House buying, mortgages, property prices etc. Your views please!

[WideWebWitch]

Following on from bk's thread on mortgage costs I'd be grateful for advice on this too. We've been out of the property market for a while - I used to own a flat in London but sold it to finance being a SAHM. Now we've moved back to a city we should in theory be able to buy a house. But we'll be starting from scratch and I have reservations as follows:

We'll have to borrow a minimum of 4 x my salary (Dp is going to be a SAHD - I haven't got a job yet but am looking) to buy a very small house. Mortgage costs will be approximately 25% of net pay BUT only if we go for interest only. If we go for a repayment mortgage then mortgage cost will be just under 50% of net pay. I'm worried about going for interest only and would rather go for repayment - what do people think? Have you all got repayment mortgages? I don't understand why anyone would go for interest only unless you intend to sell quite quickly and are counting on the market rising. Then I understand it but people keep saying to me "why don't you go for interest only, then you could afford it?" Well then what's supposed to be the vehicle for repayment if you don't have an endowment? Will a lender even let you have an interest only mortgage if you don't have a repayment plan? (seem to remember they didn't used to allow it). Or do people still buy endowments? Surely not?

Also:
Should we fix? What do you all reckon is going to happen to interest rates?
Should we be so desperate to get on the ladder again that we self certify in order to get a mortgage a bit quick before prices rise yet again? (i.e, before I have a job?) Six months ago, when we moved here, we could have afforded the house we rent. Now we just about could but it's too small and we specifically moved to this area because we thought we'd be able to buy around here but prices have risen.
What do you all think is going to happen to house prices? I'd love a crash and a buyer's market but I've been waiting a loooong time and it aint happening! I've been reading The Motley Fool on the subject and they can't seem to agree - what do mumsnetters think?

Given that our rent is currently 25% of net pay and this gets us an ok but too small house (we were desperate, I was pregnant when we moved) I'm wondering about the wisdom of buying at all. If buying means we get the same sized (i.e. too small) house for more money, the only difference being that it's ours I'm not sure I want to do it. It just won't make sense. But if we hang on will prices just get higher and stupider and will we be out of the market forever?

Sorry, I know this is long and tedious but I'd be interested to know what you think. As you can see from the time of this posting, this IS keeping me awake at night (woke up and couldn't get back to sleep even though the baby's asleep!)

I don't have an great insight into mortgages or what property prices might do, but here's my 2p!

We moved 18 months ago to our current house. It was a huge increase in mortgage (we tripled our previous one), not sure of percentage of income as dh is self-employed and his income changes. We needed more space and I totally fell in love with this house. I suspect that, even if we couldn't have afforded it, I'd have twisted dh's arm so that we bought it anyway ;o)

However, since we moved, house prices have increased enormously. Only a few months after we moved in, another house in the road went on the market for over £100,000 more than we paid. We were so glad we moved when we did.

There is no sign of house prices coming down, so I would be looking to get on the ladder sooner rather than later. Have you looked at partial ownership? There are some deals out there where you effectively own half the property and a property company owns the other half - you pay rent on the other half. One assumes that the rent is less than the mortgage or it wouldn't be worth doing it. Apparently this scheme has enabled a lot of people to get into the property market who wouldn't otherwise have been able to.

Whereabouts are you?

www, you've probably seen this, but just in case, here is the article from the Guardian

We're in the process of moving our mortgage from the Abbey to First Direct. We currently have an endowment mortgage which, we have been told, won't pay the balance at the end of the term. The Abbey's interest rate is currently 6percent.

