London - Buying a House 101
Me and my Partner are thinking to buy a house in London.
My parents have c.300k in savings that do not really know how to invest other than keeping in a bank (they dont really like to invest in stocks).
We were thinking it might make sense for them to use these savings as a down payment, while my partner and I would take on the mortgage and share the monthly repayments.
We’re looking at properties with a maximum budget of £650k. This would leave us with monthly mortgage payments of around £2,500 (including interest) over a 15-year term.
I’ve started researching mortgages and property ownership, and I have the following questions/thoughts.
Please let me know what you think based on your knowledge or experience, it will be extremely helpful to me!
1) How is it possible that there are no 20/30 fixed rate mortgages in London? Everything that I saw had a 2/3/5 years fixed rate term and then entering a variable rate long term, which would translate in crazy high rates (7.0% while fixed rate is 4.0%). This means that you have to refinance every 2/3/5 years, to restart a fixed rate term, but this is very disadvantageous, given that bank usually make you pay the majority of interest upfront, meaning that after 5 years you really have only repaid a minimum amount of mortgage, and refinancing means that you will then repay the big upfront interest chunk again, and if the central bank rates have risen in this period, your fixed rate term will be higher than the original one
2) Why do flats in London have extremely high annual service charges? Everything seems to be between £5-9k also for flats that do not offer concierge, pool, or amenities, so what do these cost include other than house insurance? This makes me question how you can actually earn something when renting out, as 25% of your profits will be eaten away from these costs
3) If you rent the flat, it is my understanding that you will pay the taxes based on your total income for the year (meaning after including salary and bonus), which means that you will pay c.45% taxes on rental income. I know that you can offset the rental income with some allowable expenses, but it is still very high. I also read that under current rules, you can deduct 20% of mortgage interest payments, is that only for rental properties or also if you live in the property? Lastly, are service charges tax-deductible as well (seems so to me)?
Thank you so much to everyone that can help me a little bit in my research!
Not sure why this comment is in a Investment banking forum, but to answer your questions:
Thank you so much!
Everything is clear, just a couple of follow-up:
1. I understand your point about the mortgage, but wouldn’t it still make more sense to lock in a long-term fixed rate and then refinance if needed? You can always refinance either way, but with a shorter fixed period, you’re more exposed to external factors and potential rate volatility.
2. Also, I appreciate the clarification on the service charge. Just out of curiosity, could you share what’s typically included in that? I cannot believe they can reasonably justify this level of annual expenses
Again, thank you so much for your time!
Would suggest reading this regarding buying flats in London.
https://archive.is/20250608073412/https://www.telegraph.co.uk/money/property/buying-selling/why-you-shouldnt-buy-a-flat-in-london/
Wow this was super helpful. Thank you so much!
London residential real estate is the dumbest investment you can make right now. Foreigners offloading en masse.
Hi OP - as someone who owns a flat in London zone 2, here's my two cents:
Firstly, don't do this purely as an investment for your parents. You've said you & your partner want to live there which makes sense, but if you're looking at it from an investment returns perspective - the answer is the returns will likely be poor. See my post here (www.wallstreetoasis.com/forum/investment-banking/how-to-be-rich-as-a-ba…) but in summary - as you said you pay 45% tax on the full rental amount not profit i.e. basically paying 45% tax on your revenue rather than profit. Crazy I know. As another poster said you can get a 20% rebate but that's still painful. Secondly, stamp duty costs are really high upfront and also as you mentioned service charges (more on that below). So from an investment standpoint they would make a lot more just chucking their £300k into an S&P 500 tracker.
