How to buy a house in London?

Posted on by FIRE v London

The calm long term stability of my financial life has just been severely threatened. My other half and I are seriously considering buying a house. Moving house, that is.  This leaves me floundering around wondering what to do with my investment funds.  I’d love any comments/suggestions readers have.

Broadly speaking, I have no plans to move house. For years.  I live in a house that is more than adequate for my needs.  If Warren Buffett has never moved house, why do I need to? And the great man’s house wasn’t in London.  My house is in London, and thus is worth at least £2m. This means the stamp duty involved in moving in the same neighbourhood is of order £200k+.  This is money down the drain, a tax on my mobility, many many months’ income, and so forth.

And of course my investment philosophy reflects my view that I have no foreseeable major funding needs in the next few years.  I.e. I don’t need to find a lot of money to buy a house.  So my cash holdings are <5%.  Most of my exposure is to equity markets.  In principle this means my firepower can drop by 50% in as little as a month.

And yet.

And yet an amazing house has just come on to the market.  Sort of (at the time of writing, the seller has withdrawn it).  A house which makes both my wife’s heart and my heart sing.  A house we can imagine living in for far longer than our current house.  A house in our area, an area we know well.  A house, in short, which is very tempting – if we could get an offer accepted and funded and ultimately completed.

The house in question is an upgrade from our current house.  It’s worth at least £3m.  The stamp duty is eye watering.  But I can afford it.  My investments can more than cover this.  But how to organise my investments for maximum flexibility while preserving the returns potential of those investments.  Can this be done?

I should say that I think the odds on me buying this house are no better than 3:1.  I.e. I have a 25% chance.

The real complication arises from the seller’s insistence that he only will consider cash buyers.  Cash buyers, i.e. no chain.  I.e. people who can put down £3m+ straight away, plus ~10% stamp duty plus costs.  Let’s call that £4m of readies.

This ‘no chain’ dynamic is in fact very common in the prime London real estate market; if I remember rightly over 60% of £2m+ London homes are bought by cash buyers.  So if you need to sell your principal residence to buy your next house, you are putting yourself in the <40%.  And it is an inferior 40% which leaves you at a disadvantage.

I am in the fortunate position where my investment portfolio is worth over £3m so I can afford the house. Or so I thought. But as I worth through the details, numerous questions arise:

  1. How much of my portfolio is Unsellable?  My pension is Unsellable.  I consider my ISAs Unsellable too.  I also have some private company shares which I can’t sell, or certainly not in a hurry.  And in fact I also have a disclosable investment in a public company and selling that would trigger Regulatory News Service announcements I don’t want to trigger – making this holding Unsellable as well.  It turns out I now realise over 25% of my portfolio is Unsellable.
  2. Should I use a mortgage?  I do in principle like using leverage with long term property investments.  I bought my current home for around £1m, with a 50% mortgage.  My equity in that home has quadrupled, even though my home has barely doubled. But that old mortgage is at <2% p.a. interest costs, whereas a new mortgage would be at 4%+ interest costs. This is less than my dividend income yield, and while it is less than the after-tax investment returns I make, such a mortgage would be cashflow negative for me.    And there is a question about how  much mortgage I’d get anyway; my earned income is pretty low in the scheme of this transaction and my investment income is about to be traded into a house, at least temporarily.
  3. How to rebalance my portfolio to provide me with flexibility?  Ordinarily, for funds I would expect (probabilistically, in this case) to access in the near term, equities would not be an appropriate place to store them.  Bonds would be better.  But with speculation of interest rate rises still front page news every week, upping my bond allocation feels very risky.  And my portfolio has proved surprisingly stable over the last three years.  So I’m minded to just risk a wholesale market rout, and forgo the house if it happens.  But is this risking a divorce?
  4. Where to assemble £3m of cash? Assuming I get an offer accepted, I need to start amassing £3m of cash. The deposit insurance limit has just dropped, in GBP terms, to £75k per bank (this being a €100k limit, and the Euro having fallen by 20% since the limit was last set at £85k).  Am I just paranoid to imagine that the moment I transfer £3m+ to a solicitor’s escrow account, that account’s bank hits its MF Global moment, and my funds blow up? Do I have an alternative?

 

10 thoughts on “How to buy a house in London?”

  1. Hi, read with interest your article. This is something that I fear happening as I watch my wife on Rightmove almost nightly. I can’t quite believe it is such a buyers market that you need to have cash for them to even consider you though. A lot of properties around SW18 where I am are just not selling let alone allowing them to demand cash buyers only. If it is a bargain on some objective measure like cost per sq foot then its worth a bridging loan when you allow for those costs over the lifetime of the house?
    Good luck.
    Paul

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  2. Hi FvL

    What happens when you start liquidating your ‘sellable’ assets only for you to get gazumped by another cash buyer?

    Would Mrs FvL really divorce you if you didn’t go for the house?

    As you say, you live in a house that is more than adequate for your needs – do you really need to move?

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  3. Hi FvL,

    An interesting challenge!

    Myself and my other half went through a similar thought in terms of moving a few years ago. We ended up moving, but… and here is the big difference, we thought (and I still believe this to be true!) we needed more space.
    We spent a while asking ourselves why do we want to move (bigger kitchen, dinning area, office, more bedrooms for people to stay etc.), and what is actually wrong with our current place (lease running down, maintenance costs going up etc.).
    We then sat down and worked out what each of us wanted, and prioritised them (I had a wine cellar, she didnt :)), and what we would compromise on (the wine cellar went :(), only then did we start looking for places.
    So I would sit down and ask yourself, really deeply, what is the difference, what is it that makes you so sure you will need to move from where you currently are?
    I have known friends buy places simply because they thought they were perfect, heart aflutter type places…. only to find more problems come up and its not quite the dream they thought – remember to use head over heart… easier said than done!