We are going for a First Direct offset mortgage which is 5percent, if everything stays the same as it is currently, bank balances, savings etc. we could pay our mortgage off 7 years early.

hi www

i was wondering where you'd got to!

i don't understand why anyone gets an interest only mortgage unless they are certain that (1) they will sell the property at some point - otherwise it's just rent, right? - and (2) when they do they will at least make enough to cover the mortgage. i'm not sure if people still go for endowments, but the pitfalls are well known, i wouldn't do it personally. if it were me i'd go for repayment.

i think 4 x salary and 50% of net pay gives you very high exposure to rising interest rates. the consensus among commentators i have read seems to be that they will go up - if it were me, i would fix.

i know you are very good at budgeting, but will you actually have enough to pay the bills after shelling out all that on the mortgage? what about insurances (life, buildings etc)? you will also encounter additional costs if you are working.

under no circumstances would i get a self certifying mortgage before i got a job, if i were in your situation. in fact, i would go further and say give yourself a few months in the job before even thinking about this level of financial commitment. what if you absolutely loathe working? or the job itself and have to find another? or if your dp finds being a sahd does his head in and he can't bear it?

what will the market do? no idea - there seems to be a conflicting report out every week, and as ks says it depends what is happening in your part of the country. however, imo, the best way to protect yourself in the event of a crash is to make the financial burden as bearable as possible, i.e. sustainable in the longer term, and to make sure you are in it for the long haul (you will only crystallise a loss if you are forced to sell for some reason). another factor to consider is how secure your job would be - e.g. are jobs in your industry being outsourced to india at the moment?

ok, have just read this over, and it seems i'm not sitting on the fence on this one! i'm sure what i have written is not what you wanted to hear, and bear in mind i'm very cautious about money compared to many people i know.

obviously, the decision is yours and if you decide to go for it, good luck to you. just think about the risks and the steps you would take to mitigate them.

good luck with whatever you decide

what have you decided, ks?

I was thinking about your situation all day, WWW (because my own life is too pathetic...). If I were in your shoes, I think I'd aim to buy a small property with prospects for adding a bedroom (loft conversion?), offset repayment mortgage, fixed interest rate for at least 5 years with a building society, and plans to stay in the property at least 12 years. But these are questions to ask yourself, and what my thinking was in asking:

1. Could you stand to stay in the same property for the next 15 years? If answer=YES, I'd buy. House price booms/busts tend to run in 15-16 year cycles in the UK (look back to 1988, 1973; almost nobody was predicting big price falls then, either). If you stay 12+ yrs, prices would have almost certainly recovered by the time you went to sell again. But people only stay in a property an average of 5-7 years, and 5-7 years after the height of the last boom was when the market was last at its lowest, and negative equity traps their worst. Is the only property you could afford now going to be too small for you, 5-7 years from now? Or is work/other circumstances likely to require you to move away?

2. (Mortgage type & options). Go for longish (at least 5 years) fixed. Can you realistically live on 50% of your income? Repayment if YES. If NO, then are you under age 35? Then endowment, but pack in as much into the endowment payment as you can. If you're over 35, or you can't stomach living on 50% of your income, keep renting. I'm using age 35 as a cut-off because what if the endowment underperforms, and you need to keep working longer just to pay the damn debt off.

2b) Can you muster enough deposit to get an Offset mortgage? They really are a terrific product, but usually have larger deposit requirements.

One idea that has been repeatedly mentioned to us is a two-part mortgage; we could get a variable rate offset-repayment for half of it, and a fixed rate endowment for the other half. Sounds weird... but it's kind of like hedging your bets in all directions.

Apparently, most Buy-To-Let's are interest-only/endowments, so they are still very popular, and with all the scandals should be better regulated, nowadays. The stock market is relatively cheap at the moment, too; but there's always the real risk the investment won't grow well enough to pay off your mortgage. There's a long checklist (sorry, don't know what all is on the checklist) of when it's a suitable product. But I'm pretty sure the maximum age thing is right up there. I would always trust a building society over a bank or other type of lender to sell a suitable endowment, but it's still more of a gamble than a Repayment. Have read that "Pension mortgages" are a bad idea, if that gets suggested to you.

One thing to keep in mind; when renting, you never get the money back. Even with a crummy endowment, you will see some of your money equivalent back, maybe all of it and more. So even a "bad" endowment still tends to be a better investment than renting.

