Raising Capital or Retaining Cashflow on a Bank Base Rate Tracker

Dear Lord Smythe,

As we do not know much about your personal circumstances, which could have a massive influence we are not aware of, the easiest thing to do is break down mathematically the factors you have given us.

What is the Value of the outstanding unsecured debt and how much does it cost you per month.
What is the value of the property in question and hence how much is the o/s mortgage
How much is the rental income (looking at current yields)
How much capital would be left to purchase a new property
What would the Purchase Price and rental income be

Then you would need to factor in cost of sale, cost of purchase and the increase in cost of BTL finance (around 2% plus fees)

There will probably be more questions I haven't thought of yet but this would be a great start for us all to try and solve your puzzle 🙂

Based on what you have told us, my instinct would be to sell.

The low interest rate you are currently enjoying is living on borrowed time, and, the second BOE raises the base rate, property prices will start to stagnate.

Make hay while the sun shines.

Repair the roof while the sun is shining.

Always have a pot of cash for a rainy day.

All these sayings seem to fit your conundrum. 🙂

We do not know enough facts yet really.

The mortgage could be 10k and value 70k for all we know yet.
We don't know what the alternative investment options are (they could be much worse)

If and when interest rates rise (unlikely until well into next year) the rises are predicted to be very small and gradual and no more than up to 3% in approx 3 years. These BofE predictions are assuming current growth which many consider is unlikely to be sustained under current market conditions. Therefore 1.99 above base could still look like good value for a while.

If there is a need to increase interest rates it could be because of an improving economic climate and this could out weight an increase of borrowing costs in the balance of Supply and Demand especially when Supply seems to be the issue rather than rampant wealth.

Therefore it is not a given that prices will do one thing or another if interest rates rise.

If in doubt it is often safer and cheaper to do nothing until you are sure and keep your options open.

You've raised a good question here, and one which I'm sure many other readers will be contemplating with the market as it is currently. Neil and Vanessa have both given some good feedback and I'd like to add my two-penny-worth here too.

It may well be that you already have a 'gut feel' for what you'd like to do. I have found during my investing career, that this is often the best 'steer' we can have. You must still look into all the facts and figures and reach a conscious decision, but your instinct will tell you whether that is right!

Indeed, the fact that the lease is shortening is quite a factor to take into consideration. I guess the overall question is, how much more will you benefit in true cashflow terms if you were to sell up, pay down your debt and purchase another property/ies vs keeping the status quo?

If you are already certain of the move you'd make in property terms and have a good grip of the figures, then making the decision should be easier. If you are uncertain, then taking Neil's advice, it's best to stay put until the way becomes clear. A favorite quote of mine is 'Resistance is created through a lack of clarity', so keep going until you find it!

Hope that helps 🙂

Hazel

Thanks for all the comments so far most helpful and further food for thought.

As to my circumstances, the debt pay off will be £20K so saving £400 pm in credit card repayments and £40K to add to new property or keep as rainy day fund as Vanessa alludes to as I feel there may be opportunities ahead and I avoid extension costs which if paid will not really add any monetary value to property.

I have not sourced or worked out where the £40k could be used as a deposit for another property but sometimes one needs to shift a property to lead on to another opportunity.

I dont think base rate will go up quickly and agree with Neil so there is reasonable margin to be had and my product will always be at a lower rate than other BTL products.

My gut feel is to sell if I can achieve over stamp duty level ( property is on for £270k) or if not retain and let out to bolster my cashflow. Perhaps a win-win scenario ?

Reply to the comment left by "Lord Smythe" at "04/06/2014 - 17:40":

Just some observations if you do sell:
The savings of £400pcm on your credit card are less than your profit on the property so this plan is actually cash flow negative depending on the interest paid on the surplus funds, but as you will not want to tie it up this may not be very much.

Also the costs of selling will increase the effective APR of the credit cards quite substantially. 3k cost are 15% straight away.

If you do not increase your cash reserves above the 40k amount and you do wish to purchase another property it will need to be at a lower value due to deposit LTV requirements and purchase costs. Don't forget the new higher BTL rates will eat into cash flow.

If there is a good chance you are looking to buy again you may be moving backwards from your current position.

Alternatively your exposure to debt and risk may be of more concern.

Reply to the comment left by "Neil Patterson" at "04/06/2014 - 19:43":

Neil

Excellent comments. Thanks.

Steve

Is the mortgage portable?

Reply to the comment left by "Lord Smythe" at "04/06/2014 - 21:09":

Thank you, but I did forget that your surplus cashflow on the property is taxable income so the value of it depends on your tax position.

However this is a great example to show how everyone's circumstances are different and need to be considered individually subject to personal preference and attitude to risk