AIBU to choose holidays / activities / future savings over a bigger house?

Stay where you are. Use the money for experiences and fun. Plus your DD might want to do hobbies that can be expensive, you might want to support her through uni/buy her a car. Honestly, enjoy the freedom that being mortgage fee brings.

Plenty of families live in mid terraces and don't regret it at all. 🙄

Admittedly I do think the schools complicate matters - I would move if I wasn't happy with the local options.

We made the decision to stay put and enjoy life in a smaller house, I don't regret it.

With two rooms downstairs is one a living room and one a dining room? In future you can make one a chill room for your child and friends or add a sofa bed for sleep overs.

I'd probably stay put but I've raised four children in a snug 3 bed house where there third bedroom can only fit a single bed and bedside table!

I've wanted a bigger house now and then but I like having spare money for other things.

Could spending money on doing it up and decorate to your taste make it feel more like your house?

Stay put. Enjoy being mortgage free, don't give any money to the legalised spivs (aka estate agents), and all the benefits of being near work and your families.

That's even before the other things you mention.

No, neither did I @Catza I thought it was three living rooms downstairs, but it does sound a bit snug.

Gotcha. I didn't realise you were counting a bathroom and a kitchen in your "3 up, 3 down". Our kiddo is currently in a box room and, while not ideal, it somehow works as it means she is spending more time with us and less being tucked away in her room (early teen). We have an open plan kitchen (kitchen diner and a separate living room) which means enough room for a large dining table and can sleep any guests on a large sofa-bed in the living room. I think, having an open plan downstairs helps a lot for the house not to feel too small. Plus, as I said we ruthlessly decluttered during our last move so barely have any stuff. I can clean the entire downstairs in 15 min flat.
We moved here from a larger house where we had an additional bedroom and a second living room. In all honestly, that second living room was just a space to hang laundry and put away things we didn't use so it was a total waste of space and energy. And it took absolute age to try and keep the place tidy. We also had a huge garden which was an expensive thing to keep looking good. I now have a much smaller garden which I enjoy.

I have a slightly different view to the majority here in that I’d rather have a home I love with space that works well for us than lots of holidays etc. My children are a lot older than your daughter (and I have two rather than one), but we found our quality of life in our old house (small 3 bed) drastically declined as our boys grew in size: no space to entertain with the kids up too; no space for friends to hang out, general detritus everywhere - the house was SO hard to keep clean and tidy and I am a very organised, tidy person - and us generally getting under each others’ feet more and more. Now we’re in a much larger house, life feels so much calmer and everyone feels the benefit.

I also don’t agree with the ‘bigger house more stuff’ argument; my house is quite large (3 bed so not a huge mansion) and it’s super easy to keep tidy because we we don’t accumulate stuff and everything has a home. Keeping on top of cleaning and tidying this house is a hundred times easier than the last one even though it’s probably double the size!

Funnily enough @Izzosaura your house sounds just like the bigger house we were wanting to move to! Goes to show it's a matter of perspective.

Before you decide to do anything, you could have a look into how much a new bathroom & kitchen, redec and plaster would cost in your area. 'Recently sold' on Zoopla is a goldmine for inspiration if you look at others on your road.

As someone further up said, decluttering goes a long way. And getting some built in storage for the bits you want to keep.

If you are already feeling cramped with just a baby, then I think the extra space would be worth it for you.

Baby "stuff" takes up more space than that for older children, but when they are older they want to have friends over, they need a quiet space to work in, and, based on current trends, they may still be living with you into their 20s. I get the attraction of being mortgage free, but £150000 over 10 years with you being able to push your extra salary into it, feels quite doable. And hopefully there would be more pay rises in that time!

As others have said, it's down to priorities - I've lived in biggish and really small houses having renovated a lot and in your shoes I'd want to move (although yes, Stuff will just expand to fit whatever space you have!), but plenty would prefer to stay put and enjoy the additional income.

Is there room to extend at all? Or add a garden room of any kind? Might be a halfway option to avoid overstretching yourselves (which is definitely no fun) but still gaining some space?

I would have to disagree with many posters. You are still pretty young (obviously, with a young baby) and have been mortgage free for a few years so must have built up a good savings pot. A "fairly small" terraced house in a not very desirable area doesn't sound that great for your forever home. Also, you have both increased your salaries recently. Much as I love holidays and treats, I would be inclined to pour some of your savings / disposable income into your future home - a nicer area, more space, a larger garden and perhaps semi-d / end of terrace rather than mid-terrace.

I think you may regret it in the future if you stay where you are.

See how you feel in a couple of years. I was in a similar position and had two kids in a small but mortgage-free house and it was tolerable when not very mobile, but just got more and more difficult. It created a constant low level of stress in having to have everything put away and moved about all the time. It's been totally life changing to move somewhere bigger, and definitely worth the mortgage. We have less money for holidays but we don't need them as much as we aren't desperate to escape our home any more!

Holidays are great, but they're a small percentage of your time compared to how much time you spend at home.

Does the "less desirable" area mean less desirable schools? I know your dc is tiny, but all my moves post dc have been about catchment area, so if you do move really consider that.

I don’t think you necessarily need to move for space but I would be checking quality of the schools before you make a final decision on staying/extending mortgage. Primary is potentially less of a consideration but secondary might be more so. I only say this because I’m seeing a huge amount of soul searching among my peers about moving house now our kids are approaching the end of primary as no-one likes our catchment secondary. If a move later on is a possibility, you’d be better to do it now while you can still get a mortgage prior to your DH retiring.

I think there’s no pressing need to decide right now. Why not see how much you can put aside in savings, and then revisit the choice again in a few years?
We’re also mortgage-free and live in a small house (bought 20 years ago) with 2 kids - we thought we never wanted to move but we are now outgrowing the house and starting to think about it (dp works full time from home - at the dining table which is hard in school holidays - and teenage dd is really too big for the tiny box room and doesn’t want to invite friends over as there’s nowhere to hang out). There’s not much space to extend without losing all the garden (and it might be cheaper and less stressful just to move). Since paying off the mortgage a few years ago we’ve nearly saved enough to upgrade outright. With a 10 month old, future schools are definitely a consideration - are you in the catchment area of schools you’d want her to go to in the future?

They have loads of stuff for a bit and then all of a sudden reach about ten and don’t need lots of the big things- car garages, Barbie houses etc. once they’re high school age they’re rooms are much less cluttered

Seconding @Merrow's argument here. DH & I have just called off a move to another city for the same reason. Yes, more space is nice to have, but is it worth the stress and upheaval of moving house, then pinching your pennies, not going on holiday, worrying about money? Deciding, positively, to stay where you are could be the most freeing thing you can do.

Maybe, because you've already had one foot out the door, you've avoided spending on this house? If the fancy takes you, you could also put a percentage of what you'd spend moving into getting your present house as good as it could be.

As someone who grew up in a 3 bed flat with 3 generations of family under the same roof, I am for quality of life over a big house. You have 6 rooms, that's plenty for a comfortable life. I would focus on decluttering before making any further decisions about moving. Presumably, you have 3 bedrooms? Is there another child living with you? If so, are they old enough to be heading off to uni shortly?