3. Can you get any kind of mortgage payment protection insurance? Probably not, from how you describe your financial situation; nor would I guess you'll have much savings buffer, either. In which case, could you live with yourself if the property was repossessed because you lost your job and maybe your DH couldn't work either? Or is there someone who would lend you money to live on until you could sell up or find new work?

gah, ks, wrong thread!

Thanks so much for your thoughts so far everyone.

Bk, I think I agree with you actually and I don't understand why anyone goes for interest only either unless they're doing up, selling etc. I'm not risk averse generally, not at all, but I think we're in a very difficult situation atm and I don't like the idea that I'd have absolutely no option but to keep working to pay the mortgage were we to go for it. For example, if for some reason I had to give up/lost my (theoretical not-yet-got-even) job then dp would have to work and it would take 100% of his net pay to cover the mortgage. Not a good situation. What I haven't counted is maintenance from ex dh. If I add that in then mortgage will be 30% of net income, which looks a lot more reasonable. It would still mean though that I would HAVE to keep working in the same type of job. Unlikely to be outsourced to India but ikwym, nothing is certain.

Sobernow, my old mortgage was with Birmingham Midshires, don't think you'd have wanted me in your kitchen when I first woke up at 4am but thanks! Freckle, these increases are madness aren't they? £100k MORE?!! Blimey! Ks, the Motley Fool is here, can be interesting. Emsiewill, thanks for that article, no I hadn't seen it, haven't bought a paper today. All we've done is go to Mothercare and argue Zebra, yes, we could stand the same place for 10 years ish or more I guess. I think you're right - we need to get somewhere bearable with potential for another room or extension in the future. It might mean moving areas though but I guess I could live with that as long as we're in the same city. I've done unsavoury areas before, I can do it again! I would be inclined to go for a 5 yr fix I think - I do remember the 80s and 15% interest rates but it seems most people don't, going by the attitude in the market in general. Re 50%, see above - if I add maintenance the situation doesn't look as dire. Ex dh is likely to be able to pay this (secure job, stable guy, has provided for this even if he dies etc). Anyway, baby awake, must go but thanks all - other views appreciated too.

message withdrawn

If you are fairly handy and can stand the mess, then the suggestion that you go for a property which needs work doing to it is a good one. It's not always ideal with small children around, but you could perhaps work on a room at a time, keeping that room out of bounds to children. It would enable you to get a better property (from the point of view of size, location,etc.) for your money.

I was stunned by the £100K increase in price and the house on the market was less well situated than ours - on a corner, no front garden to speak of (so right on the road - we have a large front garden so are protected from the road to a degree), very small back garden, garage round the corner in another street, etc. I have to say that the house didn't sell, but others in the road have for similar prices since.

Next-door-but-one has been bought by a couple who have spent the last few months doing it up (previous owner had lived in it all his life - died at 63 - and had done nothing to it). They have probably spent about £20-30K on it, but the value will have increased by much more than this.

Hi www. We've been stung by TWO endowments (persuaded to take out a second top-up last time we moved). So I would never ever go down that route again, although who knows, maybe interest rates will rise over next decade and it will do better than current projections. Apparently you can do interest-only backed by an ISA as well ... but I heard govt. is making ISAs less attractive on some money programme (can't remember details). Have just moved again and split the mortgage so endowment covers what it's projected to pay out and repayment for the rest. But original endowment was due to pay out 2015... repayment is 20 years so we'll be paying mortage for much longer than we'd planned. Someone told me that any investment product carries a risk so they are unsuitable by their very nature for covering a fixed liability like a mortgage which has to be paid off at a certain date. Wish I'd heard that when we originally bought.

Endowments aren't actually that bad. In fact teher is a strong case for them in terms of diversifying your risk (by taking out a repayment you only have exposure to property prices, wheras if you take an endowment you have exposure to equity markets as well). What all these speopel who say thy have "lost" on an endowment forget is that the same economy that has led to lower returns on equities, hasled to huge increases in property prices, so you haven't actually lost anything. The only thing wrong with endowments is that they were sold to people without a full explanation of the risks.

