Moving up the property ladder on one income?

[fluffygreentail]

We are running out of space with two preschoolers in a house with smallish rooms. Since the summer, we have been starting to think about buying a larger house but only have one income.

Looking at finances, we would be increasing our mortgage to net income percentage from 22% to around 33-37% depending on how much we borrow and the price of house we end up buying. We'd still be able to save a few hundred after bills/higher council tax+ estimated increase on utilities/food/having a few days out but that seems tight. We seem to get a run of quite months when we have to drop money on unexpected things (things which cost several hundred) and then nothing for months after. Children get more expensive as they get older too.

It seems like the right time to make our next and final move but not sure if we are cutting it too close to the wrong side of manageable. If we don't do it now, we'd never do it.

Or, being naturally quite frugal, we continue to save to add to the rear of our house but due to space constraints, it wouldn't be a huge extension or just start overpaying our mortgage.

Any experience of this situation?

Thank you.

Gotcha. I need to find an io mortgage like atticus. Self employed husband so we have tax planning that might actually work well for this kind of io mortgage. Never seen one though!

That's another reason it's good for us Apatite. I'm now self employed.

In fact for us (at the risk of complicating things) the holy grail would be an interest only offsetting mortgage (first direct do one) since then you can offset any money you have sat around waiting for the tax man.

There is another house in a catchment of a school we know about but don't think they will have negotiation and there is another slightly cheaper but not sure about main road and catchment. Three contenders within 40k of each other. Apart from the price and catchment issues - each of them offer long term and final move for us.

I still don't think my question has been answered! I know how an interest only mortgage works, in fact my first mortgage was io and I had an endowment. So my monthly mortgage payments were split between the interest account and the endowment account.

It is my belief then that atticus must have a fund of some sort, separate from the io mortgage (even an account of some description with the mortgage provider) into which the overpayments go to build up a fund designed to pay off the capital either by the end of the mortgage term or before, depending on how much is in the fund. This is the case, no?

I'm anti IO mortgages, but it's because I've never met anyone with a "repayment vehicle" such as yours atticus: I can completely see now why you've chosen this. Makes sense.

A final move is worth stretching for, fluffy. I'd save like mad, build up a three month cushion at least, then take the plunge. Life will never be risk-free, no one can predict the future, a calculated risk like this? I'd do it. Make sure you're happily within catchment of your preferred schools, deep breath, go for it. Your kids will be gangly teenagers in the blink of an eye!

No, sorry wowfudge, you're not being stupid I just don't think you understand how overpayments work. The overpayment doesn't go into a fund or a pot or an investment.

It could do if we had chosen for example to have an endowment or some other investment vehicle. The reason people do this is in the hope that the investment vehicle generates more money than has actually been put into it.

We chose not to do this and instead chose to make overpayments on the mortgage loan.

The bank takes the money we pay over each money, subtracts the interest and uses the rest to pay off some of the capital (the loan) we owe. Exactly the same as it would do if the mortgage was repayment.

The only difference is if it was repayment we would be compelled to make this capital payment, we do it voluntarily and are only compelled to pay the small interest part.

It may be to early to decide which school your child may go on secondary level.
Schools change a lot, education system changes all the time - what's going to be like in 6-7 years? crystal ball

However we moved to where selective grammars are and both my kids are one in each of them. I just knew they were bright (taking after their parents hehehe no doubt). Yes tuitions are v.expensive and you need to buy lots of practice books etc.
hobbies become expensive in 3-4 years time. Music lessons I am paying ~80 pounds pw now. It used to be much more when both played piano as well.

Probably strange for those who have always thought of IO as risky but the reason we're set up like this is because as a lawyer I am extremely risk averse and would never want to risk not being able to cover out outgoings.

Fluffy if this is going to be your forever house then I'd say go for it as long as you think you can afford it and are fairly comfortable with the schools. The fact that you're thinking about it so much is a good sign.

I know it all gets pricey with kit and tuition. The primary school in catchment for two of the houses were my third choice when we applied for schools in november only because I had to put something if you get what i mean. I spoke to the head teacher for 40 mins and put as third choice so we werent given a school 3/4 miles away.

You might not need tuition of course

i think we need to work out if we moved to a larger house, happy we would be saving only half the usual amount we are able to currently save each month. we aren't talking huge figures so thats why there is a lot to consider.

