Did we make a big tactical error here?

[Gentleness]

We bought about 3 years ago, intending to live here 7-10 years, get as much mortgage paid off as fast as we can and then move somewhere bigger, better, shinier, perfect, etc etc etc. We love the house now, having done a fair bit of work on it, some of which will have made it worth more, some will make it sell more easily and some is just for us. But with 2 toddlers and baby #3 on the way and no off-road-parking I know this house will seem cramped in 4 years. In my occasional Rightmove obsessive moments, I've not seen anywhere in our next price bracket that I like better though, so the plan is looking ok for now - so I thought...

The recent news about house prices crashing is spooking me. Looking at interest rates on savings, we piled a lot of ours into overpayments and so our mortgage looks really healthy BUT we don't have a stash built up at the moment and will struggle to get a decent one together over the next 4 years. I'd planned on having so much equity as providing the deposit for the next house. Have I been really, really stupid? If this house price falls 40% over the next few years, our savings would at least have given us a buffer but they're stuck into the mortgage now.

I feel a bit thick. I don't like it! What do you think?

I have done something very similar, bought 4 years ago, although we intended to only stay for a year, then had DD which delayed things, then the market went arse up.

I also ploughed most of my savings into bringing the mortgage down in the first year leaving me with a big chunk of equity. But not now... We are in the NE and the market has already fallen quite a bit, much more than the national average. I will break even at the moment I think, but have no money to move on with.

The only thing that I can suggest is that you save what you can from now on and try and build some savings up that can be the deposit. Thats my plan - although we can stay in this house for as long as we need. The other houses that you will be looking to buy will also have dropped by a similar amount.

Are there any ways you could adapt the house you are in - extension?, Add off street parking, that sort of thing?

I do take comfort in the fact that although I have boxed myself into this house by ploughing my savings into it, that my mortgage is more affordable, and when the rates do go up and the values drop even lower I will be in a much better position than if I had a bigger mortgage that was swelling out of control.

I don't understand your concern. Paying off (say) 50K of mortgage is no less valuable than having 50K in savings when you're trying to move surely? And if your mortgage rate is higher than the best net savings rate you could have got then it will have put you in a stronger financial position.

It can certainly be advantageous to have the money in savings so you have a buffer in case of job loss etc, but this is irrelevant to how much you will be able to spend on your next house purchase.

Buying 3 years ago puts you at the peak or just after in terms of prices and from my understanding the prices then are broadly what they are today. I think values may drop a bit but i think the bank of england plans to inflate the economic problems away so savers are going to be punished. It also means interest rates will be kept lowish to avoid crippling the economy and minimise repossessions. So although people have been waiting for the crash (some people i know have been waiting for 6 years or so) i think it will be more of a slump. People like us, who would like to move but could stay put, will do so. That leaves the sellers as deaths and divorces etc but those prices will mot go rock bottom due to lack of supply. Prices will reduce in some places and stay static in others. That's my guess anyway!

I suppose where you might lose out is in the work you have done. Unless you have added space, and in particular, bedrooms then you might struggle to get your money back. We spent a lot on our place but in the end the difference in asking price of ours compared to our neighbour's place is less than what we spent. A pretty uncomfortable thought but due to the length of time we owned the house we have not lost money. Yet.

I dont completely understand why you dont think you have a "stash". Our mortgage company would let us withdraw our overpayments if we wanted. So we have an emergency fund. Is yours locked in? Also say we lost our jobs the overpayment could be used to "pay" our monthly payment so buffering from redundancy. It makes me feel very secure.

Next if you area ahead on payments and you owe less then you will also owe less on your next house. If houses go down by x% then if your are going up in size then the gap between houses reduces. So a slowing of the market helps most people (just not those downsizing). Yes the slow market will make it more difficult to move but in the long term slowing is good.

My way of thinking is that if you have a mortgage you have to pay it off one way or the other. You can sell the house or you can pay/overpay. If you overpay the debt costs you less. If you can withdraw it in an emergency why would you not keep on overpaying to reduce the amount of interest? Savings are being inflated away so you might as well reduce the borrowing cost?

I think overpaying is a no brainer.

No doubt someone will be along to tell me that i am a deluded scottish presbytarian type who is unecessarily suspicious of debt! But who cares - overpayments are buying me a hell a lot of security and good nights' sleep!

I agree. Equity on a sold property will provide a deposit just as easily as cash.
If your mortgage isnt flexible enough for you to take out money if you need to then you could look at changing it, but unless you can find a savings account that will pay you more after tax then your mortgage interest on that amount of money, then I would carry on overpaying the mortgage.

The way I read it is that you have ploughed money into paying down your mortgage, thinking that money would be at least the same (as in, you could sell the house for the same amount of money and just get the same money out again) or preferably more (through the value of the house going up).

However, if the total value of the house goes doen significantly, then you won't get the same amount of money out - you will get less.

E.g. Mortgage originally £50,000 on £100k house.

Paid down £25k so remaining mortgage £25k

Scenario 1: Sell house for £100k. £25k pays off remaining mortgage, get £75k (original deposit + extra money put in) as deposit for next house.

Scenario 2: Sell house for £120k. Actually get £95k back for £75k put in.

Scenario 3: Sell house for £80k. Only get £55k back for £75k put in.

Is it worth getting an estate agent round to give an estimate of how much your house is currently worth, given that your improvements may have offset any possible reduction in value?

