Property up and downsizing. What do we do with existing property?
Everyone at some point of time needs to either upsize your property or downsize. It is due to a number of reasons but the main one for upsizing is having a larger family and for downsizing is children moving out or separation.
Regardless of the reasons behind it there is always the same question - what do we do with existing property?
Most people automatically wish to sell existing property not looking at the other options. And the only other option most people think of is just renting the property out. Renting is correctly not an option in most cases - risky, little and not guaranteed money, potential damage to the property, agency overcharging, maintenance to mention just a few.
Rent to Buy seems like a great option for many. It is a combined sale with a rent. Typically the buyer exchanges contract today with deposit payment and rent the property for few years before buying it for higher price. We will explain figures and advantages below.
With down and upsizing each person need to look in detail into their personal circumstances and financial aspects. From financial point of view you don’t need to sell existing property in order to have enough deposit to buy another house. And lenders don’t have a problem with you having another property with the mortgage as well.
As the example:
You own the property which is worth £200k with £110k mortgage on it. You have £90k equity.
You want to buy the property for £300k. The deposit required is, let’s say, £45k.
As you see just £45k is required and your equity in existing property is £90k. It just make sense to think twice before selling it.
Let’s say these clients have a bit of savings of £20k. And the other £25k can be relatively easily withdrawn by doing a remortgage on existing property. That way there is no need to sell the house. It works even better with downsizing as typically the properties are cheaper and less deposit is required.
Let’s look at the risk and cost of buying and selling the residential property at the same time:
Sale price of your existing property. It is obvious you have a chain and because of it buyers need to be flexible with time and therefore the price they offer is likely to be lower then the market value. Some of the buyers are not looking into property for sale with chain and you almost most likely do not attract the buyers who are looking to buy the property quick regardless of the price. On the typical property worth £200k you expect the offers of £185-195k so let’s say it is a £10k loss.
Purchase price of your new property. It works very similar to above with sale price. Because you have a chain and need to be flexible with time you are likely to be only plan B for existing owner. Therefore the price he is willing to accept when it is a chain buyer in opposite to straight purchase is likely to be up to 5% higher. Typical loss therefore on £300k property will be again in the region of £10k.
Risk of delayed purchase of your new property. The owner of your new property might not wait that long for you to complete the sale and simply walk away and put property back on the market. Although it is not a financial loss apart from solicitor and mortgage fees you don’t want to suddenly start looking for a new property.
Why Rent to Buy would be a great option for this scenario?
The price you are likely to get is actually slightly ABOVE MARKET VALUE. It is due to completion having taking place in few years time. So instead of selling property for £190k you sell it for £205k.
Over the period of few years you receive a rent which not only pays off your mortgage but leave you with surplus. Let’s say it is around £100 a month so £4000 in 3 years time.
You also save money as you don’t pay any estate agent fee for sale. It is another at least £2k.
So total savings are £21k in this particular case. And there is hardly no tax to pay as well due to the fact it was your residential property.