Q I bought my flat with a mortgage about six years ago, scraping my way in as a first-time buyer just before any of the government’s help-to-buy schemes were available. I chose fairly low repayments and a long mortgage term, reflective of my financial circumstances at the time. Last year, I secured an amazing job with a much higher salary and it has changed my life. I’ve paid off all my other debts – apart from my student loan and mortgage – and now have savings and investments. My mortgage is a five-year fixed rate with an interest rate of 1.54% and 23 years left of the mortgage term.
I have calculated that between overpayments and reducing my mortgage term, on my current salary, I could be mortgage-free in the next five to seven years. My thinking is to reduce the balance while I am still in the fixed rate-period, and then just pay off the rest using my cash savings (since they are earning very little interest) when it moves to the standard variable rate (SVR).
However, it has always been my dream to own a house, not a flat, and I wish to move to a different area. I am in my mid-30s and would like to know if I am better off:
1. Saving my money as a deposit towards a house and then porting my existing mortgage (it is portable).
2. Repaying my mortgage in its entirety, then selling my flat to obtain a large deposit, and obtaining a new mortgage against a house.
3. I’m not sure whether this is possible: repaying my mortgage in its entirety, releasing equity in my flat as a deposit towards my house, thereby keeping my existing flat, and then renting out my flat? It’s in an area with a high rental demand.
I would be in my 40s by then. What would be the pros and cons of each approach – or at least, what would I need to consider?
A I don’t know why you seem to think you need to be mortgage-free before you can consider the options open to you but I do know that you should be looking at your entire financial position rather than focusing on just your mortgage. Have you set aside an amount of cash savings as an emergency fund to tide you over if, for example, you lost your job or faced an expensive repair bill? Are you in an employer’s pension scheme or do you have a personal pension to provide yourself with an income once you retire? If you have, all well and good, but if you haven’t, you would be wise to put an emergency fund and/or pension plan in place not least because contributions to the latter attract tax relief – unlike other investments – which boosts your pension pot at no cost to you.
Once you’ve got all that sorted (if necessary), you can turn to realising your dream of moving to a house in a different area from your flat. Your option one is viable but as you are aware, because the rate of interest you can earn on savings is lower than what you are paying on your mortgage, you would be better off reducing the balance on your mortgage – but only if you can do so without penalty. With most fixed-rate deals there is an early repayment fee to pay although some deals let you repay 10% of the mortgage balance each year without having to pay a penalty.
Your option two also works, albeit in a slightly different order. You sell your flat, use the sale proceeds to clear your current mortgage and put anything left over towards the deposit on a house together with a new mortgage on the house with. If you were to do this during the fixed-rate period, you would need to “port” your current mortgage to your next property, topped up if necessary with an additional mortgage – with different terms – from the same lender. Given that your earnings have increased substantially and you have no other debts (apart from your student loan), you might find that you can implement option two far sooner than you might have imagined.
Option three is, I’m afraid, a non-starter. The only ways of releasing equity from the flat is by selling it or increasing the size of your mortgage to raise some cash to put towards your house. If you did increase your mortgage to be able to release equity and rent out your flat, you would have to pay the higher rate of stamp duty land tax (SDLT) on the purchase of your house and income tax on the rental income which might have the additional downside of pushing your taxable income into the higher-rate tax bracket.