Originally Posted by
Kris
I could be wrong, but the way I see it is this:-
You've been looking to buy a house and come into an inheritance of £250,000. The house you want costs £200,000. By paying the £200,000 you are left with £50,000 cash. Not an inconsiderable sum, but you have tied up a large amount of money into the house. True, you can sell your house if you fall on hard times, but who wants to do that? And, who knows, your house may lose value in the short term.
If you put down a hefty deposit (say £40,000), your LTV will be 80%. You'll get a very good deal for that. A 20 year (2-year) discounted variable mortgage for a house with LTV of 80% at Furness costs 1.3% interest . After two years, if interest rates are edging up, then maybe you'd consider borrowing less money and putting in more of your own money. Either way, you'd be looking for a new deal because the Furness deal goes to 5.29% after two years.
If interest rates remain the same, you could even consider borrowing more money at the low rate. You'd have £210,000 in the bank earning a small amount of interest, or £210,000 in a Fund earning anything up to about 15%, or £210k in some other investment that returns a lot more money. In the meantime, your 20-year mortgage will cost about 22k over 20 years. So, about £91 a month.
If the house gains value at current market rates, then in 20 years the chances are the house will be worth more than £222,000 (a 10% rise over 20 years? That's very likely to happen). Yes, you have to consider inflation etc, but in 20 years you will be worth (value of house + return on £210,000 investment ). If you buy the house you will be worth (value of house + return on £50,000 investment).
If you fall on hard times, you will have enough money in the bank (providing you haven't squandered it on holidays) to pay your mortgage until you find a new job etc.
You could argue that the person would be putting the money they would be paying for the mortgage into an investment fund. However, many of us don't have that level of self discipline and would probably squander our extra wages on holidays and cars.