Hi LWB
Thanks for that. I too will apologise for being a bit over sensitive about this and reacting hastily. All behind me now
Anyhow, back on topic, maybe we could drawout a few scenarios here. Figures will be approx. and I will assume living costs of £1500 as this should be the same for all scenarios.
1. Borrow against the house
400K house with 50K mortgage
Add 50K to mortgage bringing total mortgage to 100k
Approx repayments for mortgage inc. insurance etc £700 at current interest rates
Cost of data feeds, internet connection etc. £200 per month
Minimum income required from trading excluding living costs is £900 per month
Total required per month is £2600 inc living costs and excluding tax
Add 35% for tax and NI ie. £910
Gross required income from trading is £3510
Targeted Return on Capital Employed (50k) is approx 7% per month
Upside is no moving costs and family stays in current house. Downside is very exposed to interest rate changes and a very high return from capital employed required. The real risk is that the interest rates are increased, the housing market corrects sharply and the trading fails to produce the required minimum required. This could produce a worst case for example of house now worth 250K (30% drop) with a 100K mortgage and no capital. Net assets now 150K.
2. Downsize the house
200K house with no mortgage
150K balance from sale of house
50K used to finance trading capital
20K set aside for one years living costs
Cash balance is 80K earning 3% per annum ie. £2400 per annum
Cost of data feeds, internet connection etc. £200 per month
Minimum income required from trading excluding living costs is £900 per month
Total required per month is £900 exc living costs for first year and excluding tax
Add 35% for tax and NI ie. £315
Gross required income from trading is £1215
Targeted Return on Capital Employed (50k) is approx 2.4% per month
Upside is no mortgage costs and no exposure to interest rate moves or housing market. As all costs are covered in the first year any gains can be retained in the trading account for the second year when living costs will be covered from the trading account. Downside is the requirement to move and the costs associated with this.
Worst case for this scenario is new house now worth 140K (30% drop). 80K in the bank. Net assets now worth 220K but no debt and no mortgage.
3. Do nothing
For this I will look only at the worst case for comparison.
House drops 30%. House worth 280K with 50K mortgage.
Net assets 230K
So, from an asset protection point of view my take would be to downsize. Beare in mind that the asset values are based on a probable worst case scenario it is possible that interest rates will not increase significantly and houses will maintain their current pricing. Personally, I think the housing market is due for a mjor correction. The turning point in the last downturn was the increase in interest rates. Rates increased over 50% from a base of 8-10% to a rate of 14-16%. Current rates of 4% only need to increase by 2% (ie. to 6 percent) to give us a relative increase of 50%. A 2% increase in base rates would see a 50% increase in mortgage charges with all the knock on effects on consumer spending and house prices. Negative equity for some is just round the corner.
