To get a mortgage or not

[Marie324]

Hello
Looking for some impartial advice what on what to. We are currently renting and family of 5. Our outgoings are very high as we live in SE. Rent is £1900 pcm, food bill is £1000 per month and that's if we are strict, bills come to £1000 per month. We have one disabled child due to this claim £1500 in universal credit per month. My part time salary is 28k and my DH is 49k. We also get DLA of £550 and child benefit of £240 per month. This seems like a huge amount of money coming in but we honestly struggle every month and are in a lot of debt. We have a deposit for a mortgage which has kindly been gifted to us but means we will lose our universal credit allowance making us £1500 worse off a month. My post is basically to ask for advice on whether to take a massive financial risk in order to get a mortgage. The minimum we could get our repayments to is £1600 per month. My employer currently is unable to increase my hours. Any advice welcome. Thank you!

Take home is 6.5k currently not 7.5k

You need to keep your roof and windows watertight but you can do that yourself. Leaks within the home need to be dealt with immediately - and plumbers can be pricy. But normal use of bathrooms and kitchens are not an issue. Storm damage to fences again is something that can be done yourself - fencing doesn’t cost very much.

If you buy a house with a roof in good condition with a relatively new boiler, clear gutters, no sign of mould or leaks - you should be able to keep maintenance ticking over for the next few years.

I agree with this.

Could the relative put the down payment money into a high yield account for you and just pay off the debt right now?

I think you need to look at your food bill item by item and see if you could do better, or eliminate the majority of snacks you buy.
See if you could get store brand items cheaper than name brand, etc. Try to identify must-have items versus nice-to-have items.

If you could hold off in buying until next winter, you might be able to find a house that missed the buying season and is still on the market.

I wouldn't buy a house at the moment in your situation.

I would prioritise your immediate financial security. Work towards stabilising and managing your current finances without utilising any debt and stay put. Pay off your current debts and build up emergency savings, up to the £6K limit permitted by UC.

Then, I would focus on contributing as much as possible into your pensions. Pension contributions are disregarded as income by UC, so you may well be able to do this without any impact on your present disposable incomes.

With extra investments into pensions, I would plan to buy a property later in life when you're older, and the children are more independent.
You'll still be building up significant investments, but the financial risk is vastly reduced, payments into a pension are significantly more flexible than a mortgage, and you'll retain housing security with your housing allowance.

If you’re looking at shared ownership, research staircasing. It has the same costs as buying a house all over again like conveyancing. And if you staircase too much it is hard to sell the property and to find a buyer who earns enough to afford your portion and little enough to pass the shared ownership criteria. They can also increase your rent on the “shared portion” a lot. And again even if don’t staircase, can be hard to sell and find the right buyer that passes the other owner’s affordability criteria. I think shared ownership only makes sense for key workers in areas out of their budget.

Just to add counter balance.

I'm with shared ownership in the SE. Theres a scheme with my HA where I can buy 1% more a year at the original price with no solicitor fees. If I staircase 5% or more at a time there are fees, but my HA usually offers a 50% discount once a year or so. I've gone from 40% to 70% ownership in one transaction.

If I want to sell then I have to go through the HA for three months, then I can sell open market. If someone wants to buy 100%, then I just 'complete and sell' in one transaction (regardless of whether I can actually afford to buy 100%).

The rent portion is fixed at something like 1% increase a year, basically not too much and less than inflation.

Main quirks are I still think selling could take a while, but not too worried as SE is high demand.

Maintenance charges are the thing to watch as these can go up - possibly more of an issue if it's a leasehold block of flats, not sure about shared ownership houses. But on the other hand, I've got no external maintenance jobs to worry about doing, boiler is included in maintenance and heating costs are low.

We both already contribute a high amount into our pensions. We had considered buying later in life but the later we leave it the shorter the term meaning the higher the repayments. So it's a bit of a now or never situation. The debt is a priority and about 5k of it should be paid off in the next few weeks.

