My wife asked me to find a way for us to move into a more expensive house, but without increasing our repayments. I came up with a scheme that could possibly achieve this for some people. I have explained the principles below. I have also written about the risks, and the reasons that we are not seriously considering this strategy at the moment.
[Image from: Royalty free photos.]
Before I go into the scheme itself, I need to explain a couple of things.
First, I need to say I would never go into my personal finances on a public blog. This is partly why there are no actual figures here. Neither do the details I give below reflect the situation we are in: they explain the principles of my scheme, nothing more. Realistically, we couldn’t pursue this scheme even if we wanted to.
Secondly, the other reasons that I have not gone into figures is that my calculations are back-of-a-fag-packet estimates at best. So I wouldn’t get too excited about what you’re reading here. Even if it is actually possible to work a scheme like this (I honestly don’t know) the strategy I am going to present would be rather risky. So please, unless you are really sure that you know what you are doing, read this as a warning about what not to do rather than a suggestion of what you should do. I am certainly in no position to take responsibility for your financial welfare.
So, on to the details:
Imagine that we purchased out existing home about 6 years ago. Like other properties, its value would have risen considerably over that time, so we now have significant equity in our home. Imagine that we also have a few thousand squirreled away and a small inheritance. Let us say we have some £120,000 in equity and cash.
The scheme would involve taking this equity and cash splitting it four ways:
- We would take one quarter and use it as a deposit on a buy-to-let property. We’ll call this property 1. The rent from this property would cover the payments on a fixed-rate interest-only mortgage on the property. There will be a little left over as a contribution towards maintenance, insurance etc.
- We would take the second quarter, and use it to buy a second buy-to-let property just as we had done with the first. This is property 2.
- Repeat with a third quarter of our existing equity. Now we have property 3.
- Put the remaining quarter in the bank. We’ll call this cash the “scheme fund”.
Then, we take the money we are paying towards our existing mortgage and use it as a contribution towards the rent on the property that we actually want to live in. The remainder of the rent would be taken out of the scheme fund: just enough to cover our rent each month. This fund would also have to cover any additional outgoings on our buy-to-let properties.
- One of the buy-t0-let properties would actually be the house we live in at the moment. This saves us the costs of selling it at the moment.
- The scheme fund would sit in an account that is offset against one of the mortgages on one of the buy-to-let properties. This will reduce our monthly outgoings, so enabling us to rent quite a nice property and maintain our buy-to-lets.
- One of the buy-to-let properties would ideally be the property we want to live in. This means that we know that at least one of our properties has reliable tenants: ourselves.
Taking these measures would comfortably cover all our outgoings for some 5 years, during which time we could live reasonably well. At this point, however, the scheme fund would be empty, so we could no longer pay our rent. So, in some 5 years time, we would be forced to sell our 3 buy-to-let properties for funds.
Now, the interesting thing is that if property values go up by around 3% over the next 5 years (just over inflation), we would break even. The scheme fund that we spent running the scheme would be paid back by the gain we make when we sell the buy-to-let properties.
If, however, property values go up by more than 3%, we could make a tidy profit. If they continue top rise by as they are at the moment, we could pay off our mortgage in 7 years. And we would live comfortably in the mean time.
So, why don’t I put my money where my mouth is? At least four reasons:
- It is too risky.
- I do not know if any of this is actually possible.
- It is too risky.
- It could be so much work.
- Our real financial situation is not really like the one I have described here.
- It is too risky.
Oh, and did I mention the risks? I’m simply not prepared to live with the risks. The short term future of the housing market is very uncertain at the moment. Predictions by financial experts vary widely. Some people think that prices will keep going up. Others predict a major crash with losses of 40-50% and more each year. The truth is, I don’t think anybody really knows what will happen over the next 5 years. I am responsible for my family’s financial well-being. I simply cannot gamble away our financial stability.
So there you have it. My advice to you: don’t do it!
That said, some people think they can predict the future. If you are one of those deluded individuals, and you manage to pull off a scheme something like this one, I would be delighted if you were to leave me some comments. Of course, some cash would nice, too! But given that the risk is all yours, I’ll settle for your thanks… and, oh, all right then: maybe just couple of hundred for the idea. 😀
Could this really work? Or is it just daft? Your comments are all welcome.