AIBU to worry we've overstretched?

[crimson72]

DH and I moved to a new place last year on a five year fixed term. The total mortgage term is 25 years (24 now remaining) and the total amount borrowed is about £330k! The LTV is 70% and our monthly repayments are about £1400. By the time our five-year term comes to an end in 2022 we'll be down to £280K remaining.

Our joint income is £60K a year approx, down from around £85K when we bought the property (DH has since gone self-employed and set up a business).

I thought £1400 p/m didn't seem too bad as I have friends who pay that amount or more in rent (I live in London). However, I've been reading the debt thread currently in AIBU and almost everyone else seems to have much lower mortgages than I do.

Would you be worried in my situation?

@NoSquirrels I'm not sure what the T&Cs are on our mortgage with regards to overpayments, but I will definitely look into it!

Actually given the massive economic uncertainty atm it might be more sensible to put money aside to account for interest rate rises. We always overpaid on our mortgage but we had an interest only mortgage and so if the interest rates had rocketed we would have been able to divert the overpayment money into paying the higher interest element. Our mortgage payments (interest plus overpayment) were massive at £4000 per month but the interest element was a fraction of this.

If you have a capital repayment mortgage and you cannot take back your overpayments then given how much you've stretched yourselves I would be inclined to put the money to one side earmarked for assisting with probably increased mortgage payments in the months to come.

Be very unusual if you couldn’t overpay by 10% each year without penalty, but definitely check!

cloudtree but if the capital amount is reduced by overpayments then the interest rate rise hits less hard? Not sure I understand your logic?

Thanks Cloud. Yes, ours is a repayment mortgage. We do have a couple of thousand in savings which we'd hoped to spend on home improvements, but perhaps it's best to keep that aside as a safety net against interest rate rises.

Have you calculated what your mortgage payments would be if interest rates go up by 1%, 2% etc.?
Could you still afford the mortgage then?
(I can remember when my mortgage interest rate was 13% back in the 80s/90s).....

You can clearly afford this house at the moment, irrespective of how much other people pay. But please be honest and realistic when your circumstances change eg having children, illness or made redundant. I'm currently in a similar house in zone 3 and mortgage started at £2100! Remortgage and a small inheritance have brought it down to £1600 after 5 years which means we can now afford childcare etc. If we can't afford repayments then house gets sold and we move out of London

Mortgages are terrifying. Mine is "only" £119k and it still gives me the fear.

One way of managing your stress would be and I have never done this, lol to set up a savings account where you build up 6 months, or a year's worth of mortgage payments, so you know you have some protection if anything goes wrong.

But otherwise, all my London friends had mortgages like yours in our 30s and 40s, and they're all selling up and buying palaces and islands now. While I'm chipping away at my tiny investment.

So you'll be glad later on.

cloudtree but if the capital amount is reduced by overpayments then the interest rate rise hits less hard? Not sure I understand your logic?

The interest rate rise does hit less hard but once you've sunk that money in overpayments you can't always get it back (sometimes you can)

So if you've paid off 10k capital by making overpayments then yes you are still paying say 3% interest on a mortgage debt which is now £10k less but you don't get brownie points from the bank for the fact that you did that. If mortgage rates rise dramatically (which certainly isn't beyond the realms of possibility) then you now HAVE to find that extra money each month.

I don't know how the maths pans out ( it might be neutral) but it might be better to keep the money aside when you don't know what is going to happen and things are so uncertain.

basic example

£300k mortgage at 3% is £750 interest a month

£300k mortgage at 8% is £2k a month.

you might have voluntarily overpaid your mortgage by £1250 for 12 months and thus reduced the capital owing by £15,000 but you've now got to find £1900 a month (285k mortgage at 8%) immediately. The option element has been taken away from you and you've already sunk £15k into paying off capital. If you'd put that £15k aside you'd have a cushion for 12 months when you have to pay the higher amount.

I don't know I might be talking bollocks. We always overpaid but as I said in the previous post we did that knowing that if we ever needed to we could simply pay the interest only so we always had a massive amount of flexibility.

Really the issue is that your income has fallen fairly significantly since taking the mortgage out.
There is not much point comparing yourself to anyone else. Yes you could buy a castle in the far north of Scotland for that money but it's irrelevant. You live where you work, have family, friends etc

Do you expect your income to remain the same? Would it be worth your DH going back to his previous role with higher income? Or is there a good chance his business will start providing more income?

Can you look for a better paid role to take up some of the slack? Can you rent your second bedroom out to a lodger and have more income? (You could do a Monday to Friday let if you live somewhere with decent transport to the city)

Over pay as much as you can now before kids appear

Do your 'bills' include contributions to savings or does that have to come out of the remaining £850? I'd want to build the savings up a bit if I were you, couple of grand isn't a colossal cushion and you don't want all your eggs in one basket.

Significant interest rate rise is going to hurt you if it happens, but you presumably knew that when you bought. With a good chunk of equity you're insulated from the very worst risks anyway, and it's possible to add years to the term, iyswim. The fact that you'll have 20 years left when this term runs out doesn't necessarily mean you couldn't possibly remortgage for longer.