5k of the debt will be paid off asap. The rest we are hoping to pay off over the next 6 months ourselves. With the food my disabled child needs specific snack food otherwise he really doesn't eat much at all so we can't cut back on that as he is underweight as it is. But I'm sure we could cut back on certain other things. As I said I will try shopping at Aldi or Lidl and see if that makes any difference. Thanks

How old are they children? UC won’t last forever as they get older and your eligibility falls off. Will the relative keep the deposit for a bit longer, pay off the debts now and wait a little while?

I understand your concern.
But by directing the extra money you would've been paying into a mortgage into your pensions instead, you'd be receiving subsidised housing for the time being. In the meantime you'd be accumulating a substantial lump sum with the additional boost of tax relief within the pension investments. It could then be used to buy a property with a very large cash deposit - or outright cash purchase in later life.

Overall the cost of buying a property would almost certainly be considerably reduced by this route -
You'd be investing at least £24K a year (£1,600 per month plus tax relief at basic rate?) - rather than using net pay to service the interest on a mortgage. And you'd keep your housing security in the interim.

The “now or never” mindset is unhelpful for such a huge financial decision, it can blur the practicalities when it feels urgent. You’re safe in your house, and you’re comfortably paying off your debt, you can afford the special food for your kid, it’s ok. This extra money is a huge bonus. I wouldn’t worry about the term, because you can downsize later to live mortgage free, or move areas, once your kids are older. For the higher repayments in the interim, you can look at different brokers to help you get a good mortgage deal.

There’s a great book called the “The Behaviour Gap” by Carl Richards, about how money makes us feel, and he has an Instagram account too.

That's really interesting. I'll look into this further. Thank you

That's true. I think we need to remember not to rush into anything. We will definitely use a broker nearer the time.

Family of 5, not a five bed house?

We have another 10 months on our tenancy anyway so it's not imminent and we have time. 2 of my kids are primary school age and 1 in nursery.

Is your rent £1900 or £1900 minus £1450?

Buy a property when you’re older, house prices have risen, so their gains are blown on a bigger deposit for a smaller house? Despite the current downturn some sections are still rising and if mortgage rates fall they may rise more quickly.

Meanwhile, even in the last year, rents have increased significantly and look set to continue.

I’d say they can’t afford to keep renting in that scenario. All of the work to build up finances can be done as a house owner.

We don’t know the age of the relative. The offer is now, it may not come again.

So the UC we are awarded each month is made up of multiple elements, 1 of the elements is housing which is 1450 for where we live. Depending on how much we earn each month the total UC entitlement is deducted from our earnings and that's the amount we get each month. So yes the housing element means our rent is hugely subsidised.

I’m not sure how you can afford a mortgage then, plus you have debt as well?

Yeah this is kind of the whole point of my post. DH wage is expected to increase over the next 5 years, the debt will mostly be paid off, i have the option of working extra shifts if i need to as a last resort. I have received a lot of good advice here and interesting ideas so that's been quite helpful.

You get £2290 per month in benefits?

Yes.

I have a severely disabled child so a large chunk of that is due to that. As I have previously said I don't necessarily agree with it and I don't make up the rules.

A simple investment in the global index tracker would have outperformed the rise in UK house prices by a significant amount in the past 20 years. This is before taking into account the cost of mortgage interest payments, taxes and maintenance costs. Or the uplift in pensions by the tax relief into an investment.

-Average UK house prices rose by 74% during that time - an average of 2.8% per year.
-A typical global tracker has risen by 400% - an average of about 9% per year.

This doesn't factor in the uplift in pension contributions for the investment tracker; or the cost of mortgage interest, taxes, and repairs and maintenance of a property.

Building wealth is a slow and steady game. Rushing in because you 'want it now' or believing it's 'now or never' is not the way to build financial security over the longer term. A prudent assessment of risks and return, along with establishing a safety net of financial liquidity and security is more likely to be sustainable.

Is your AIP including losing the benefit?