The houses are just great and i wonder if we should buy before the prices get higher and before the children start school so we aren't chopping and changing mid term.

thanks for post, really helpful and ive learned something new about IO mortgages

Meant thanks to everyone for posts.

atticus - would you mind letting me know who your mortgage provider is? We are planning to move and that kind of mortgage product would be of interest to us.

fluffy - if you are thinking of moving up the ladder, in terms of interest rates, there's probably never been a better time to do it. Also, have you considered that your current house may have increased in value giving you a better LTV %? We found that to be case when we last re-mortgaged. Your current mortgage provider will have a book value for your house on its files. Sometimes you can test the waters by looking online at what remortgage products they are willing to offer you. You could remortgage to a lower interest rate and make overpayments, putting you in a better position for the next place - you may also be able to port the mortgage.

Cant believe im still here worrying about a move. Im coming back to check for posts every 5 mins, so thanks for sticking with me!!

Yes, think our house has gone up a little, not an awful lot but the new houses are substantially more than more than our current. think we can port the mortgage - do you mean keep the one we are on but increase the amount?

Yes - it means you don't pay any early redemption charges or new product fees.

Atticus, I too would like know who your mortgage provider is please!

We have an offset mortgage which is interest only and works in the way atticus describes. When we remortgaged we borrowed an extra £100k so that we could either pay school fees or extend depending on what happened. We have ended up drawing this money down to extend but beforehand if was offsetting the higher mortgage, so no interest was due. When DH gets a bonus etc it reduces the balance immediately which is great. Don't know if this type of mortgage is still available as it might suit you?

We are with HSBC on a lifetime tracker IO mortgage but if we were remortgaging I would go for an offset First Direct mortgage (First Direct are part of HSBC). For us it would work well since I have a fair bit of money that hangs around waiting to be paid to the taxman and offsetting this would make a lot of sense. The interest rates tend to be higher though on offset mortgages.

Thanks v much atticus, will look into both.

All you're actually looking for is an interest only mortgage with the ability to make unlimited overpayments without any penalty. This is what gives you the flexibility.

When we were asked by HSBC how we intended to repay the capital we said a mixture of ISAs and overpayments. They were fine with that.

How long have you had your mortgage atticus?

We are also with HSBC on a lifetime tracker, but with a comparitively tiny mortgage, no doubt on a comparitively tiny house. Our interest rate is only 0.89% as we got in just before interest rates hit the floor nearly 6 years ago.

I save all our overpayments in a variety of high interest current accounts paying upto 4% interest after tax so, while we're not fully offset, our mortgage is effectively earning us money because we pay about 70 pm in interest and earn more than that in interest on the savings.

So I'm suggesting that you consider saving some separately rather than overpaying if you can get a better interest rate elsewhere, but that might not work for you, because of larger amounts of money, or if your interest rate is higher, and I assume that you are a higher rate tax payer, so will pay more tax on interest.

I instinctively want to pay most of our savings on the mortgage, but it doesn't make financial sense to do so.

We could possibly make a little there Ilkley but probably not since we've only been on this particular mortgage product for three years and so our interest rate is higher (1.5 above base) and I'm a top rate tax payer which means I lose 45 percent of any interest. I'll do the maths though and see.

That's why for us the offset would be good since I could offset the money and the loss of the interest for us wouldn't be a big deal since we don't see half of it anyway.

As soon as interest rates on savings accounts get better though it could be worth looking at. Crazy isn't it how much they change? When we were moving 5-6 years ago we had our equity sat in a savings account paying us 10 percent!

ah ok so atticus is able to pay 4000 per month (most months/some months...) - that would be a substantial repayment mortgage if it was a repayment mortgage and if 25% of net earnings is based on net earnings of 16k per month.... 192k net - quite a lot for most people...

4000 per month would be a repayment mortgage on something like 400k mortgage at 3% paying it off over ten years.

on a 20 year mortgage the same repayments of close to 4k per month would get you a 700k mortgage.

but if earnings v variable and are 16k one month and 2 k the next then yes it makes sense for IO. i would hazard a guess tho that most of us who got IO back in the hey day of pre-2008 were way down the ladder in London earnings...and the IO amount represented affordable versus the repayment which was unattainable.. [but the mortgage broker said hey don't worry coz your equity will quadruple as prices will rise...] and if the base earnings or sometime earnings are not so high then it would be hard to get IO mortgage unless you have a v high ltv.

I don't earn 192k net I wish!

As I've said, our mortgage was just under half a million. This current mortgage is IO on a 10 year term since my aim is to get it paid off asap. The repayment would be about £4000. We're now below £300k due to the overpayments we've made.

But the figures are irrelevant. The point is that however much your mortgage is it makes sense to go IO because it gives you ultimate flexibility if your circumstances change. This is particularly important in the OP's case where she is worried about the fact that they have only one income and her DH hasn't been in his job for that long.