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I have a shared ownership property with an estimated value of £250,000. I own a 40 percent share and pay rent on the rest.
The mortgage on the share I own is £37,000 and costs me £235 a month. The rent I pay is £595.
My mortgage contract ends in June. I have £100,000 saved. Would it be wise to use some of that to pay the mortgage, or should I use my savings to increase my equity in the property, known as laddering?
My lease on the property is now less than 80 years. Extending this will cost around £8,000, plus other costs related to the staircase.
The stairs would reduce the rent, but not by much since I can’t get 100 percent there. I would also like to keep a decent amount of my savings free. MR
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David Hollingworth replies: You are in the positive position of being able to consider various options as you approach the end of your current mortgage agreement.
In addition to allowing buyers to purchase an initial share of the property, shared ownership allows for the purchase of additional shares as your situation changes.
Known as a ladder, this would allow you to potentially own the entire property over time.
It sounds like you will have already discussed this with the housing association, which makes a lot of sense and will help you better understand the options and associated figures.
Paying off the mortgage would lower your monthly costs and protect you from being hurt by higher interest rates.
Those higher mortgage rates certainly could be a reason why you’re more focused on reducing debt, rather than potentially borrowing more to move toward full ownership.
While it is relatively easy to understand the potential interest savings that will be realized by paying off the mortgage, it is difficult to directly compare that savings to the potential profit if you decide to buy another stock.
Comparing mortgage and rent costs is difficult
Increasing your ownership interest in the property will reduce your rent payment, giving you a reduction in your monthly costs.
It seems that you have been a little disappointed by the fact that an additional share could reduce the cost of the rental.
However, that is not a comparable comparison to overpaying or swapping your mortgage.
What we don’t know is how house prices will behave in the future and therefore how this might add to or detract from the benefit of the ladder system.
> True Cost Mortgage Calculator: Check what a new fixed rate would cost
Ladders: In addition to allowing buyers to purchase an initial share of the property, shared ownership allows for additional shares to be purchased as your situation changes.
If prices were to rise and you own a larger share, you would clearly benefit more from that price increase, compared to retaining your current minority share of the increase.
Of course, there’s no guarantee that prices will go up, so there’s still no right or wrong answer to this question, but I would advise you to factor it into your long-term thinking, rather than focusing solely on rent reduction. .
There will also be costs to buying another stock, so factor these into your decision.
Extending the lease is another cost that might be worth exploring further. As the lease runs down, the cost will increase and the other impact will be on the range of available mortgage lenders, who will have minimal expectations on the remaining lease.
emergency fund
You are right to want to maintain a level of savings. This is important and will largely depend on your goals in the future.
Having an emergency fund is crucial, so it wouldn’t be a good idea to put all your resources into the property and you should keep some cash savings in reserve.
How much you retain will largely depend on your financial and lifestyle goals, but it’s nice to have the option.
Rather than thinking in all-or-nothing terms, you might want to consider a balanced approach, potentially buying a smaller additional share, allowing you to keep some savings but keeping your mortgage for now.
Compare mortgage options now to switch to at the end of your current deal.
That will help you better understand how manageable it will be to maintain or even increase the mortgage, now or in the future, if you decide to buy it outright.
> What’s next for mortgage rates? Should they be fixed for two or five years?
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