Not that I think you should necessarily take one out www. I do agree with Batters - outside of some hot spots in London, there probably isn't going to be a spectacular property crash (and even in London it's already adjusted). Far more likely to be a plateau or very slightly rising prices. You need to look at the difference between what you have to pay in rent, and what your mortgage repayments would be for a similar house. If the interest only payments on a mortgage are lower than your rent, then any excess could be used to repay capital so even if prices don't rise, you are in a better position by buying.
In terms of which mortgage, I would be looking at getting a fix for at least 2 years (rates are only going one way at the moment) An offset probably wouldn't be best for you as you wouldn't be taking avantage of all the features, and rates do tend to be higher. If all you can afford is interest only, then do that- but make sure you get something that allows overpayments (and adjusts the interest charge immediately you make those overpayments)so that you can eat away at the capital whenever possible. Check moneyfacts.co.uk for the best buys.

One caveat www. If the properties you are looking at are also the sort of places likely to be targetted by the buy to let brigade, then I wouldn't buy at the moment. The expected rises in interest rates are going to make lost of buy to let unprofitable, especially if there is already a large market and therefore no room to increase rents and yields. That could lead to lots of people desperately trying to sell their properties to reduce their gearing, and a big fall of in prices.

completely sympathise www. we have been looking for the past 3 years and waiting for the crash. we are just about to take out a interest only variable mortgage with abbey national and once we are settled we can pay £30 admin fee to switch to repayment. this has gone against what we did previously on a 'safe fixed repayment' but we had to decide between having a house and having a life. so for the next 6 months we are doing both! best advice i ever heard is 'always buy the worst house on the best street' if you do have to sell up you hopefullly won't lose out or you may even gain during your time there, even if you don't renovate.
good luck

This will be of no help what so ever but anyway, if i could buy a house, which ever way it had to be done, i would definatly do it to get back on the property ladder. I hate having to rent privatly or waiting for some idiot to decide that we are worthy of council housing.

Hi www - I would definitely avoid endowment - we've got one for part of our mortgage and it's not looking good. Have you thought about a long term fixed rate? You might be able to get a good deal on one (i.e. 10-15 years fixed rate) because I believe they are the way the banks and the government want us to go, so I guess they will be pushing them. Also, it takes the guesswork out of it and the risk of interest rate rises. And at the moment interest rates are only going to go up, because they couldn't get much lower!

Your dp is working isn't he? So in theory, you could buy now, on his salary? I'm guessing he won't stop work until you find a job so you wouldn't be incomeless.

I'm sure you know this, but the evening post on Thursdays (I think) have a big property section. Some friends of ours have just moved to Knowle which is quite a lot cheaper than lots of areas but is still quite nice. They got quite a good deal on their house.

The other thing you could do is get somewhere that needs doing up - which is what we did, and got quite a lot of the price that way. I don't know how DIY minded you are, but you can get more for your money that way.

Good luck with the job hunting btw. And hope Ava is better.

Prufrock, I disagree. We've been paying into an endowment for 14 years which we believed would pay off our mortgage. Now it won't. It will only pay half of what we thought was guaranteed. Rising prices are no help, they just make it more expensive to move house when your circumstances change ? having a baby, for instance. The only way rising prices would help would be if when the mortgage is due to be repaid we sold our house. But anywhere else we could buy would have gone up in value too. The only way rising prices help is if you are in a position to downsize or move to a cheaper area. But our baby won't be grown up by the time the mortgage has to be repaid so the first option is out. Moving elsewhere would mean leaving our jobs and our friends ... and the rest of the country is catching up with the South East where we live so no hope there either.

Just wanted to agree that your initial message was long and tedious - also to add a thought: if, at the end of the day, you can only afford an interest only mortgage - you're at least getting on the property ladder ready to benefit from any future rises in the market. Worst case scenario (apart from a long term crash in the market leaving you with negative equity) is years down the line you sell your house, pay back the mortgage and you're in the same position as if you'd always been renting. More likely, though, there'll be some kind of rise in house prices - however gentle - from which you will benefit and anyway it won't be long before your income will increase (once baby starts school) and you can either at that time start some kind of savings vehicle - doesn't have to be endowment - or switch all or part of mortgage to repayment. I'd say you don't want to worry too much about how to repay the capital sum in 25 years time - 'cos who knows what will happen in 25 years. Bet that's controversial.