The option we pursued (in a very similar situation) was to take out an offset mortgage. Although the mortgage rate is slightly more, we keep money in our own savings and current accounts but they are counted as if we had used them to pay down the mortgage and are only charged interest on the remainder. However they remain as cash, so we could also use them for other purposes if we needed them to...

tricot, "i think the bank of england plans to inflate the economic problems away".

So far, we've had almost three years of cost inflation running above wage inflation and as a result, Disposable Incomes Fall To Lowest Since 2003

In fact Mervyn King has specifically said that wage inflation (at least for us proles, not his banking buddies) is the 'wrong' type of inflation and would be targeted. So not sure whose economic problems you think the BofE plans to inflate away, but it certainly isn't normal working households.

This is more of a delationary environment than an inflationary one, and the last place anyone needs to be in a deflationary environment is heavily indebted as those debts become gradually more difficult to service.

Agree with alabama. when they talk of inflating away they are not talking about you and me unfortunately. This happened previously in recessions but M King has ruled it out this time.

tricot, re-reading, I do acknowledge that you also made the point about paying down debt and on that we do agree btw.

Noddy, the only thing that keeping base rates low achieves is that it deflects blame for households struggling and repossessions away from the BofE (as ostensibly, they did all they could) and instead puts the blame on external factors (i.e. cost inflation).

Fortunately for the BofE, very few people are able to make the link between a currency being devalued via low base rates and QE, and the price of 'stuff' we import rising..

I know they literally bank on the ignorance of the public. This stuff should be taught in schools

Noddy, unfortunately people want to put their fingers in their ears and sing la-la-la rather than face up to reality - the previous gvt infantalised people so they expect a magic wand or the lottery to pay the bills.

alabama clearly you are more of an economist than me as you have all the lingo!

In my simple way i see my savings getting tiny interest rates and inflation running higher. (with my lack of nuance perhaps i am rolling inflation and qe together in a crude way but the outcome for me seems similar) ie every day my money is worth less in real terms. I sprang to the conclusion that the value of my property was thererfore also deteriorating while the market was stagnant. Because if i sold (ignoring other housing market moves) each pound would be worth less, like my savings. So my next leap was that this also meant that debts would reduce due
to inflation all the time too.

Obviously that ignores all sorts of other stuff.which i dont understand (ie what is deflationary) and other factors like wages also reducing in value over time.... Ooh my brain hurts.

Anyway am i totally on the wrong track?

Tricot - nah, I can just talk the talk

I can see where you're coming from but what you're doing is comparing savings and property (and debt) to the cost of living, and in itself there's nothing wrong in that. So yes, savings are being eroded when compared to the cost of shopping, which is rising at a higher rate than savings (although if your savings were earmarked for property then in most parts of the country they would be growing relatively).

However when you look at servicing debt:
Your mortgage repayments today = £500 = 500 loaves of bread
Your debt next year = £500 = 400 loaves of bread

So on the surface, it appears that your debt has shrunk, compared to loaves of bread. However, we're not paid in loaves of bread, we're paid in £Sterling. And due to negligible wage inflation the debt has remained at roughly £500, whilst the money available to make those repayments has shrunk due to the increasing cost of bread. So your debt repayments have got relatively larger with time i.e. as with an interest rate hike, but not pinned on the BofE (genius huh!)

Oh well in a strange way it feels better knowing that whether a saver or borrower we will feel the pain! I was feeling picked on as a savings person!

There is plenty I don't understand about economics so this has been useful!

I think my attitude has been that once money is in the mortgage, you don't take it out. I've not really considered doing so, but good to be reminded it is an option.

We looked at off-set mortgages and because the rates for them were so much higher than the best fixed rates, and there were additional fees for arranging, it seemed better at the time to plough savings in and go for a low rate.

So, what I still don't understand is whether my theory is rational that (say) £20k now will be worth more in low rate savings (2%) in 4 years than in equity in a property that has dropped in value by 40%. We didn't buy at the peak, in fact it was well past, so maybe the 40% drop is not going to happen for us (hope!).

But it doesn't matter how well your property does in terms of where you put your money now. The size of your mortgage is all that is important here. Imagine your mortgage is £100K. Even if your house is now only worth £80K you'd still owe £100K (if you hadn't paid any off).

If you'd asked before you bought your house if you should "invest" in property or in a savings account then the future performance of the housing market would be relevant.

"So, what I still don't understand is whether my theory is rational that (say) £20k now will be worth more in low rate savings (2%) in 4 years than in equity in a property that has dropped in value by 40%."

No - the value of the property isnt relevant here. You have borrowed a certain amount in a loan.

You are paying interest on that loan. You can either pay off the loan and save interest, or you can put it in savings, which means that you pay the interest, earn a small amount of interest on your savings, and pay tax on the interest gained.

While it feel emotionally bad to pay off your mortgage earlier and 'lose' money with a decrease in value, the alternative is just to have a bigger mortgage. Paying less on your mortgage does not protect the value of your house!

i agree with the others.
all you can do now is compare the interest you gain on your savings versus the interest you pay on your debt.
So basically you put your money in the direction of the one with the highest interest rate - which is almost always the debt.
Google mortgage calculators (John Charcol ones are quite good) to illustrate it further. It is a real eye opener to see how many thousands you save over the life of a mortgage by making modest overpayments.

Alternatively you could continue making minimum mortgage payments use the overpayment you would make to save for a deposit - come the time to move you just rent out the current house (infact by the time you do it is possible the rental value will be more than the actual mortgage payment) - of course this depends on you not needing the equity in the current house to purchase the new one.