40k deposit, looking to buy in London. Is this a bad idea?

[roseforme]

Hi all - looking for some advice.

Myself and DP have a £40k deposit and a combined household income of £75k. We have no kids. We have seen a broker, and have been advised that our maximum buying ability is around £400k. (The deposit is mine, but I will obviously get a lawyer and a deed of trust.) Securing a mortgage, then, is not something we’re too worried about being able to achieve, although obviously we know that it’s not easy.

£400k will get us a flat we like in the area (zone 2/3 London) in which we currently live. In our area there are lovely 1-beds, some even with small gardens!!, selling for this price. (One, with a study and a balcony and just 20 min walk from my office, has just gone for £400k… but I digress.)

The interest rate quoted by the broker meant monthly mortgage repayments would be a bit lower than our current rent, and a further hundred pounds lower than that if we went for a 30 year term.

Parents have generously offered to loan us the money for stamp duty, fees etc. We have an accurate overview of what these will be from the broker.

However: I am terrified that we are going to somehow live to regret this decision. The following things worry me: price declines causing the deposit to be wiped out and wasted, negative equity, interest rate rises, impact of Brexit/Corbyn/insert policy or political change here, change in circumstance leading to us having to sell at a bad time (unlikely, but who knows?).

I have researched these topics to death and I could talk about them until I was blue in the face, but I can’t seem to settle my mind.

So with that in mind, can someone please explain to me whether using a £40k deposit to buy a £400k property, in London, in the next year, is a smart decision or not? I know that there’s never one right answer, but I figured others might know or spot things which I haven’t considered.

Buying a house you intended to live in for years is sensible but for me, buying a small flat that probably won't meet my needs in 5 years seems risky. As you said, you'd be saving on rent but you're having to stretch so far to buy that you would lose all your savings with less than a 10% fall in the market.

As you're so stretched, you would have nothing left over for a property that needed any tlc or updating at all. Also, have you considered ground rent? That is potentially a big additional and ongoing cost.

On the one hand, the market is soft, so your money may go further than it has in the last five years or so - if you can get a big discount on a property with room for improvement that will increase your safety margin. But the UK property market - and London's above all - is hugely exposed to a hard Brexit, not to mention Corbyn's taxes and controls, so your 10% deposit could easily be wiped out. Only take the plunge if you can afford to ride out the next ten years if things go badly.

I'd go for it but if there's any possibility you'll have kids then I'd go for a two bed where you can afford one as it's so expensive to move.

I’m in a similar position and it’s so hard to know what to do for the best.

In the end we decidedly we’d rather not spend more money than necessary on paying off someone else’s mortgage.
In reality no one can predict what will happen. House prices may dip, but in London are unlikely to tank all together. Plus if the economy goes tits up it will be much harder to get a mortgage.
I would say that we are looking at 2 beds for similar ££ (albeit ones that might need some work doing ) - you might find that a better compromise than a 1 bed if you’ll be there for a few years ?

Our friends have just bought a property in London for around that, but they have bought a big maisonette and plan to stay in for at least 10 years so hope they can ride out any negative equity. Even if you were in negative equity, your housing costs would still be lower than continuing renting, and at least you are building an asset. I'd see if you can do some good negotiating, we live in zone 3 SE and there is a lot on the market in your price range that has been for sale for months and months, people may be pretty desperate to sell because of Brexit and take a low offer. Worth a try anyway!

I would do it. Renting in London is so expensive, I think you'd likely be more out of pocket if you continued to rent than if you buy and prices fall a bit more.

Just right at the minute, I’d say hang on til you see what happens with Brexit. If it looks like prices are going to rise, you’re in a position to move immediately, if they fall you won’t have missed out.

I will tell you though it’s the scariest bloody thing in the world - at some point you do just have to jump and keep your fingers crossed. (And of course have a plan in place for interest rate rises, job losses etc...)

It would be less risky if you buy a bigger house that is more likely to meet your needs for longer. We hadn’t considered kids when we bought in our mid twenties- it was too small for a family- luckily we sold just before the apartment market stalled (before the buy to let market got squeezed) and we moved a bit further out to get a 3 bed house.

You can get a three bed house in South East London for your budget. Lots of negotiating to be done right now.

I think you'd be crazy to get a 1 or 2 bed flat in London right now. Where I am SW17 zone 3 they are not selling or selling at a huge discount. All the forecasts (for what they're worth) point towards this continuing & tax changes to buy to let will probably increase supply & drop prices further. If you're looking longer term & thinking of children buy a house further out with good transport links. Some areas of SE London have 3 beds in this price range. East Croydon/Addiscombe you could even get a semi & possibly a drive. Transport links to Victoria & London bridge are excellent (less than 20 mins direct).

