I'm 29 and over the years I've been saving aggressively and now officially reached the £1m mark. I currently rent a nice shared apartment with a flatmate in central London and in a couple months my contract ends.
I'm unsure whether to continue renting or just buy outright with NO mortgage in order to avoid the high interest rates using my cash savings. I have the following options, all leaving me with a decent amount of cash remaining for some stocks investment exposure and cash buffer.
Option 1 - continue renting)
Size: 2 bedrooms shared with a flatmate
Monthly Rent pp including bills: £1,600
Total Annual Cost pp: £19,200
Option 2 - buy one bedroom flat)
Size: 1 bedrooms
Purchase price: £700,000
Total Monthly Utility Bills: £200
Yearly building service charge and ground rent: £5,000
Total Annual Cost: £7,400
Option 3 - buy two bedroom flat and rent out 1 room)
Size: 2 bedrooms
Purchase price: £850,000
Total Monthly Utility Bills: £300
Yearly service charge and ground rent: £6,000
Total Yearly Cost: £9,600
Spare Bedroom Rent: £1,200 (£14,400)
Total profit: £4,800
I know this is very basic assumptions but would appreciate anyone's thoughts, unfortunately the annual service charges really screw over home owners in London.
are you from the UK or you are an expat here?
Can't help but I just wanna congratulate you for your achievements in finance and hitting the £1M mark. Goals. I hope I will get there, my dreams will continue to fuel me
First, congrats on that achievement.
At the current state of housing market in London, I’d probably stall a couple more months, as prices are likely to decrease even more in the next quarters.
Property prices were already down 2% in December 2022. With high rates and less/no borrowers, prices will likely keep falling.
Wait for a stable bottom and buy then. Hope that helps!
£1M at 29 is very impressive. What sort of role do you have to save that much?
I agree with the other poster, wait until end of the year until property cycle has played out more and house prices decline.
Personally I would buy a nicer place with a mortgage, rather than buying with cash outright.
First of all congrats on hitting a very impressive milestone.
You should include the opportunity cost of buying a house in the total annual cost.
You should also account for the potential costs of lease renewal if you are buying a leasehold flat.
You can avoid service charges / ground rent if you don't buy a serviced flat.
From the UK, I initially rented then I bought. I've always heard people advising "wait until prices come down". I never saw it happening except for a temporary drawdown during Brexit and then up again. And for those who think it was rates driven, sorry but London prices are mostly driven by supply/demand and there's a structural supply shortage in the capital.
No CGT on 1st property means all capital gain is yours. 40-50% of monthly mortgage payment repays capital hence balance will reduce overtime without even realising it. 10% overpayment p.a. allows to reduce monthly burden if you wish (good use of bonus!). Plenty of available mortgage capacity: lenders love finance professionals and are out with 4.5-5% fixed rate deals atm. Just avoid places with massive service charge which kill your cash flow and honestly add little value (not sure you need a cinema or a sauna in the building…)
Also for those who "4.5% cost of capital I can invest and make x% more": ok and then…? You are not a HF, better use those £ to enjoy a place you can make your home.
I don't really get your cost of capital point? Are you saying it would better to buy cash? I just don't see how that makes sense even in the current rate environment.
Clearly to accumulate as much as he has, OP knows where to put cash to generate some returns because 29 at £1m cash, if we ignore the chance that OP inherited/trust-funded it, is pretty insane.
I think the numbers are too basic to make a hard nosed financial decision, e.g.stamp duty, tax on rental income.
It is probably more important to consider other factors, including how long you plan to stay in London and your chosen area, if you plan a family (1 bed vs 2 bed), the comfort of not having to move if your lease expires vs hassle of dealing with maintenance.
Congratulations on reaching the milestone, lots of good advice but one point to bear in mind that there is no guarantee that the Service Charge stays even remotely at the level you buy in at, or even something vaguely related to inflation.
I know multiple people who bought flats in big newish developments (e.g. Battersea) and have seen the Service Charge go up 40/50% or more in 2 or 3 years. Especially in large developments you have very little chance of fighting it as well.
I'd reiterate what a couple of other people have said:
- it sounds like you are looking at a modern luxury flat on a new build development if you are paying such a large service charge. If you want it, go for it , but you're just throwing money away. You can absolutely buy nice property with lower service charges (e.g. a period property).
- I'd question if you want to put all of your cash / net worth into property. Why not put down a 20%/40% deposit and keep the rest invested. Presumably some of your cash is in ISAs, I'd be inclined no to spend that if you don't have to
Congrats on the achievement so far. Would be great to here a bit about your career path.
Rent, not worthwhile buying just yet
I don't think you factored in taxes on renting out the 2nd room, which would be taxed at 40% I believe
Depends on the rent, below a certain amount taxes are zero actually.
It wold be a shame to spend all your hard earned savings in one property in London. 1m is a lot of money anywhere outside London.
Better to get a loan. Anyways I think most force you to remortgage in 5 years? Rates are likely to go down by then, so you'll have the chancre to likely lower your monthly cost by then.
With the remaining you could do more investments. Keep it in isa and even buy a second home somewhere in the Mediterranean, chillin every summer, if that would be of interest
1m can go a long way, shame to spend it all in London
A flat in a desirable part of London is almost guaranteed to go up in value. There is also the psychological aspect of knowing that whatever happens, you’ve got a roof over your head.
A house in Italy / Spain is nice but you’d have to spend a lot of time there to make it worthwhile (or rent it out but that’s really a hassle).
Always buy.
Why would anyone rent? Just basic maths, no matter where you live. Plus I’m taxes are super high.
Yes it is just basic maths, but the maths tells you that its not always better to buy. Especially today in London where rates have shot up and prices have not significantly reduced yet.
For arguments sake lets say you purchase a 700k property with a 500k mortgage at 5%. Annual interest is 25k, assume 5k for service charge & ground rent + 2% of property value annually for maintenance (14k). So thats an annual expense of 44k (3,667 per month) - I'd say you'd definitely be able to rent something comparable at this price or lower.
I did not factor in property appreciation into the above but if we assume that the value rises in line with long term inflation (2%), then assume the alternative is that you invest the 200k deposit at 7% (conservative long term market returns) you'd be better off renting.
You have a lot to learn about real estate. Not trying to be rude here.
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