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?

For all the people saying this mortgage would scare them - that doesn't necessarily make sense. OP would likely be paying similar amounts if not more in rent if they didn't have a mortgage, and wouldn't be paying off an asset. With a LTV of 70% in a worst case scenario they could sell (even at a bit of a loss if they were rushed) and be ok. We have a similar mortgage in London and would be paying significantly more in rent without it.

Mortgage debt with a decent depot is secured, it's very different from unsecured personal loans. A lot of people on the debt thread didn't mention mortgages either because they didn't think of it as debt or because they were renting. We have a largeish mortgage but no credit card or car debt - to me that's much worse and unnecessary.

OP I don't think you're massively overstretched now if you have a good savings buffer, but with your income drop and your husband being self employed I'd be (a) making very sure that he has good income protection insurance and (b) keeping your own skills up to date or consider a part time role, as self employment can go tits up even for the best workers, plus the extra would out you back to £85k and lot more comfort.

We had almost exactly the same three years ago, OP! £330k mortgage, approx £1,400/mth. We were very squeezed for the first year because DH and I were both working PT (4 days a week) with a few days/week nursery costs for two kids. Then one child went to school and 30 free hours kicked in for the other child, and we could breathe again!

It's been tight, but it's been worth it. I see this as hopefully being the only big mortgage DH and I will ever need to have. It's our family home for the kids, and we don't intend to move for at least a decade. I also have friends with higher rental payments each month, and feel very fortunate that we were able to get on the housing ladder.

I forgot to add we also had a good LTV % because we sold a London flat to act as a deposit on our house.

My mate rents a room in a shared house in central London for £1k if that helps...

Your LTV may not reduce to 60% as you anticipate if interest rate rises plus Brexit plus affordability continue to drive house price drops in London.

I would be prioritising overpaying to protect LTV going forward and to cushion against interest rate rises.

However a 6 month+ buffer is never a bad idea.

The OP has a fixed interest rate for 5 years (4 more to go). Even if interest rates go sky high after Brexit, it will not affect her for another 3 years or so.

As a Londoner, I also don't think it's a scarily large mortgage. It was less than 4x earnings when taken out.

OP - I'd try to make sure you have a decent amount of savings, to cover your expenses if you lose your job/your partner's business goes through a rough patch/goes under. The usual advice is 6 months of essential costs. That way, you have time to deal with the situation if it arises. I'd then focus on overpaying if you can, as I assume you will want to fix again in the future and a 60% rate will definitely be better than a 70% one. Remember that your property value may also have gone up in the meantime. The bonus of overpaying is that if interest rates have gone up when you come to remortgage then you are already used to the higher monthly figure, as someone said earlier. That said, I don't think you need to compromise your lifestyle just to do that - just be sensible with your money.

Thanks for the replies. @LannieDuck good to know I'm not the only one! Were you on roughly the same income level at the time as DH and I, if you don't mind me asking?

I think as some of you have pointed out, the savings issue is key - I might have mentioned earlier that we have a couple of grand in savings at the moment, which is nowhere six months' worth obviously.

@howabout I thought the bank would just calculate the LTV in five years' time by dividing the capital still owed (which will be around £280K) by the total amount we paid for the property when we bought it. I didn't think interest came into it. Is that not right?

LTV is calculated based on property's current worth isn't it? As it's about the risk for them. If you no longer have any equity in the property because of price falls, or negative equity, they'd be taking more of a risk by lending to you because if you defaulted, you might make a loss. The more you're borrowing in relation to property's current value, the bigger the risk so the higher the interest.

LTV depends on how much the property is worth at the time of remortgage not what you paid - property prices may go down over the short term (because of interest rate rises etc) and this erodes the relative value of the deposit.

Calculation of capital paid off after 5 years also looks optimistic. Most of the "repayment" at the start of a mortgage is actually interest and as the term runs on the repayment element increases.

Yeah your capital repayments increase and interest repayments decrease as the mortgage progresses.

I have colleagues paying that sort of sum in rent, plus childcare, on much lower salaries than that.

They seem to manage, although it leaves them little for luxuries.

@howabout I got that figure from the MoneySavingExpert mortgage calculator, and the first year tallied with the statement I received from the bank, so I'm fairly confident/hopeful that it's right. I suppose I'm paying off more capital than you'd expect because interest rates are so low at the moment:

www.moneysavingexpert.com/mortgages/mortgage-rate-calculator

Thanks for the information on LTV too. I didn't realise they revalue the property at the point of remortgage. I'm hoping property prices won't have gone down too much by the time they come to revalue in that case, although with Brexit and everything else, it's obviously a distinct possibility and something to think about.

@THEsonofaBITCH I'm fascinated by your split month theory, it seems so simple but I have no mathematical ability to work it through.

We remortgaged a year ago with a ten year fix on £70,000, could you give an example of roughly what the interest saving would be on that please.

Any gardening tips traded

It’s a tricky one as your mortgage is not ridiculous by London standards particularly when you look at rentals. However my concern would be the below;

what happens if you have children & need childcare.
Interest rates are likely to rise at some point.
Potential income tax rises.

I also think we live in a very different world when it comes to London house prices vs the last few decades. It’s unlikely that what you buy today will see anything like the historic growth.

Our mortgage is £1250 pcm. 80% LTV. Joint Income is 75k.

Is the problem not that your DH changed from being employed at a certain salary but then decided to stop working and start a business which reduced the household income.
Mortgages today are good value compared to when we had our first mortgage at 12.5 per cent. I am not mortgage free but my last mortgage was for £60k and was £65 per month. You could not rent anything for £65 per month

crimson Yes, I think we would have been on about the same as you. I'm trying to remember whether we went PT (4 days/week each) before or after the mortgage application. But it would have been about £80k joint income.

I think it sounds like you are in a reasonable position given your husband's wish/need/dream to start a business. You can afford your current payments with something left over to increase your savings buffer. I'd view it as having 5 years for your husband to get his business going properly and having a better, documented income at the time you start looking to remortgage.

We could have paid off our (smaller) mortgage had we overpaid, but kept significant ISA savings that have been an important buffer over the last 10 years as our circumstances did not stay remotely as we'd envisaged or the bank would have expected when we bought our current place.

Personally I'd focus on planning for a substantial interest rate rise in 5 years' time - estimate what you might be paying on, say, 5% or 10% rates, and think about what would help make that ok at that point.