Q I’m new to thinking of my home as an asset and I’m learning more each week. The decision to make is: what next?
My wife and I have a two-bed flat in Brixton in London that we bought seven years ago. We have been amazed by how the prices have risen and now need to decide whether to do everything we can to keep it while we move to a more affordable area, or whether to sell now and save the hassle and risk of the unknown.
We are looking to buy a house in Manchester in which to raise our children, and while the money from the sale could potentially allow us to be mortgage free, we are unsure if it’s the right thing to do in the long term. The big decision is: sell and be mortgage free, or take on more debt with a view to a healthy retirement investment? AM
A I’m not sure that it’s particularly helpful to think of your home as an asset until it stops being a home and it can generate income as well as an increase in its value. And even if your Brixton flat were to stop being your home, it would be misguided to think of it as a healthy retirement investment as, compared with investing in a pension, property is very tax inefficient. Once a property stops being your home, it becomes liable to capital gains tax (CGT) when you sell, unlike investments in a pension, which are CGT free. And unlike money invested in property, money invested in a pension attracts tax relief at your highest rate. You also have to pay income tax on rent you receive from letting the property.
To be able to keep the Brixton flat and raise money to buy a house in Manchester, you are right – you are going to have to take on more debt. Although you can offset interest against any rental income, the cost of borrowing is also a drag on the value of your investment. There is also the risk that you won’t be able to borrow as much as you need to fund the purchase of the Manchester house. In addition, there are the practicalities to think about of living in Manchester but letting a property in London.
If you want to keep life simple, you could sell the flat, take advantage of the increase in its value to buy the house in Manchester without a mortgage and take advantage of tax relief by investing the money you would have spent on a mortgage in pensions for both you and your wife.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
