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'Buy the Dip, Sell the Rip'.. The Investor's Thread (Read 74166 times)

Liamhutch89

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A bit off topic but I can't find a better one to post in. As there are knowledgeable people in this thread, I'm seeking opinions on whether it would be crazy to stretch myself on a large extension to my house in these uncertain times.

I live in a 3 bed detached house in Leeds with my wife and 3 kids. Soon we will need more bedrooms. My salary is the only household income, I'm 33 and we owe about 110k on the mortgage. We have planning approval for a large extension that will cost around 150k. Advice from parents is always a long the lines of "we wish we stretched ourselves more when we were in your position", but these feel like different times.

This is very much a first world problem - I'm fortunate that the extension would be affordable, while still being able to make monthly investments and having disposable income, but I'm nervous at the prospect of 5%+ interest rates over the next few years as our extra borrowing (if we take it) is on a fixed rate for just 2 years. Would I be crazy to spend 150k right now when I already have a roof over my head? For a little more context, our house would likely be worth just over 500k once complete. Moving house isn't really an option as we like the area and it would cost an extra 100k to buy something equivalent to what we can build.

I hesitated to post this as I'm aware that people are struggling and I'm clearly not doing too bad, but I'm still nervous about this decision. Hopefully, anyone visiting the investing thread knows what they're in for!

abarro81

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Advice from parents is always a long the lines of "we wish we stretched ourselves more when we were in your position", but these feel like different times.

I have no useful advice (sorry!) and no doubt the answer depends a lot on salary levels, ability to find another job if you lose your current one, life priorities etc, but I'm intrigued by this comment... why do they wish they'd stretched themselves?

I always take advice from older relatives with a pinch of salt unless you share quite similar views on priorities/world views/what makes you happy etc.


Liamhutch89

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Advice from parents is always a long the lines of "we wish we stretched ourselves more when we were in your position", but these feel like different times.

I have no useful advice (sorry!) and no doubt the answer depends a lot on salary levels, ability to find another job if you lose your current one, life priorities etc, but I'm intrigued by this comment... why do they wish they'd stretched themselves?

I always take advice from older relatives with a pinch of salt unless you share quite similar views on priorities/world views/what makes you happy etc.

Largely due to the boom in house prices that occurred during their time. With the massive interest rates and job insecurities of the 80's still fresh in their memories, I think they were afraid to spend up to their limit in the 90's. Those who did would have seen massive increases in house value. In contrast, my world view has been shaped by low interest rates and continued growth in house prices (mine is valued at 100k more than I bought it for just 5 years ago with minimal work done!). I'm aware that it's a not a given this will continue.

petejh

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Leaving individual values aside the sensible thing to do would be stress-test your potential future outgoings assuming a scenario in which you lost your job and had zero income for 6 months while the interest on your loan went up by 2%.

How does that look, and what are the likelihoods.


tk421a

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How much is the house worth now? (or how much value will your 150k extension add to it?)
Have you already got planning / is it permitted development?
Have you already got your builder lined up and quoted?
How much contingency have you allowed for in the quote?

Liamhutch89

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How much is the house worth now? (or how much value will your 150k extension add to it?)
Have you already got planning / is it permitted development?
Have you already got your builder lined up and quoted?
How much contingency have you allowed for in the quote?

Was valued at 300k 6 months ago, and after the extension it should be 500-550k based on other houses on the street.

Yes we have planning.

This is one of the tricky parts. Builders are quoting absolutely ludicrous figures, so we're going to project manage it ourselves with help from the father in law, who is a builder himself but lives an hour and half away. He has costed it at around 100-110k to do it ourselves to a white wall finish (two builders quoted over 200k(!!!) to do the build and a third builder quoted 135k but we subsequently found lots of bad reviews and decided against). I understand the stress involved with project managing ourselves.

