‘on salary’
I see me as risk averse as I am holding a lot of cash in isas and cash, my only stock exposure is through (managed by others) pensions. So adding s&s to the isa portfolio would help
We both work 60hr plus weeks so I don’t have a huge amount of time and want to focus that on/with the kids
So my list is now:
- remortgage the main house in January when I can and decide how much cash to put in/how much to reduce the term too
- take a good look at the rental when it’s vacant and think about refurb and sell or sell as is
- consider cash to s&s isa and what ‘blend’ of this?

Ifa useful but this spread of opinions is useful. I’ve worked hard to get to this position so want to maximise where i am. Thanks for your input

Bear in mind the significant costs of re-entering the BTL market at a later date (particularly in respect of SDT). Personally I would keep the BTL and in due course gift it to your children (there may be some CGT to pay so you will need some advice before taking that step). They can then decide what to do with it, but they will be paying less tax on the income than you are, and can also use their own CGT allowances when they sell it.

There is merit in paying off the mortgage but there is also merit in taking advantage of tax-free wrappers to build up a pot which can be used to pay-off the remaining mortgage in a tax efficient way.

[JapanRed]

Personally I would up the mortgage payments and consider paying a lump sum of that £40k cash into the mortgage. You could potentially be mortgage free in 10 years that way.

Alternatively, if you want to spend more time with the kids, keep things as they are now but reduce your hours at work. Take home pay would be less but you should still be able to afford your mortgage etc.

[Mortgage_tom]

This may seam obvious.

Your buy to let is worth £125k and generates £475pcm, which you will be paying tax on and possibly at the higher rate.

Your mortgage is £200k and costs £1400pcm.

Just on a monthly cash flow basis you would be better of selling the house and paying off your mortgage. e.g. even selling the house at £100k would half your mortgage payment to £700pcm. A saving of 700pcm, minus the lost rent of £476pcm gross...buts that maybe £300 net max after tax and expenses. A 400pcm gain.

Tough call as that gain could be more with a 3% rise in the value of the buy to let. But you could be £400pcm better off and have £25k towards a 911.

The rental yield your getting on the buy to let is not great, less than 5%. Add on top of that the tax, maintenance, etc they may mean a net yield of 3%!

[keith333]

Dadof2 said:

...18 years remaining from end of fixed rate (Santander 2.95%) May 2019...

You can re-mortgage within four months of the end of your fixed rate mortgage without penalty. Don't know if that is okay if you re-mortgage with a different bank.

I just re-mortgaged again with Santander and went from 2.99% down to 2.19% three years fixed with no fee. The change can take place within a day, so I made a saving on the last four months of my five year fixed rate. I was lazy and simply stuck with Santander, there are probably better deals, but I just couldn't be bothered spending the time with supplying payslips, documentation, etc.

[JapanRed]

Mortgage_tom said:

This may seam obvious.

Your buy to let is worth £125k and generates £475pcm, which you will be paying tax on and possibly at the higher rate.

Your mortgage is £200k and costs £1400pcm.

Just on a monthly cash flow basis you would be better of selling the house and paying off your mortgage. e.g. even selling the house at £100k would half your mortgage payment to £700pcm. A saving of 700pcm, minus the lost rent of £476pcm gross...buts that maybe £300 net max after tax and expenses. A 400pcm gain.

Tough call as that gain could be more with a 3% rise in the value of the buy to let. But you could be £400pcm better off and have £25k towards a 911.

The rental yield your getting on the buy to let is not great, less than 5%. Add on top of that the tax, maintenance, etc they may mean a net yield of 3%!

Providing the OP wants to keep an investment on the side, where else will he get a pretty much guaranteed 3-5% percent return?

I’d keep the BTL as it’s earning him more than the interest rate on his mortgage.

[R33FAL]

All this hate on buy to let, but what other asset class is going let you legitimately lever up 80%+ of the asset cost.

Yield on full market value might be low, but remember you are levering it up say 5x so that 2% yield is suddenly 10% return on your capital

[carreauchompeur]

From an ‘amateur’ point of view I’d definitely sell the BTL and pay off half the mortgage. Whilst the previous tenant was in for many years there’s nothing to say you won’t get lumbered with muppets/voids next time around.

[JulianPH]

R33FAL said:

All this hate on buy to let, but what other asset class is going let you legitimately lever up 80%+ of the asset cost.

Yield on full market value might be low, but remember you are levering it up say 5x so that 2% yield is suddenly 10% return on your capital

I understand what you are saying, but the yield is on the entire property value (not the deposit alone) and therefore so you can not multiply this in the way as you have to pay an 80% 'yield' on the mortgaged amount - plus a capital repayment - to the company providing the leverage.

For example (using round numbers):

• Property value £100k

• Deposit £20k

• Mortgage £80k

• Mortgage Interest Rate 3% (£2,400 a year)

• Rental Yield 5% (£5,000 a year)

• Mortgage Capital Repayment (20 year term) £4,000 a year;

Total Income £5,000

Total Expenses £6,400

Total Profit/(Loss) (£1,600)


The above does not factor in house price growth (as a positive) or letting expenses, refurbishment costs, voids. or taxes (as a negative).

I own a few properties, so am not knocking this. I just don't subscribe to the notion that an asset class is a good one simply because you can easily leverage (borrow against/towards) it.

It is the fundamentals that are important (and these change over time).

If you want an investment that has to be purchased out of taxable income and where growth and income are subject to additional taxes - and are happy with the costs and risks involved - then residential property is something you may want to consider.

I did and so hold some as part of my portfolio. Advocating this simply because it is easy to borrow against is wrong though. Any decent bank will loan against your equity portfolio if you want to take the risks/rewards of leverage.

[williaa68]

What about an offset mortgage? Even allowing for the tax efficiency of the ISA, earning a tax free 2% (or whatever your mortgage rate is) is hard to beat. It is hard to get a long term fix with offsets but it has been brilliant for us. We are now pretty much fully offset but still have ten years left on the mortgage so that money is there should we ever need it short term.

[Dadof2]

Thanks for the responses, really useful, covers where I am with it all really

The yield on the BLT isn't great, the logic says sell, pay off the mortgage as quickly as possible etc.. but I can't shake the feeling that I am better having an asset I can give/mortgage for the kids university, house deposits etc... I think I'd like to keep it or something like it.

So updates:

Our domestic mortgage sweet spot seems to be putting in £50k (ISA and cash savings) and dropping the repayment period to10 years. So £170k mortgaged over 10 years at a 5yr fix of 1.89%= £1500 pcm and saving me £118,000 of payments assuming a flat % rate for comparison purposes versus £220k over 20 years at £1400. I am done then before the kids leave 2ndry school.

Tennant has moved out, property in good order but needs redecorating and the garden need a lot of work/cutting etc.. but they all look rubbish at this time of year if not weeded etc.. I think I know what I value it at but there are two agents booked in for the 3rd Jan to give us a valuation for sale and rent. I used to live at the property and the next door neighbour is interested in buying it for his son and he can build extensions on both given the way the drives work etc.. so could be an easy sale. Or I think the rent would be +£100on current which might make it worth keeping, at least giving another tenant a go?ets see if the guy wants it more than I want to keep it.

I will look at changing the kids ISAs or part of them to S&S and what would be left of ours into S&S and keeping the pension up also