big mortgage or smaller place

[Luna1980]

Currently trying to decide on our next strategy regarding our house purchase - got inspired by another earlier thread. Have to caveat this that we're both European and have no experience of buying property or anyone to ask really so would love to canvass MN to see if anyone has any advice on what's best to do. Background - we are a couple in our early 40s with one DC (due to our age very unlikely to have another).

Option 1 Currently live in a really nice part of London and have found a nice two-bed flat which would require approx 280k mortgage that we'd hope to pay off by 60. This feels fine and safe etc.

Option 2 We've also seen a couple of houses that would need us to borrow approx.400k and we'd probably never be able to repay (due to our age/salary levels) but are three/four bed and would obviously allow us to have more room, a home office etc. The plan I guess would be to downsize once DC left home - is that what people do?

Which one would you go for? Instinctively we'd go for the flat - because it's cheaper/good location etc.....but am also aware that property purchases in the UK is a very different thing to where we come from and so we're confused and would love some help.

[chloechloe]

I live in Europe where renting is considered one of life’s expenses, whereas property obsessed Brits consider it throwing money away!

Having said that, whilst most Brits are desperate to own their own property, I think most buy with the intention of paying off the mortgage by retirement age at the latest. I think it would be a minority who buy in the knowledge they would have to downsize as they couldn’t pay off the mortgage.

As a family with 1 DC I see a lot of added value being in a flat in a great location. I would almost see that as a better option regardless of whether it’s the better choice financially speaking.

[emmathedilemma]

Have you investigated how much you can borrow as I'd be surprised if you'd get a mortgage for option 2 if you say you'd probably never be able to repay it.

[sunshinesupermum]

The flat with a smaller mortgage every time. Can you find a 3 bed flat which would give you the option of using one of the rooms as a study/home office if you need that extra space?

[Lightsabre]

That seems like a big difference between the two options. Is there not a smaller, cheaper house you could buy? Otherwise I'd say a two bed flat would be fine if you're definitely not having extra kids.

[Luna1980]

thank you everyone. In theory, of course, we could repay option 2. But that assumes that both of us carry on earning the same as we do now age 70. Which we might do but realistically a lot of things can happen between now and then. Pragmatically, am therefore thinking that taking out the max mortgage age 40 - we are unlikely to repay it. With option 1 - it's a lot less and am assuming that we should be able to almost no matter what.

I guess I just dont know whether people usually go for the maximum the banks will lend which for us would be 400-430k max at our age or what they think they might realistically pay off or be comfortable which may be a lot less. I just feel like being foreign this is a whole other conversation when it comes to accommodation - especially as when it comes to monthly repayments they are essentially almost the same if you take into account service charges/overpayments etc.

[emmathedilemma]

I think you need to do some maths and look at your current outgoings and expenses to work out what you can realistically afford to pay each month on a mortgage, and if you still want to both be working fulltime at 70. I would never have borrowed the maximum the bank was willing to lend me or I'd have been living on dry toast for the last 2 weeks of every month!
Also bear in mind that interest rates are currently about as low as they will ever get so if you borrow the maximum you could be really stretched if they go up.
Your other option (which you'd need to take financial advice on) might be to buy a larger property on an interest only mortgage on the basis that would downsize once you retire or DC leaves home and over the long term the value should go up to enable you to pay off the capital.

[Luna1980]

emmathedilemma yes, thats the option we are looking at. Interest only for the expensive house and basically move to a smaller/cheaper place when it's just the two of us i.e. no need to live off toast etc but we'd also not need a larger place once older. I guess the assumption would be that we would pay off the same amount flat/house but on the house downsize once older. Our concern i guess is that a flat just wouldnt go up in value as much if we ever need to seel it as much as a larger house. However, the monthly repayments on a larger mortgage or a flat with service charges is almost the same amount.

Honestly, in France, you just go and rent a flat you like now and get on with it. People dont see properties as financial instruments.

[BobbitWormNightmares]

I'm in my thirties and about to buy a house, at last! I find it strange that you say it's common in France to accept rent as an expense. Rent is money down the drain. Owning your property means having complete control over your home, and an inherence for your children.

If everyone settled for renting, the rich would just get richer

[TeenTitan007]

Option 2 is the more daunting but financially savvy decision. Your property should be an investment which can grow in value and support you financially if you needed it to sell it/downsize. Renting is only to buy time towards a deposit or for flexibility - should you need it.

[HollowTalk]

Honestly, in France, you just go and rent a flat you like now and get on with it. People don't see properties as financial instruments

But that means they pay rent throughout their retirement. Which do you really think is the better financial decision?

[HollowTalk]

If mortgage + charges on property 1 is = mortgage on property 2, you'd have to be crazy to buy property 1.