We have 150k to spend, which gives us around 40k for fitting out/contingency.

kac

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Liam what is the interest rate of your 2yr deal and is switching to a 5 yr fix a possibility? If it is a stretch I'd be nervous about signing up to something that meant a remortgage in 2 years time. I suspect it's a bit of a race against time to get a decent mortgage deal at the moment - my current fix runs out in Dec and trying to get a 5yr fix sorted asap!

tk421a

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Affordability aside, it sounds like a reasonable investment case.

I'm in a similar situation and we're about 5 weeks into the build. So far, I wouldn't underestimate how much you'll also enjoy being in the future home / the value you attribute to that. If you're confident in your estimates / valuations, then I think you'd be hard pressed to find an investment that will return 33-66% in the time period of the build, so purely from that perspective it'd be worth it. Better than the 5% interest rate you'd pay to fund it. Theoretically you could sell and have made a gain (though I imagine the thought of a house move with 3 kids is not fun).

That's if you can afford it without putting yourself under undue stress (financially and personally).

Liamhutch89

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Really appreciating the views presented, in particular, not sleeping on the quality of life gain from the house itself! It's easy to forget about that when crunching numbers.

Kac - I've gone round in circles on this and it's tricky because my current mortgage has 2 years left at 1.1% and to fund the extension we have an extra borrowing offer of 140k at 3% for 2 years. At that point we could combine them if wanted. We only really had one offer to borrow as much as we need, so it was take it or leave it.

In terms of financial stress from rising interest rates, again this is very much a problem I hesitate to share right now, but I think it would mostly impact our disposable income and not our ability to pay the bills, unless things really start to look bad in the economy (say 10%+ interest rates but then I'd imagine most of us are fucked anyway).

spidermonkey09

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Really appreciating the views presented, in particular, not sleeping on the quality of life gain from the house itself! It's easy to forget about that when crunching numbers.

Kac - I've gone round in circles on this and it's tricky because my current mortgage has 2 years left at 1.1% and to fund the extension we have an extra borrowing offer of 140k at 3% for 2 years. At that point we could combine them if wanted. We only really had one offer to borrow as much as we need, so it was take it or leave it.

In terms of financial stress from rising interest rates, again this is very much a problem I hesitate to share right now, but I think it would mostly impact our disposable income and not our ability to pay the bills, unless things really start to look bad in the economy (say 10%+ interest rates but then I'd imagine most of us are fucked anyway).

To my amateur reading, 2 years at 1.1% is not to be sniffed at, even if the extra 140k is at 3%. A lot can happen in 2 years!

remus

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If you're confident in your estimates / valuations, then I think you'd be hard pressed to find an investment that will return 33-66% in the time period of the build, so purely from that perspective it'd be worth it. Better than the 5% interest rate you'd pay to fund it. Theoretically you could sell and have made a gain (though I imagine the thought of a house move with 3 kids is not fun).

Worth bearing in mind that this relies on the housing market staying pretty strong. If house prices take a dive then the return could be substantially less. Less of an issue if you're planning on staying in the property for a substantial period of time though as you can wait out dips in the market.

kac

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That sounds like a pretty good finance deal to me and basically you are saying you need the space and saying you can afford it even if there is a really big increase in rates. I assume that at the total debt level you are still within a reasonable income to mortgage multiplier and so won't have trouble getting remortgaged at whatever the best deals are in 2 years time. If so doesn't sound like a bad decision in principle.

Nails

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I'm probably slightly catious in nature (well only in a financial sense). I'd say it might not be the best time to make a big financial commitment with the current turmoil in government and the markets. Many economists are predicting 6% interest rates by next Summer. Currently the rate of fixed mortgages coming to an end is 300,000 per quarter. This will be 375,000 by Q2 next year. Interest rates at 6% will mean a doubling of mortgage costs for people coming off a fixed. Combined with energy and cost of living crisis it's hard to see this not resulting in a housing market crash.