Now onto your specific questions:
Service charges - lol this could be an essay. But in summary you have a mixture of things - some flats have serious cladding issues that haven't yet been resolved (avoid), but for the most part it's unfortunately just inflation. Minimum wage in the UK has more than doubled in the past decade, which impacts even basic things like cleaning costs for the building. And the cost of tradesmen/plumbers etc has gone up massively since Brexit and Covid, so any stuff that needs fixing costs a fortune now. Also energy costs since the Ukraine war - this are even more onerous than you'd think, due to the fact that whilst as a flat owner you're protected by the energy price cap for your home, the communal areas of the building aren't limited by the price cap (as the building is not considered a retail consumer). So that gets reflected in your service charge. So yeah basically inflation since Brexit/Covid is the culprit, along with fixing cladding.
Technically a lot of the above factors will impact freehold homes e.g. houses too. The difference though is that a house owner can stagger their maintenance over years or even decades. Not that it's a good idea necessarily (hence why you see some houses on the market that are extremely dated/complete wrecks). Whereas a management company is legally obligated to keep the building in good condition to maintain market value etc.
3. Renting out the property and taxes - see my above comments, and also my post linked above. My advice is honestly don't rent it out to anyone else. We also have a Labour government who are increasingly pro-tenant and hostile to landlords (planning to ban no-fault eviction etc). And it's already near impossible to evict a tenant who isn't paying. Good luck if you rent to someone else, but my advice is don't do it.
Wow this is super helpful thank you so much!
I would just like to ask your opinion on the following thought:
If we consider the down payment as a “gift”, so not an investment (meaning a 0% return would be fine), and if I am able to have a monthly payment (of mortgage + annual service charge) that is equal to my current rent, I would assume I will be much better off financially, given rent is just a pure expense, while in this case I will be building up for equity, right?
So the answer to your question is yes, with a few caveats:
Mortgage interest costs - remember to bear that in mind, as it isn't your whole mortgage payment that goes towards equity but just the principal part, and as you said interest is higher at the start.
So your comparison of renting vs buying should really be = rent vs (mortgage interest + service charge + stamp duty amortised over say 5yrs). Then you'll see the choice isn't quite so easy. Having said that, for me personally I'm still glad I bought despite stagnant house price growth. As being a home owner gives you the following upside:
- Security of where you're living, you don't have to worry about being given notice, and can have a place you can really call home
- Following on from above, you can decorate and customise the flat as you want
- One thing that isn't factored into that formula above for rent vs buying is that inflation is your enemy as a renter, and your friend as a homeowner. What I mean by that is your rent will likely keep going up every year with inflation, whereas your mortgage payment is generally fixed. And every year the mortgage balance gets inflated away in real terms effectively. So that means it gets more affordable over time as you get pay rises etc - another reason that home ownership pays off if you stay longer rather than just 2/3yrs etc.
- Opportunity for capital growth. Like I said I wouldn't bank on it, but surely after 10yrs of not even increasing in nominal terms (let alone keeping up with inflation) London flats in zones 1/2/3 are due a comeback. Especially with return to office mandates coming in.
- Rent a room scheme - I've never used this myself, but with a 2-bed flat if you ever lost your job etc you could rent a room out. Which is completely tax-free up to £7k, i.e. that's nearly £14k equivalent in pre-tax income. Living with your partner I doubt you'd want to do that but the option is there.
Anyway, those are my thoughts - the answer to renting vs buying is it depends (e.g. how long you're planning to stay there etc).
In London flats, the service charge can significantly reduce returns, especially in newer blocks with lifts and enhanced safety systems. In my underwriting I assume £6–8k per year for service, plus 1–2% of property value for major works over a 10-year horizon via the sinking fund. On a £650k purchase with a £300k deposit and achievable rents of £2.4k–£2.8k per month, the net yield hinges on the service charge and taxes. I requested the service charge budget and last three years of statements, along with the major works plan from the outset; the agent at Ernest-Brooks International obtained these before I made an offer.
London mortgages work differently than in the US or EU. You only get 2–5 year fixed terms, then refinance. It’s normal but annoying since you pay fees again. Service charges are high because of insurance, communal cleaning, and management costs. And yes, rental profit is taxed at your marginal rate; you only get the 20% mortgage interest credit if it’s a rental, not your main home
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