Advice is always to have 6 months bills in savings. Once you have this cushion then overpay your mortgage.

GrabEm, no, bills are £300 per month (so £150 each) and include council tax, gas, electric, water, TV, internet etc. Then we spend about £200 per month (£100 each) on food. Agree we need to build up more savings to have a bit of a cushion should we need it.

I'm not sure we'd be able to add to the term unfortunately, as DH will be in his late 60s in 24 years time. When we took out the mortgage the bank said they won't lend beyond the age of 70 (understandable).

People just have different feelings about debt don't they, PP say this kind of mortgage would 'scare the shit out of them' but I have a much bigger mortgage and it doesn't bother me.

Our income varies but I guess comes out at about £130k and we have £400k mortgage plus £100k via Govt help to buy which we'll start paying interest on after 5 years.

To me the most important points are not how anyone else feels about your mortgage but:

• Can you comfortably afford the repayments?
• Do you have enough each month to put some money into savings to cover any unexpected situations (job loss, repairs, etc)?

If so, then there's no problem IMO

No. Had to spend a proportinately larger % of income when we hit 15% interest rates on a much much lower sum borrowed, and on lower salaries..

May I ask how you managed to get a mortgage of that size? With all due respect, my partner and I earn considerably more than you, and I doubt we'd be able to access such a massive mortgage! Is London really that different?

Do you have any savings? Pensions? Or are you living from month to month? I don't think that's really sustainable.

If you don't have any savings at all, prioritise them - a good cash ISA is an okay bet. If you do, then you can overpay your mortgage - we threw everything at ours for about eight years and we're now mortgage-free in our late 30s (although we don't live in a £330k house in London, to be fair!).

If - and I hope that it's not the case, but just in case - the current predictions about a forthcoming financial crisis (like 2008) are true, make sure you have EVERYTHING tied up in advance, and then take advantage of low interest rates.

you might have voluntarily overpaid your mortgage by £1250 for 12 months and thus reduced the capital owing by £15,000 but you've now got to find £1900 a month (285k mortgage at 8%) immediately. The option element has been taken away from you and you've already sunk £15k into paying off capital. If you'd put that £15k aside you'd have a cushion for 12 months when you have to pay the higher amount

I know what you mean, cloud - my job is insecure so we keep cash back against this possibility.

But mathematically speaking, it’s going to be better to overpay as you’ll get a much greater ‘return’ in overpaying than by squirrelling in a savings account. So it’s a balance of risk, I guess.

The way I look at it is if you’ve always overpaid by a lot, when the interest rates go up the choice to overpay is taken away from you, but the rate hit doesn’t make a big difference to you because you e already been used to your mortgage being a higher payment. You don’t need the savings to pay the higher rate, you just carry on as you were paying off the mortgage. There’s no ‘rate shock’, if you like.

@ThistleAmore when we took out the mortgage, our combined salary was around £85-£90K - so considerably higher than what we're on now (£60K). We're also 70% LTV, so we did put a fair amount of equity into the property, which I think makes a difference (not sure what your situation is in that regard). By the end of this fixed term we'll be at 60% LTV.

We do have a couple of grand's worth of savings, but I definitely want to live more frugally and put more into savings, just so we have more chance of weathering any financial/Brexit storms if when the time comes...

Tbh I don’t really see the issue. You have to live somewhere. If you didn’t own the house you’d just be paying that in rent (or more potentially)

We took out a similar amount when we bought and our combined income at the time was almost 6 figures, except we only had a 90% LTV. We piled a lot of extra money off the top when it came in (bonuses etc) after we had built up a pot of savings (we have 6 months worth of essential bills). We're 4.5 years in and because of gains and overpayments we are now on a 60% LTV and pay £1200 (started at £1800), but have mostly tried to set aside the extra £600 a month and periodically overpay. It's a lot of money and it can feel overwhelming but we have managed to do some hard saving at the beginning of the term and it's really paid off.
Not sure how we will afford the next step on the ladder though 

@crimson72 - oh, I see, I'm sorry! My reading comprehension skills are a bit off today (I have a terrible cold, that's my excuse!).

Given that you've got a good bit of equity, I'd be ALL about the savings for the next five years or so, TBH. We went and spoke with an IFA who gave us some excellent advice (and although we're not poor, we're not 'super-duper-high-end' either).

I'm going to assume by your username (and apologies if I'm wrong!) that you're only in your mid-40s, so you're still young enough to go for some 'high risk' investments?

We've got a bundle of debentures tied up in renewables, which should show a 12% return in less than 72 months - if you're not overly risk-averse, might be worth looking into?

But mathematically speaking, it’s going to be better to overpay as you’ll get a much greater ‘return’ in overpaying than by squirrelling in a savings account. So it’s a balance of risk, I guess.

Absolutely. I'm not advocating saving rather than overpaying in a normal situation. I am saying that in a very uncertain climate where we may well be about to fall into a serious recession and interest rates may well increase significantly, it would be a sensible short term move. It is all about risk management.