    In terms of illiquid assets, I am with you – definitely cant access your pension, and I avoid taking anything I can from my ISA (I use the income from money I invest in my other half’s ISA to overpay our mortgage). I see these as providing my retirement income, so should not be sold. We took out a fair old size mortgage, and so my costs have gone up with it compared to our last place which meant compromising on our lifestyle.

    From what you have put in your post, I would not do the move if they are asking for cash only and no chain. Alternatively, could you change your home into a Buy to Let (maybe not ideal, but…) – if you want to banter back and forth about it happy to act as a sounding board!

    Do I have regrets? Naturally yes. I regret that I am no longer in Central London (ok, some argue Zone 3 isnt that far out but…), my mortgage payments and insurance are significantly higher (think about 3 fold!), so I can’t save as much as I could (note… could!) have done previously, and my whisky collection has gone down….
    On the plus side… we have a nice home, I love getting back to it, we enjoy spending our time together there, we eat out far less, I cook better meals and its easy to have people to stay! I have overall a fair better life than before I would say!

    Good luck in the working things out!

    Cheers,

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    1. London Rob: Mrs FvL loves your resiponse! So do I. Thank you very much.
      In response to your points:
      – why does the cash only thing make a difference? What I didn’t say is that I doubt I can get a mortgage of any more than £750k (based on income, which is about to take a big dive if I sell £3m of investments).
      – I have wondered about turning the current house buy to let. I don’t think it is that rentable – for the same reasons why we would fancy an upgrade – so assume I wouldn’t get a yield of more than 2.5pc. Gross. For an income-orientated investor who is confident of getting 7pc on a balanced portfolio over the long term, this isn’t enough. And we hate property hassle. And I have don’t fancy being any longer longer London property either.
      – wise advice to consider very carefully the pluses and minuses. We have been. Ironically Mrs FvL has had her eyes opened to some of the downsides of our current setup and upsides from a move.

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      1. Hi Mr & Mrs FvL 🙂

        I would be with you on avoiding the Buy To Let – I can’t stand the idea personally, never have, never will – too much hassle, but has to be pointed out 🙂

        You only need to have that income when the mortgage is approved and you go through the paperwork – if you sell the assets after, can you afford the mortgage repayments? What happens if interest rates go up to 6%, could you still cope (I built in enough that I think I could cope, even if not like it, if my other half lost her job, and interest rates went up to 6%) – what if they did go higher?

        If you have already made a list and gone through the plus and minus and you both feel that its the right thing to do, then its a hard one…. can you sell the house faster than you need to sell your assets (we actually moved into a serviced apartment between moves) – what are the sellers timelines?
        If you need to sell the house fast, then my recommendation would be get a moving company in to take out all but the bare basics (to show its lived in, a bed, sofa / tv), but very little else. Add the licks of paint necessary and then go for it to sell it off.

        Without seeing the fine details of the numbers (and please dont take this as me asking to :)) then its a difficult call. If it helps, and it were me, this is what I would do:
        – Work out the timelines of when the vendor wants to complete their sale by (if its gone off the market, maybe a bit of time is on your side)
        – Work out realistic timescales to get your house on the market, and then sold (so probably 3 or 4 weeks to empty, clean /repaint etc.), then a couple of weeks to get certificates, agents etc. and viewings started
        – Work out my best case. I sell the house, offer and exchanged on the new house and live in rented accommodation – what would I need to purchase the new house and all associated costs (full structural survey or homebuyers report depending on state / type of house, legal fees etc.) and a bit of contingency (e.g. 1 million), then work out what mortgage I could get for that, and the costs.
        – Work out the worst case. Can’t sell the house, how could I fund it. Does that mean I have to exit everything I can to purchase it, and how much leeway does that give me, and then reenter the market once I have sold the house
        – Challenge myself. What exactly is it that makes this house a must have. I remove my heart (assuming I had one :)) – I list what it is offering, e.g. 3 bedrooms, dining room, kitchen etc. I then go onto rightmove and find other properties with the same physical attributes, in a similar area. What is the difference? Is it that these houses hardly ever come onto the market? A new build is being done which has the same but lower maintenance but less character? What exactly is it about this house that makes it a must have?
        – Imagine how you would setup both the house you are looking at, and another one. How would you like living there, would you have the kitchen as is, and a separate dining room, or would you merge etc.

        Lastly – how long can you live there for. Example, if its a 5 floor town house, that may not be great in 30 years time (I dont actually know how old you are so a bit of a guess :)) when you are old and grey, would you want to be walking up that many flights of stairs? Is there enough space for a stair lift, or does it have a lift in? What is the longer term plan – will you stay in London? Say you are 40 now, you may think its great, even at 50, but come 60 you may want to move out. If you are 50 now, you may think its great, but now its only 10 years when you want a quieter life and have to move again…

        Housing really is a big decision and I dont think a lot of people really spend long enough thinking about it all 🙂

        Good luck, and keep us posted on what happens!

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  5. In terms of liquidity, where do you keep your none-ISA equities? If you have / move them to interactive brokers they’ll give you a margin loan at 50-100bps over base, which is pretty cheap (but risky, yes!), but presumably we’re talking about temporary liquidity here. Also if you’re not selling your old house first you’ll need to complete before April, or it’s an extra 3% stamp duty.

    As to where to park cash while getting stuff sorted out, I’d recommend NS&I monthly income bonds (they are ‘instant’ access) and are fully ‘guaranteed’ by the state up to £1m, i.e. £2m between you. Otherwise that’s a lot of £75k savings accounts you’ll be juggling…..

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