Advice on mortgage repayment amount please

[blinkineckmum]

Hi,

£750 mortgage on a £2900 pay?

All our mortgage advice said we could afford to borrow a certain amount and our repayments would be around £700 pm.
Yesterday we put in an offer and got a MIP. It all moved a bit fast, and when we read the MIP properly we found the repayments will be more like £750 pm.
We are stuck with one bank as we have a fixed rate on our current mortgage which ends in 12 months, and the early exit fee is not worth moving.
Our take home pay (after tax) between us is just under £3000, but I will be on mat leave this year.
I am nervous about the higher monthly repayments.
Our current house is smaller (hence the desire to move), and we pay about £450 pm.

So, would you be happy to pay £750 pm (and extend the term of the mortgage) in our circumstances? It's fixed for 5 years.

Or would you be looking at cheaper properties?

For context, on our current mortgage we have been able to overpay most years, despite 2 periods of mat leave and childcare costs, though I had hoped to take the full year off this time.
The house we offered on also needs work. We have savings for this. But the hike in mortgage repayments plus using our savings is making me nervous.

Any thoughts or advice appte.

Thanks

Depends on number of people and other outgoings of the household.
Think about the council tax banding, heating costs, Phone/mobiles etc as these are the biggest outgoings for me...and then potentially childcare costs when you return to work!
£750 is almost a third of your income on one thing and interest rates may eventually go up, add another 1.5 or 2 % to the repayments and think would you manage?

It sounds perfectly doable to me. Financial advisers do say not to overpay your mortgage as a rule as it’s such a (comparatively) cheap loan. Best to put any extra money you have into investments. So overpaying isn’t necessary. Don’t overthink it.

Thank you. I had trouble working out the % of our pay so you've helped! Yes, it's the rising interest rates which really bother me. Council tax goes up a bit.

Very reassuring Gladiola, much appreciated, thanks.

Another thing to consider is your earnings. Are they likely to increase over the next few years due to being on a payscale or having the chance to move upwards in your jobs? Or are they likely to decrease due to maternity leave? Or stay stagnant?

If they are going to increase I'd say go for it. If you're both at the top of your current earning capacity I'd be more cautious, because interest rates will inevitably rise at some stage.

It's more like a quarter of your take home.
But if you are concerned about the difference between "around 700" and 750, I'd be concerned about what will happen when interest rates rise, also, what happens at the end of the fixed rate? Will the interest on that part of the loan likely be higher or lower than currently?

Good points, thanks.
Our income would only go up if I up my hours. I only work 3 days per week now and would rather keep it like that until the kids are at school at least.
Who knows about interest rates? The old fixed is 2.34 and the new is 2.14...
At the end of the MIP it gives an idea of what we'd pay monthly if interest rates went to 10%. Not affordable! Then it says they could increase more than this, which scared me.
It feels like a gamble, and I am risk averse... but then again, we could do with a bigger house.

We just got a MIP yesterday. Our advisor said they have to include the highest rate of the last 20 years - hence the 10% quote. But that's incredibly unlikely. But you should make sure you can manage with 1-2% increase which is likely.

Our take home pay is about £4000 and payments will be £1100 so about the same % as you. I don't find that too much at all but I guess it all depends on how much you spend!

Our take home pay is about £4000 and payments will be £1100 so about the same % as you.

I don't think the percentage works all that well as a comparison because you'll have much more disposable income than the OP even after paying out a quarter of it on your mortgage.

Are you sure you have a good deal? We're remortgaging and it's 1.5 fixed 80% ltv.

Our income is 5k and our mortgage is going to be just over 1k.
However I do think yours is affordable.

We have a mortgage deal where the monthly amount can be afforded by just one of us should the other lose their job. One can overpay by 10% of the total mortgage amount each year, so that's what we do.