[lightyearsahead]

Alternatively, if you have a 25% deposit you could take out an interest only mortgage, save the money you would be putting into the mortgage into your pension tax free (up to £40k per year). Draw out 25% tax free (if still available) when you are 55 pay off mortgage or fund other property plus have any uplift in value.

You would need to work out the number but a very cost effective way of saving.

[Luna1980]

@HollowTalk - pretty much....i.e. the difference in what we pay for interest/service charge is the same - obviously, the total debt is different but the amount of equity that we'd have in option 1 and option 2 after twenty years would be the same. the only difference is that with option 2 we'd essentially still have ten years' worth of debt. but per month it's more or less the same.

@lightyearsahead thanks - might have a look into that. we definitely have more than 25% equity and were planning on going interest only on both options

[Luna1980]

@HollowTalk i appreciate the systems are different between here and on the continent but most people do just rent. pensions are also higher and include an assumption that people still have rent to pay and therefore we are no worse off even on retirement.

[HollowTalk]

How much is the state pension approx, over there? I've never compared the UK to other countries.

[Luna1980]

@HollowTalk the UK has the one of the lowest pension provisions in the OECD - but thats largely because it is assumed that Brits don't have to pay for accommodation unlike in the rest of Europe. As I said the systems as compltely different

[HollowTalk]

I wouldn't get an interest only mortgage. Would you mind giving us some approximate figures?

I didn't realise that about the UK though should have guessed!

[greenlynx]

I won’t comment on mortgage options but don’t buy a flat, it’s always more risky. You depend on ground rent, there is little you can change inside, there might be issues like with cladding and so on.

[chloechloe]

There really is a different mindset to renting on the continent. Many see renting as beneficial as you don’t have the upkeep and maintenance costs. Also property prices don’t seem to increase quite as quickly on the continent as in the UK. By the time you factor in fees, taxes etc, the cost of buying is very high and takes a long time to recoup.

That’s an interesting point about pensions, which explains a lot.

In many countries (Germany, north Italy, France), the cost of property is also higher than in the UK (London aside). I bought my first house in the NW of the UK for a price that wouldn’t even buy a garage in some towns on the continent. I have many friends in Germany and Italy and 95% of those who own their own houses / flats have either built onto existing family homes of in family owned land. Multi generational living is very common and the only way of affording property for the majority.

[LampsOn]

Forget about money for a minute, where would you prefer to live? Location location location is really important. Things will open up again soon, will you necessarily need office space at home? Do you enjoy being close to what London has to offer?

[Luna1980]

exactly, on the continent buying a house is very very different andnits definitely not treated as a pension or a financial vehicle.Ao we do understand that the UK is different but this who buy today, sell tomorrow is very alien to us., so we are financial quitw illiterate when it comes to buying propertynin the UK but strangely unlike with everything else you dont actually get an adviser/there is no one there to guide you through the process.

If this was about rentung, then we would probably rent the bigger place for the same amount of money per month as the small one but the idea of having a much larger debt hanging over us is quite scary.

[StepOutOfLine]

@chloechloe

There really is a different mindset to renting on the continent. Many see renting as beneficial as you don’t have the upkeep and maintenance costs. Also property prices don’t seem to increase quite as quickly on the continent as in the UK. By the time you factor in fees, taxes etc, the cost of buying is very high and takes a long time to recoup.

That’s an interesting point about pensions, which explains a lot.

In many countries (Germany, north Italy, France), the cost of property is also higher than in the UK (London aside). I bought my first house in the NW of the UK for a price that wouldn’t even buy a garage in some towns on the continent. I have many friends in Germany and Italy and 95% of those who own their own houses / flats have either built onto existing family homes of in family owned land. Multi generational living is very common and the only way of affording property for the majority.

It's true that property is far more expensive in Italy than the UK but not much multi generational living. It's not uncommon for members of the same family to have 2 different apartments in the same building, but the living with Grandma myth is just that.
This came to light in the early days of Covid when people were saying that one of the reasons Italy was so hard hit initially was the MG living. Iirc one of the broadsheets then did a spread about how almost exactly the same number of families in the UK live multi-generationally as do in Italy.

[combatbarbie]

I'd be surprised if you got a mortgage for option 2, UK lenders will only give you a mortgage up to age 67 and so it would be entirely dependant on the affordability calculator.

[Luna1980]

we can definitely afford Option 2 - and even got a mortgage on it once - till I got freaked out about the overall debt etc.

Do Brits just not care about the overall level of debt? In terms of monthly affordability, we'd be fine both ways.

[Heronwatcher]

If you can comfortably manage the interest only mortgage I’d go for the house. In flats, however large, you’re at the mercy of your neighbours and the house sounds like it would be nicer to live in, plus it will appreciate in value more. And you could also rent a room out if you really needed to (I had a Monday- Friday lodger when I was younger and it was great).