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House purchase - 10% deposit versus 20% and other factors

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    House purchase - 10% deposit versus 20% and other factors

    Trapped in a bit of a quandary at the moment. Currently going through a house purchase and deciding between 10% and 20% deposit. Lender is Halifax.

    House is £380,000

    10% deposit:
    Have enough cash at hand to pay without taking much additional dividend
    2.54% interest on payments
    £1541 a month
    £462,350 repayable

    20% deposit
    Will need to take about £50k dividend resulting in £9500 income tax
    2.34% interest on payments
    £1339 a month
    £401,828 repayable

    Has anyone come up against this before and what did you do? On the face of it, the 20% seems to be (in the short term) a worse way of doing things, because of the £9500 dividend tax. However, as this is London and everything is accelerating in price, is it better to take the hit and have 20% of the equity as its value increases? I suppose the real question is "can we expect the 20%, with tax included, to outperform 10% with no tax to pay"... maybe)

    Is there a stand-out best option here or are they both about equal? Would be interested to hear views of others and what they did in this situation.
    Last edited by PerfectStorm; 22 May 2016, 19:16.
    ⭐️ Gold Star Contractor

    #2
    Even without the price rise. Over the lifetime of the mortgage option 2 is the better option

    Comment


      #3
      How much do you have in the company? You've got to take it out at some point so if you've more than enough for your warchest etc and plan on earning more going forward I'd be happy to take the hit and invest in my home. That's what you earn money for really.

      Think longer term about what will happen when you close the company? Do you envisage having to pay a higher rate divi tax? If so then taking the 9k out now seems a good idea no?#

      EDIT : Those interest rates a tad high (but it's awhile since I checked in). Are they for a contractor mortgage? Did you get it through a broker?
      Last edited by northernladuk; 22 May 2016, 19:28.
      'CUK forum personality of 2011 - Winner - Yes really!!!!

      Comment


        #4
        Originally posted by northernladuk View Post
        How much do you have in the company? You've got to take it out at some point so if you've more than enough for your warchest etc and plan on earning more going forward I'd be happy to take the hit and invest in my home. That's what you earn money for really.

        Think longer term about what will happen when you close the company? Do you envisage having to pay a higher rate divi tax? If so then taking the 9k out now seems a good idea no?#

        EDIT : Those interest rates a tad high (but it's awhile since I checked in). Are they for a contractor mortgage? Did you get it through a broker?
        Thanks for the reply. There's enough warchest for 6 months (after the 20% payment, stamp duty, solicitors and so on) and plenty of contract left so I feel reasonably confident about pulling this amount out.

        Interest rates are 2.34 direct, 2.09 through a broker, but once you factor in the brokerage fee, direct works out a bit cheaper (not by much, £100 or so over the 2 years). It's fully approved by the bank now as well, they were all over the contracting side of things
        ⭐️ Gold Star Contractor

        Comment


          #5
          Also it gets you closer to getting an offset mortgage if you want it

          Comment


            #6
            Using the 20% deposit saves you £24000 in interest.
            If you increased your monthly payments by the £200 difference in rates you save another £17000 as well and pay it off in just over 20 years..
            merely at clientco for the entertainment

            Comment


              #7
              Originally posted by PerfectStorm View Post
              Trapped in a bit of a quandary at the moment. Currently going through a house purchase and deciding between 10% and 20% deposit. Lender is Halifax.

              House is £380,000

              10% deposit:
              Have enough cash at hand to pay without taking much additional dividend
              2.54% interest on payments
              £1541 a month
              £462,350 repayable

              20% deposit
              Will need to take about £50k dividend resulting in £9500 income tax
              2.34% interest on payments
              £1339 a month
              £401,828 repayable

              Has anyone come up against this before and what did you do? On the face of it, the 20% seems to be (in the short term) a worse way of doing things, because of the £9500 dividend tax. However, as this is London and everything is accelerating in price, is it better to take the hit and have 20% of the equity as its value increases? I suppose the real question is "can we expect the 20%, with tax included, to outperform 10% with no tax to pay"... maybe)

              Is there a stand-out best option here or are they both about equal? Would be interested to hear views of others and what they did in this situation.
              Your comment "and have 20% of the equity as its value increases" is not relevant because your equity stake doesn't matter if the value of property increases; if prices go up 10%, your house is worth 10% more, regardless of how much equity you have... simple.

              £9,500 additional tax might as well mean you're paying £390k for the house. It's a heck of a lot of money to choose to pay. Could you borrow £30k from someone (to make up 20% deposit), a family member maybe, and offer to pay them 3% interest for 1 year until you can release further dividends next year to pay them back?

              You haven't said much about the mortgage itself but we will assume it is as per the norm and a 2 year deal. Perhaps then you can:
              1. Put down 10% when you buy the house, i.e. get a 90% LTV mortgage
              2. At the end of year one, when you are able to extract more dividends tax efficiently, put in as much of the dividend into the mortgage as you can (without incurring a penalty).
              3. At the end of year two, when you are going to get another mortgage deal, extract dividends again to further enhance your equity. Hopefully prices would have risen and with your increased equity stake you could be able to get a 75% LTV mortgage and hence a much better rate.
              Last edited by ChimpMaster; 22 May 2016, 20:18.

              Comment


                #8
                Don't forget Stamp Duty....

                Comment


                  #9
                  Stamp duty is accounted for - £9000!

                  Chimp: there's no one in my family who could lend me £300, let alone £30,000.

                  However the "10% then overpay in the next tax year" option was one I had considered, but again, couldn't work out if you gain on the swings while losing out on the roundabouts.
                  Last edited by PerfectStorm; 22 May 2016, 22:02.
                  ⭐️ Gold Star Contractor

                  Comment


                    #10
                    I think it's what NLUK says. You're never going to be able to extract that 50K from yourCo tax free, so you might as well take the hit when you need it.

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