Unless you were in a situation with an opportunity that might not arise again I'd be inclined to wait six months and see if the financial clouds have cleared. We're in a particularly unstable period caused by a mix of factors but massively exacerbated by the selection of a PM with a completely different set of policies to the ones that the government were actually elected on. Not only that but they're radical and extreme to the extent that they won't even allow the independent fiscal watchdog to give its view. No wonder the financial markets are spooked. It's hard to know where we'll be next week yet alone next year. Uncertain times.

Fultonius

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I was busy typing up a reply, and making a spreadsheet to work some things out, but I wanted to reply to Nails to ask something (anyone can chip in however, and this REALLY is getting o/t but...)

What impact (other than the things already mentioned - being able to afford rate rises up to 10%) will the turmoil really have on the decision?

This needs more time than I have right now to reply - but I think (and I urge others to as much as possible) to pretty much forget about "house price value" it really doesn't affect you much.  It's a more simple equation in my miund, and pete spelled it out.

1. Can you afford the loan repayments on the 150k if there is a protracted period of high (6%) and the less likely but still possible "very high" rate of 10% plus?
2. Is that good value for money for the benefit you'll get?
3. Do you *need* to do it now?
4. Will there actually be any benefit in delaying (rates not likely to go down etc.)
5. Is there an alternative / cheaper way to get more space.

Other than the useful info that doing the works should bring your house "in line" with the average street rate, it doesn't really make any difference to you if the market goes up 10%, down 10% or even more either way as you're not trying to "make money" out of  doing this, you're trying to "spend borrowed money to improve your standard of living".

I'll do some more work on the numbers and back this up later....

And by the way Liam....what is you do that you can afford a big hoose, 3 kids AND get loads of time (and energy) to climb pretty well while already having paid off so much mortgage?  Good effort!

Nails

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I pretty much agree with all of that. The nominal value of your home (or anything for that matter) has no real importance if you're not intending to sell it. So the biggest single factor in the decision is how secure your work/income is. If you feel super-secure, need it now and see no advantage in delaying then the answer's easy. The main advantage I would see in delaying is that I see the whole Trussonomics experiment playing out quite quickly (and not in a good way for Truss). I may well be wrong but I feel that 6 months down the line the economic policy of the Conservatives will have been forced into a more conventional form (ie. focus on keeping inflation down, interest rates likely to be heading for a more manageable 3-5% band, an acceptance of relatively low economic growth and no Brexit dividend). The danger is the potential turmoil that we have to go through to get there. My caution is shaped by memories of the late 80s / early 90s and seeing people I knew have their houses repossessed who were convinced they were financially secure. It was only brief but interest rates reached 15%. How many people with a substantial mortgage these days could take that? And I suppose the other thought going through my head is that the government back then was pretty shit, but it was no where near as bonkers as this one.

tk421a

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If you're confident in your estimates / valuations, then I think you'd be hard pressed to find an investment that will return 33-66% in the time period of the build, so purely from that perspective it'd be worth it. Better than the 5% interest rate you'd pay to fund it. Theoretically you could sell and have made a gain (though I imagine the thought of a house move with 3 kids is not fun).

Worth bearing in mind that this relies on the housing market staying pretty strong. If house prices take a dive then the return could be substantially less. Less of an issue if you're planning on staying in the property for a substantial period of time though as you can wait out dips in the market.

Totally.
Though in this hypothetical scenario, assuming a 10% drop in the market, it'd end up at break-even. More than 10% drop in the market and the chaos that'll be wrought given the numbers who might be on 90/95% LTV mortgages is not a pleasant thought. Though this might be rose-tinted optimism.

In addition to all the other ways people have suggested to frame it:
How much would you be willing to pay to rent somewhere that was as nice as your extended home vs how much would you pay for your current place? How does that delta compare to the interest you'd be paying on the increased borrowing?

Slight disagreement to the nominal value of your home not having any importance if you're not intending on selling - if you were to take a long enough view, you might want to consider it in the context of inheritance to kids.

kac

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The value of your home is also relevant to the LTV percentage and getting the best deals. I'm guessing that you have an agreement in principle on the 3%. I doubt you would get that deal if you applied today. I can't see waiting six months changing much apart from losing your 3% deal and rates going up. Good luck with it.