Prufrock, I disagree. We've been paying into an endowment for 14 years which we believed would pay off our mortgage. Now it won't. It will only pay half of what we thought was guaranteed. Rising prices are no help, they just make it more expensive to move house when your circumstances change ? having a baby, for instance. The only way rising prices would help would be if when the mortgage is due to be repaid we sold our house. But anywhere else we could buy would have gone up in value too. The only way rising prices help is if you are in a position to downsize or move to a cheaper area. But our baby won't be grown up by the time the mortgage has to be repaid so the first option is out. Moving elsewhere would mean leaving our jobs and our friends ... and the rest of the country is catching up with the South East where we live so no hope there either.

Prufrock, interesting what you say about buy to let - the rent we pay atm is less than the mortgage would be were to buy this house EVEN with an interest only mortgage. This house would be no good as a buy to let if bought now since the yield isn't high enough. The owners have had it for a while and have equity so they're ok though. We could afford to pay a bit more in rent and get a bigger house whereas we probably couldn't afford to buy a bigger house without over stretching ourselves financially, given the fact that rents aren't as ridiculous as sale prices. I think we've come to the conclusion that I'll get a job first (so no self cert, agree with you all there, although we don't have a large enough deposit anyway probably) and see how I like it. This house, while too small, will do for another 6 months and dd will just have to go in with ds for a bit maybe. In a few months' time we'll have a better idea of where we are with my job etc. In fact, according to all my calculations, the best case financially is me working and us carrying on renting (even if we pay a bit more but not as much as a mortgage) since our outgoings reasonable in comparison to income. Musica, yes, dp works but I will earn at least twice as much as him (maybe more) if I work - his salary definitely isn't enough to get us a mortgage. But we're managing atm on his salary, true. Just not earning enough to buy, so that's dependent on my working. He's pointed out that when dd (who is a lot better btw, thanks for remembering!) is at school in 5 years time then we can both work and I won't have to earn the main salary necessarily - we could manage on 2 smaller ones instead. He will be a SAHD once I get a job which makes sense financially. Break even once we factor in chidlcare for 2 children is £14k gross to pay the net childcare costs. Pants isn't it? Definintely not going for an endowment and think we'll only buy if a) we can afford a repayment mortgage and b) it gets us a bigger house than this one otherwise there really isn't any point and c) I find a job I can stand. It's really helped talking about this on here, thanks everyone, you're fab! I really will shut up now!

Feeee, thanks for your thoughts Actually, you've answered my question about why I would want to go for interest only. I know, took a bit to get that into my thick head didn't it, duh! Just couldn't get my mind round it. Hah, and I think someone's going to PAY me to work?!

I don't understand at all why the government is pushing long term fixed rates so hard. From everything I hear about buying houses in the USA (where 25-30 yr fixed is almost universal) they are very expensive; you actually pay large fees to fix in the rate, and even then what rate you get offered depends on your credit rating. And long-term fixed doesn't protect you against losing your job completely, which is the main reason people end up defaulting on the mortgage & having their house repossessed. Moreover, long-term fixed loans seem to keep house prices higher, from what I can tell. The UK house market may be annoyingly volatile, but at least when it crashes people on low incomes can get to buy something. It's a lot tougher where I'm from for low earners to ever buy; they just never do.

Maybe someone understands it better and can explain?? I understand the system is different on the Continent where they have 10-yr fixes and then it gets automatically reset. You can also re-mortgage in the USA, but again you have to pay large fees to fix the rate in.
Can you imagine how Europeans are feeling right now, with ECB rates at 1-2%, if they fixed in their loan almost 10 years ago? Right now, I think I'd only go for a 10+ yr fixed if our household earnings prospect was very limited or savings non-existent.