Mortgage Multiples - how big a risk would this be?

[crumpet]

Dh and I earn about the same. We're thinking about trading up, but for the house we'd be interested in, it would mean a mortgage of 3x joint salary (or 6x single).

I'm torn between wanting this house, and worry about the financial committment. WWYD? I'd be really interested in opinions.

Depends on your outgoings - any loans/debts/financial commitments?

And whether you could afford it if the rates shot up.

I would be thinking of the worst case scenario if something went wrong - one of you losing a job, through illness, redundancy, whatever (however unlikely that may seem now) together with a hike in mortgage rates ( it could happen).

If things like that happened could you cope financially and emotionally with the stress and worry.

If yes, then worth considering, but smaller house (if I was happy there) would be a lot more preferable over sleepless nights.

Not really - other than mortgage we are debt free (but having done an extension we are also pretty much savings free too!)

If you could cope for six months with one of you out of work and could handle the repayments if interest rates were 15% - if you could absorb an unexpected cost like a roof leak or boiled exploding (say, 3-5k would not drown you) - then perhaps go for it

Very interested as toying with buying bigger place myself and how best to go about it!

I think it depends on a lot of other things too.

How secure are your jobs at the moment?
What proportion of your salaries would be taken up by the mortgage?
How much spare money do you have around?
Could you give up holidays and new clothes and switch to value food if things took a downturn? Or is that how you live already?
Would you be able to cope if interest rates doubled? Or even tripled? (It's happened in the past).

The other thing to keep in mind is that the economy is looking pretty bad and the housing market is (in my opinion) still going to go down for a while. And it isn't going to suddenly bounce up after. So if there's a possibility that you'd have to move within a few years after buying this house, you could get stuck (negative equity or just the housing market not moving).

I would put the figures into a calculator and then change to 10% interest rates and see if you could still afford the house

For eg
£100,000 mortgage over 25 years @ 3% = £478 a month (repayment)

£100,000 mortgage over 25 years @ 10% = £918 a month (repayment)

If you are thinking of interest only, beware as the differences are greater

The first example would be £250 a month interest only
The second would be £833 a month.

The higher the interest rate the less benefit you get from being interest only iykwim.

Personally at the moment I would try and stick to 3x1 salary - what if one of you lost your job?

We are doing this crumpet. We are virtually mortgage free at the moment and are buying a house which means we will be borrowing 4.5 x our joint salary.

We are making sure that we are fully covered by insurance for loss of incomes, death etc.

We are buying our dream house. Although we will start off borrowing 78% of the value of the house, once the major building works are done, the value of the house will rise and we will only be borrowing 50% of its value.

It is the job thing that is a worry - we'd just about manage here on one salary, but I don't think so on the new palce. We'd have to go for a long term fixed to avoid sudden interest hikes.

One thing about this place is that it would have room ultimately for parents to live there if needed - I'm the only one and they live a fair bit away, so this is looking further ahead. It is the price drop that is bringing this within reach (just!)

littlefish I am amazed anyone will give you 4.5 x both salaries on that LTV

Although we will start off borrowing 78% of the value of the house, once the major building works are done, the value of the house will rise and we will only be borrowing 50% of its value.

See, you are NOT understanding the market here, are you? The market is FALLING.

I think as the others say, it does depend on a lot of things. But if you do decide to do it, I would speak to a good broker and look at a fairly long term fix so you know what your outgoings will be for a long period of time.

yes that too
You could be in negative equity soon

One thing about this place is that it would have room ultimately for parents to live there if needed - I'm the only one and they live a fair bit away, so this is looking further ahead. It is the price drop that is bringing this within reach (just!)

But that can be dealth with THEN - i.e. they can sell their property and buy nearer you, or buy with you THEN. You can't plan for that sort of eventuality, I don't think. If you have a large garden, you can also slap a pre-built "Granny flat" in the grounds for about 20k upwards, if things are dire. I think it's better to concentrate on your current situation personally.

I don't know where you live, but it's quite possible that the house prices in your area will drop again. Most experts are predicting that unemployment will increase, and unemployment almost always correlates inversely with house prices. So you might be able to get a similar house in a couple of years that's even more affordable.

Do you have any kind of income protection insurance? That could protect you (partially) from illness or redundancy. But I imagine that it's going to be very expensive now that the economic climate is so bad - it was never cheap.

More responses - thanks! We would have a good deposit, at least 1/3 value, so hopefully should be able to ride out further drops without going into negative equity.

I swing between wantign to grab an opportunity that might not come our way again, and wanting to burrow down and ride out the crunch.

I swing between wantign to grab an opportunity that might not come our way again

I think EVERYONE thinks this when they see a house they like, but house-buying should be a rational and not emotional thing! You are basically saddling yourself for life - you wouldn't get married with such flimsy spontaneity! There WILL be lots of other houses which are just as wonderful, if not more so. And you never know whether your 'dream' house is actually haunted subsiding or rotting to pieces until you've been there for a bit and the chimney falls on your head. If you are feeling this way, I would pull back and be a bit more rational about things.

It's hard to say without knowing more about your circumstances. We did stretch ourselves for our current house and had a mortgage of 3 times joint salary.

It was manageable, but fairly tight. I don't know how people cope with higher multiples than that.

We were however both at the start of our careers and we were fairly certain that our salaries would increase by a lot fairly quickly especially mine as I qualified would double.

I'm not sure we would do it now given the current climate.

I still think house prices have a way to fall.

OK point taken.

Pros:
Good location
Gets us into catchment for good secondary schools (current catchment is for a school which has been classed as failing for some time. For the last couple of years no children from the village have been accepted into the good schools as we are out of catchmetn and the good schools are benefitting from big investments so the catchment is tightening). Alternative is to go private. Yes we are a few years away from secondary, but for the last 15 years our local one has had a dodgy rep.
Has annex (point taken about the future, but I do worry having seen my mother and 3 sisters doing huge treks regularly for years to help my grandmother - there are not 4 of me. It was a huge committment, which was exhausting!)
Potential for income generation on the land (dh's expertise and what he has always wanted to do).
Close enough to current village to maintain friendship network
Slightly further away from ILs who live down the road, but close enough to help them as and when needed

Cons
Financial risk which I am not underestimating)
Will be outside a village in rural location but closer to town.

You have lots of arguments, but none of them are financial

How long can you get a mortgage for, and at what fixed rate? Will you be able to continue to save? Will you be able to absorb costs at that rate? (I have a small 1950s house and have had to spend 5k over the last year alone on very boring and basic repairs)

You need to focus on the financial issues, not the emotional/practical ones.

MP - the house is almost derelict at the moment, so even allowing for the falling market, the value of the house will rise once the remedial works are done.. I'm really aware of the falling market. We've done our research in this geographical area, and with this type of property.

some sensible advice here

Bugger you are sounding v sensible MP.

We are checking the mortgage point again this week. When we first did this a few months ago there would have been no problem on either a fixed or repayment basis, but I'd be wanting to reconfirm as it could well be that banks are now more restrictive. Also need to see what is available on a longer term fix.

There is budget to do some saving though not as much as if we were to stay here. If the market drops to 50% below peak we would still not be in negative equity.

All this assumes that the seller would be willing to sell at the amount we'd be willing to offer. And whether we are successful in selling ours at a price we'd be happy with - we'd put all this out of our heads, but it seems as if there is a buyer interested, so it's come to the fore again today.

(and meant to thank you all again too)