Fultonius

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Right, Might have more time to explain my thinking and then let people pick holes...

Putting aside the inheritance thing (who knows, maybe some mad lefty government gets voted in and makes a 100% inheritance tax  :blink: ), my thought experiment on this precise situation are as follows, with some worked examples.

Basic premise is that you have decided you need the additional space for the kids, you don't want to move anywhere soon and you're not trying to build a multi-property empire to live off/sell off in later life (we're not all Shark).

Option 1 - You decide to extend your current place and stay there forever...
Option 2 - You buy something similar in the street that's already the right size
Option 3 - You extend, then find you have to move in future.

I'm going to work this through with 2 scenarios. 10% house price inflation over a "nominal period" a whopping -25%. I'm going to ignore interest rates for now, as they'll mainly affect monthly repayments, not the differences in the scenarios (too much) .

Option 1:

Current mortgage: 110k
Current Value: 300k
Equity: 190k

Carry out works. 150k, added to mortgage.

New mortgage 260k, new value 500k*  LTV: 52%  [my opinion, so long as you can afford the monthly repayments @10% interest, then crack on - I don't see any chance of building matrials or builders day rates dropping in the near, medium or long term...]**

Option 2: Sell current place and move to bigger place.

Current mortgage: 110k
Current Value: 300k
Equity: 190k

Buy new place at 550k

New mortgage: 360k, LTV: 65%

Option 3:

You carry out option 1, then for "reasons" you have to move, and the market shifts....

Lets start at the extreme end. All houses drop by 25%.

Existing house value(after works): 375k, LTV: 69%, Equity 115k (pretty healthy for such a house price drop, long way to -ve equity)

You want to move to the "550k" house in an identical street in a new city somewhere...   

550k house is now also worth only 413k, meaning you only need a 298k mortgage to move, 38k more than your existing mortgage. LTV: 72%.

Contrast this with a house price gain of 10% across the market:

For scenario 3, you'd then need a 365k mortgage to move house.  LTV would be 60%.

Point being, in a rising market, moving to a bigger house ALWAYS costs more. It might "feel" nice to feel like you have 50k, 100k etc. of "value" in your house added on when the market shifts, but it doesn't really ever benefit you, the carrot gets bigger but the stick also grows longer.... I just never quite understand the UKs national obsession with thinking house price inflation is a "good thing". Most of us would be much "better off" in a flat or dropping market.

Quote
Slight disagreement to the nominal value of your home not having any importance if you're not intending on selling - if you were to take a long enough view, you might want to consider it in the context of inheritance to kids.
I'd argue that whatever way it goes, general house price inflation is still not a benefit to future inheritors, as the market just keeps on getting less affordable. Of course, in that market you want to make sure you're improving your house etc., but that doesn't mean that increasing house prices across the board actually benefits the one-house owning populace in any measurable way.

I'm open to be shown the errors of my logic, but I just don't see it.

*just picked the lower valuation, and the higher one for the existing house as a conservative case.
**Do everything you can to make it as energy efficient a build you can, see if you can get any interest free loans for insulation upgrades etc.

remus

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Good numbers there!

Point being, in a rising market, moving to a bigger house ALWAYS costs more. It might "feel" nice to feel like you have 50k, 100k etc. of "value" in your house added on when the market shifts, but it doesn't really ever benefit you, the carrot gets bigger but the stick also grows longer.... I just never quite understand the UKs national obsession with thinking house price inflation is a "good thing". Most of us would be much "better off" in a flat or dropping market.

If house prices are rising faster than inflation and your end game is "sell this massive house in london I bought 30 years, move anywhere else in the country, retire" then inflated house prices are a good thing because you end up with a big wedge of cash. Agree that if you want to stay in the same area or, god forbid, move up the property ladder then it doesn't help at all.

kac

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 Martin Lewis has been pointing out for years how stupid it is that we celebrate house prices going up. However, there is a difference between general house price inflation and the value of your house going up due to you improving it.