Gladiola Financial advisors may well advise that Best to put any extra money you have into investments. So overpaying isn’t necessary. If you do the maths, though to see what the investments are earning, noting the level of risk, compared to the cost of borrowing, you may see a different story.

I looked at the saving (of compound interest) with even a small overpayment, it prompted me to overpay as quickly as possible, so our mortgage was paid off in ten years, which reduced by half what we would have paid in interest over the whole twenty five year term.

Obviously, you would first pay off any other debts with even higher levels of interest rates, before tackling the mortgage. Nevertheless, it is never correct to just advise against paying off any debt in isolation.

Any such advice which does not encourage you to work out the costs yourself and compare alternatives uses for your money, is always going to be suspect.

Interest rates are highly like to go up, slowly. The current period of low rates is historically anomalous. You should always ensure you would be able to afford the mortgage at 4-5%, maybe even more, since those are the more historically 'normal' rates. Even though you are fixing, bear in mind that you will have to get another deal i n 5 years' time, and this may involve higher rates. However, a lot can happen in 5 years - you could both have doubled your salaries!

That said, those repayments sound doable provided you're not servicing huge debts. You need to do a budget of your monthly outgoings on maternity leave to check, and to look at whether there's any fat you can cut out.

If it's fixed for 5 years then you won't be affected by interest rate changes in that 5 years.

I wouldn't be unduly concerned about an extra £50 but as a pp has said, a bigger house and bigger mortgage means (usually) higher life insurance (on the basis it's linked to mortgage), increased council tax and utilities. Just do your sins thoroughly!

Having said all That, we stretched ourselves at a similar stage and it was the best thing we did. House prices continued to go up and if we'd have waited to move for 2 or 3 more years, we wouldn't have been able to afford our house.

*sums

But a fixed mortgage is only fixed for a term. So if you fix at, say, 3% for five years, and the BoE interest rate increases to 5% during that time, on completion of the 5 year term, you will only be able to get deals at, say, 6-7%. So you're only protected for the term of the fix, IYSWIM. However, a lot can happen in 5 years career-wise!

FinallyHere yes of course each person’s circumstances are unique. However, not overpaying the mortgage means you can put more money into investments that will give you a higher return. The saving of interest on a mortgage term is not really worth it for most people as the saving you’d make is a trifle compared to what you can or could make from investing wisely.

Let's not forget that you can pay off a huge chunk in 5 years so although interest rates might rise you will have a better loan to valu

can put more money into investments that will give you a higher return.

Would be very interested to know the sort of investments, except the riskier sort.

Thank you all for taking the time to reply. Our pay won't increase much but I could work more. And childcare costs will go down. We already live fairly frugally with one car and no gadgets... no tumble dryer or dishwasher, no tablets or devices bar phones, no tv.
Good point that some mortgage will be paid off in 5 years.
No word back yet about the offer.

As someone mentioned, your fixed rate won't be affected even if the rates do increase within the 5 years. Usually when your fixed rate has come to its end you will have the option to arrange a new fixed rate. The mention of the higher rate when your fixed deal ends will most likely just be an idea of the variable rate which you will go on if you don't fix a new rate when yours ends

If you're looking for cheaper payments then look to try extend the term for the maximum. You can always look at decreasing it at a later date if your finances allow you too.

Sorry just wanting to check, is your overall mortgage term 5 years? Or is that just how long your fixed rate is for?

Fixed rate is for 5 years. Term was 20 years but would go up to 30 years on this new deal. I don't think we can get a better rate on a 5 year fixed because of the early exit charge.

That sounds similar to our situation. We have recently bought a bigger house. We had a fairly low repayment with only 10 years left on our old house. Our new repayment is more and we have increased the term to 15 years BUT we have used the new mortgage to pay off a loan and credit cards so we are actually paying less now. We have fixed for 5 years and should be able to pay off a big chunk in a few years due to an inheritance. Go for it - we would have paid our house off quicker if we had stayed where we were but would have been in a house we had outgrown