I have a shared property with an estimated value of €250,000. I own a 40 percent stake and pay rent on the rest.
The mortgage on the share I own is €37,000 and costs me €235 per month. The rent I pay is €595.
My mortgage agreement expires in June. I have €100,000 in savings. Would it be wise to use some of that to pay off the mortgage, or should I use my savings to increase my interest in the property (aka stairs)?
My lease on the property is now less than 80 years. Extending this would cost around £8,000, plus other costs associated with stairs.
A staircase would reduce the rent, but not hugely because I can’t get the full 100 percent. I would also like to keep a decent amount of my savings free. SR
Mortgage Help: In our weekly Navigate the Mortgage Maze column, real estate agent David Hollingworth answers your questions
SCROLL DOWN TO FIND OUT HOW TO ASK DAVID YOUR Mortgage question
David Hollingworth replies: You are in a positive position to consider different options as you approach the end of your current mortgage agreement.
As well as allowing buyers to purchase an initial share of the property, shared ownership also allows them to purchase additional shares if their situation changes.
This is known as stairwell and allows you to potentially own the entire property in time.
It sounds like you may have already discussed this with the housing association, which makes perfect sense. This will give you a better insight into the possibilities and the associated figures.
Paying off the mortgage lowers your monthly costs and protects you from higher interest rates.
Those higher mortgage rates could certainly be a reason why you’re focusing more on reducing debt, rather than potentially borrowing more to pursue full ownership.
While it’s relatively easy to understand the potential interest savings that come from paying off the mortgage, it’s difficult to directly compare those savings to the potential benefit if you choose to buy another stock.
Comparing mortgage and rental costs is difficult
Increasing your share of ownership of the home lowers the rent payment, giving you a reduction in your monthly costs.
It sounds like you might be a little disappointed with how much an additional share could reduce rental costs.
However, that is no comparison to paying too much or paying off the mortgage.
What we don’t know is how house prices will behave in the future and therefore how that might increase or decrease the benefit of stairs.
> True Cost Mortgage Calculator: Check what a new fixed rate would cost
Staircase: in addition to allowing buyers to purchase an initial share of the property, shared ownership also allows for additional shares to be purchased if your situation changes
If prices were to increase and you own a larger share, you will clearly benefit more from that price increase, compared to maintaining the current minority share of the increase.
Of course there is no guarantee that prices will rise, so there is still no right or wrong answer to this, but I would advise you to factor this into your longer term thinking, rather than just looking at the rent reduction to look.
There are also costs associated with buying another stock, so keep that in mind when making your decision.
Renewing the lease is another expense that could be worth investigating further. As the lease expires, costs will increase and the other impact will be on the reach of available mortgage providers, who will have minimal expectations about the remaining lease.
Emergency fund
You are right to want to maintain a savings level. This is important and will depend greatly on your goals going forward.
Having an emergency fund is crucial, so it wouldn’t be a good idea to put all your resources into the property and you’ll need to put some cash aside.
How much you keep depends largely on your financial goals and lifestyle, but it’s nice to have a choice.
Rather than thinking in terms of all or nothing, you might consider a balanced approach, which could involve buying a smaller additional share, allowing you to maintain some savings but maintain your mortgage for the time being.
Now look around for mortgage options that you can switch to at the end of the 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 outright.
> What next with the mortgage interest rate and should you fix it for two or five years?
NAVIGATE THE MORTGAGE MAZE
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow a commercial relationship to compromise our editorial independence.