Anyway I suspect Pete will ask for his thread back soon so probably best discussed elsewhere!

Fultonius

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Good numbers there!

Point being, in a rising market, moving to a bigger house ALWAYS costs more. It might "feel" nice to feel like you have 50k, 100k etc. of "value" in your house added on when the market shifts, but it doesn't really ever benefit you, the carrot gets bigger but the stick also grows longer.... I just never quite understand the UKs national obsession with thinking house price inflation is a "good thing". Most of us would be much "better off" in a flat or dropping market.

If house prices are rising faster than inflation and your end game is "sell this massive house in london I bought 30 years, move anywhere else in the country, retire" then inflated house prices are a good thing because you end up with a big wedge of cash. Agree that if you want to stay in the same area or, god forbid, move up the property ladder then it doesn't help at all.

Aye, good for them, shite for everyone who lives there  :lol: Ask anyone on Skye if they like house prices going up because    well-off Londoners can buy a second house and pump the local prices...

Maybe this could all get moved to the mortgage thread that's just popped up?

Fultonius

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Back on topic. It seems to have occurred with little fanfare, but Ethereum has fully moved over to Proof of Stake cutting its energy consumption by 99.95%. Seems pretty major!  It was using more than 5GW - or about 3 times one of the two new Nuclear reactors at Hinkley, or about 2-3 big offshore wind farms. I really wish someone would tax bitcoin for its energy usage.

https://blog.ethereum.org/2021/05/18/country-power-no-more

Still on a very long HODL and hoping for some slow and steady gains now.

teestub

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Everything has gone quiet on the crypto front since they lost half their value! Be interesting to see what happens in the future.

I guess at least all the NFT owners out there can feel better that their blockchain for their worthless virtual items isn’t using too much energy.

Yossarian

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I worked for a crypto development er, company (though they preferred to describe themselves as a "public goods lab") for a few months earlier this year. I have no idea what the future of crypto will be like, but whilst there continues to be vast amounts of investment into those sorts of places, I'm quite sure that in the short to medium term things will start moving again.

The whole thing was completely ridiculous, which is party why I'm trying to write a sitcom about it. The whole experience was completely ridiculous. An amazing bunch of insanely clever (on paper) people (virtually everyone had PhDs in computer science / cryptography / maths) led by some very impressive (on paper) founders. Yet the main project white paper was the most unintelligible, verbose and pie in the sky thing I'd ever read. It looks like a document written by aliens who'd learned to write English using a dictionary of words over 8 letters long. I've got no doubt that they believed what they were writing / planning, but that was based on the self-belief and belief in the project that you only get when you're young, when the only people you ever meet or talk to are also totally immersed in crypto, and when you've been given more than $25 million to make your project happen. (I doubt the investors shared any of the cod-utopian possibilities of it either - I think it was much more a case of earmarking a massive chunk of the tokens in advance of the thing launching with a fanfare and watching them (probably fairly briefly) explode in value.)

Liamhutch89

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Thanks again everyone, posting here has helped settle my nerves. It does make sense to go ahead with the build, despite the chaos in the world!

And by the way Liam....what is you do that you can afford a big hoose, 3 kids AND get loads of time (and energy) to climb pretty well while already having paid off so much mortgage?  Good effort!


I got a big leg up with my house deposit, receiving a 30k inheritance in my teens, that I somehow managed to keep safe until my mid 20's and not piss it all up the wall.

For work, I'm an engineer specialising in fire safety. My niche is providing advice in legal disputes, mostly in relation to the design and construction external wall systems and their impact on safety. Since the Grenfell disaster, there's been huge demand and not enough fire engineers, so salaries and bonuses have been on a steep incline for years, which has allowed me to pay off big chunks of the mortgage. 95% of the time I'm working from home, so I can get on the board pretty much any day I want after the kids have gone to bed. Getting out on rock is a bit more difficult.

 

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