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 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 Sort of (at the time of writing, the seller has withdrawn it).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:
- 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.
- 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.
- 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?
- 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?