How to decide if we can afford mortgage?

[Beaverfeaver]

We currently have a mortgage of £200k which is affordable and savings are put away.

We have around £60-100k worth of equity.

Our mortgage company based on our current earnings will loan us additional monies for us to move soon, which if we took all they are offering would mean a mortgage of £365k.

This is a horrendous amount of money and would mean mortgage would be huge.

If we don't think is affordable, why do they want to even give it to us?

Comfortably I'm thinking more like £275, pushing to £300k at a big stretch.

How did you decide what is right for you?

Our salarys are ok now, but you never know if redundancy is around the corner and we are planning on starting a family which will mean drop in earnings from me

We had trouble getting a mortgage as I'm self employed. Our mortgage is small as that is all they would give us. However I wouldn't really want to be paying more than £1000 a month on repayments and you gave to consider what would happen if interest rates rise.

Just to add:
Reason I'm asking is that I am the sensible one and DH not so much.

He wants to move to the best house possible and believes that if the mortgage guys will give it to us, then it will be fine.

I personally would stay put where we are if we could, but it's only 1.5 beds and no parking and no proper garden, so would be better off with something larger for us to start family

Ideally, I would like to keep our current house and convert to blt and release equity to move elsewhere but I don't think we have enough equity to do so looking at the online calculators.

We can convert to BTL but they want the LTV at 80% or under meaning if the house valuation came back at say £275, the maximum amount of equity to release would be £20k, and that would not be enough for us to put down as a deposit on a £300K house.

Also, the BTL companies want rent to cover 120% of mortgage payment, meaning it would have to be interest only as I am only guessing, but I think rental would be £950pm max...

Has anyone done anything similar and it worked?

We bought our cottage in 07 just before the crash. Interest rates were high and we kind of maxed out our mortgage allowance (£175k) we had 5% deposit. We could have bought a 3 bed family home but instead went for a characterful 2 bed cottage (with the idea of moving in a few years) it was £980 a month INTREST ONLY!! Mortgage as at the time we couldn't afford a repayment one but knew our earnings would go up so could chip away at it as and when. We had a tracker mortgage which everyone thought we were insane as at the time fixed rate mortgages were the done thing as the tax rates were riding. We took a gamble, it paid off!!! Our mortgage is now only £300 a month interest and we pay an additional £700-1000 month overpayment. We like the flexibility of this method and as a bonus, our cottage has held its value since the housing crash!! We intend to save an additional 30k (we have 25k equity) so we can move to a £235k house which will suit out needs with the same sized mortgage we had in the first place so we know we can afford it

Twiddle - that is very similar to us when we bought our first flat.
It was only £140k, but a repayment mortgage in 07 was almost £1000.

Being fresh into work we weren't very clued up on finances and struggled every month.

It was fixed for just a year and we also made the gamble to move onto a lifetime tracker (interest only), and our mortgage went down and down and allowed us to overpay and also allowed us to move to our house now which is still on its lifetime tracker.
Even if rated go up, it will take a while for them to get back to the 7% we were paying back then as we are on .9% above base.

What you need is to write downs proper budget... Income versus detailed and realistic outgoings. Factor in all the likely blips, and consider some of the less likely ones (interest rates go up, washing machine/boiler packs up, you find yourself pregnant, one of you is made redundant...) If the dead washing machine will be a worry, a job loss could be an all out disaster.

You're totally right to query whether the lender is considering affordability. I believe they're better than they used to be, but their affordability algorithms seem to count on people feeding themselves or £3 a month, never heating or lighting their houses, and walking to work. There's no way we'd have managed the repayments on what they were prepared to lend us. And I'm glad you're looking at LTV anyway, because while there may be 90% or even 95% mortgages around, I wouldn't be thrilled to be on one when the interest rates do, eventually rise and I need to switch mortgage.

So definitely keep moderating your husband, however lovely it might seem to get that monster house. If its going to be a source of serious financial strain, it'll wipe out all the pleasure of the enormous kitchen.

There is a lot to be said for having a small mortgage. It may mean you can take longer off work when you have a child - it may even give you the option of not working for a few years. But obviously 1.5 beds and no garden isn't ideal for a family, so a move now sounds sensible.

You say you are saving - does that include putting money into pensions for both of you? With you both working and no dependents, you will probably never be as well off as you are now until you are in you mid 50s - by which time it's too late to get a good pension together.

If you want a family and you expect to go back to work, don't even think about keeping current place as a BTL. You will be juggling time frantically for the first few years, and you don't need the hassle (let alone the expense) of replacing the boiler in the BTL or finding new tenants every so often.

So I would say think simple - get a low mortgage on your new house and overpay it by as much as possible.

I think you need to ask what the repayments would be on the big mortgage and practice living off the rest of your salary.
I agree it's an issue with mortgage companies. Ours offered to lend us half a million! No way we could pay that and still feed ourselves!

We also went by whether we could afford it (and live) on one salary. If we have two kids (I've one on the way) and hope to have a 2 year gap then that means 2 kids in nursery at the same time pretty much wiping out my salary in childcare. For a few years we will totally be living off my DH salary.

Thank you all for responses and some very sensible advise, much of which I hadn't thought of at all.

Being able to afford to live off of one salary is important.
Juggling BTL and new family could be stressful and not required.

Have discussed pensions but we are very much against them (as we were when we originally visited the idea 8 years ago). I won't go into the reasons as it's boring and everyone has their own opinion.

Lots of thoughts to process now but has certainly helped clear my mind of a few things

I've never taken the maximum offered.

The rule of thumb used to 3.5xsingle salary, and I've always stuck to that to buy houses that were within my means.

You also need to think about affordability if interest rates go up (which is the only way they can go from where they are now).

"Have discussed pensions but we are very much against them (as we were when we originally visited the idea 8 years ago). I won't go into the reasons as it's boring and everyone has their own opinion."

I'm not suggesting that you have to put the money into a pension wrapper (a SIPP or a personal pension), but by pension savings I mean very long term savings that aren't available to be used as a deposit when you buy a new house. ISAs will do perfectly well for the first £10,000 a year each - and not many people can afford to stash away and not touch more than that.

Your house is NOT your pension. I've seen far too many people plan to downsize but when it comes to it they love the house they brought the family up in and want the extra rooms for the grandchildren and family christmases.

Have a look on this website as I find the advice given by Martin Lewis really helpful. You need to calculate all of your monthly outgoings and see if there is anything left over. A larger mortgage would swallow any leftovers & may mean cutting out luxuries like gadgets & holidays in order to be able to afford it. Do you have a contingency fund for emergencies?

www.moneysavingexpert.com/utilities/

Please bear in mind that interest rates can only go up.

I think 3 x joint salary is a sensible amount to borrow and even so it will be really tough if one of you loses your job.

Rule of thumb used to be 3x larger salary + 1 x smaller OR 2.5x joint. I still think it is a useful rule of thumb but doesn't take into account disposable income other commitments.

You do really need to do a detailed budget and make sure there's plenty of contingency for unexpected events and rate rises.

I'm quite risk averse so max we've ever taken is 2x joint & we've been v comfortable with that level of repayment & have great holidays!

It's entirely dependent on your salarys and outgoings. Factor whether you want to live on one salary at any point and if you need it childcare (you might already be paying this I wasn't sure from the op).