I was in this position in 2008. The credit crunch was taking hold and there were awful predictions about house price slumps. Unfortunately in London it’s never really a buyers market. House price drops come in tandem with uncertainty for everyone. It’s also a bit of a catch 22 since if prices drop enough, demand increases and the prices move back up.

I went ahead with my purchase as a first time buyer as ultimately I wanted somewhere to live and to call my own and where I was in control. I also knew I would be there at least five years. Looking back it was ridiculous to have worried as by the time I came to sell, the flat had increased in value by about 40%. The difference in my situation is I had a 30% deposit and my purchase price was £210k (zone 2 London)

The key is the length of time you are happy to stay in a one bed flat. It could start to feel cramped and get frustrating. I stayed 8 years but was ready to go. It might be better as others have said to get a two bed, or at least one with a large square meterage (I think people can get a bit obsessed with number of bedrooms when sometimes the second bedroom is not good for much and has been carved out by shoving the kitchen into the front room - I’d rather have more usable living space). Often people quote the late 80s as a time when the house market was at its worst. My parents bought then and it was a bit of a struggle but values recovered over the years. There are sometimes troughs but they don’t seem to last forever, particularly in London where there is more demand than supply. Brexit seems particularly unprecedented at the moment but I expect prices will again recover eventually.

Can I ask why your dp doesn't have a deposit? When dh and I moved in together (before we were married) we both had fairly large deposits, his larger than mine. I would be more concerned about moving in with someone who hasn't managed to save unless there's a good reason for it.

I have posted the same response on the Brexit thread - but thought it might be useful here:

In reality though no one knows what the Brexit effect will be, how long it will take to play out and what impact it will have on different locations. Not sure that by 29th March we will know the impact - think it will take 5 years to play out - but peoples lives need to move on. Also will the impact be greatest in London - or port areas or boarder areas - who knows? Also overlaid with other market forces, change in BTL costs, London over heating, withdrawal of international property investors etc

What may happen though is that people sit on their hands, v little comes on the market - some people have to sell (divorce, debt, death, downsizing, relocation, growing family etc) and because supply and demand ratio is skewed prices remain artificially high until things settle and people are confident to move again. Think we are in for the long haul this time. Though post 2008 boom in London property prices whilst country in recession was unprescidented.

Agree that you would need to find somewhere future proof - so IME - 2 beds if you were to have a family, somewhere you would be happy to live for 10 years, somewhere that could sell quickly, or rent well, or of a value that you could buy your OH out of things went wrong if the timing of this was negative equity.

Don't buy a one bed - those will definitely be the first to drop and heavily (voice of bitter experience!). Look to Zones 3-4 and get somewhere bigger or a house; Bromley, Chislehurst, Plumstead Common/Shooters Hill - all nice, green, safer areas near to good transport links into the centre all for £400K or less. These are not chi-chi areas but they are solid neighbourhoods. I think the London market is starting to crash and Brexit will accelerate this. Look to future proof.

Do you really need to be in zone 2/3? Our 3 bedroom house in SE London cost the same (we’re zone 4). It’s a 25minute train drive away from central London and not using the tube is amazing! We have a good garden, garage, a wood (conservation area) 5 mins away from us, lovely neighbours, good catchment area. House needs a bit of work but we will do it eventually. It is our forever home. We are slightly worried about Brexit though.

Hi all - thanks so much for the replies. You have given me plenty to think about and some fresh perspectives.

Re location - I actually work in zone 2/3 North London. So while living in SE London is an option, it wouldn't be quite as simple as travelling in on a 25-minute train to Waterloo or the City because I then have another long journey from there. (Shooters Hill to my workplace is 1 hour 25 minutes each way, for example)

We are also quite attached to our current area, although obviously that isn't an immovable commitment. Kids are a very long time away (10 years at least). However, having read your replies I am definitely seeing the benefit of seeing if we can stretch to a 2-bed. Perhaps another year of renting to get the deposit up to 2-bed level and hopefully see a pay rise might be worth thinking about.

@StealthNinjaMum - I inherited the deposit. I do save, though. DP works hard, but I am the higher earner and he doesn't have much left over after paying bills.

We also had a full and frank conversation about it. He said saving is not a priority for him when he had limited funds left over after rent etc. That wouldn't suit all couples but it's fine by me (provided that the fruits of my own savings are protected in unlikely case of break-up etc). We aren't married.

@another20 - Your last para is a useful list of ways to hedge against the risks I worry about, so thanks.

Thanks for replying roseforme. Although I can understand why you have the deposit I would be really irritated by his attitude. If you buy a house there will be times you need to dip into savings e.g. boiler goes wrong, washing machine needs to be replaced, broken window and if he 'isn't bothered' it means that internally he has an expectation that someone else (i.e. you )will do it. Ask him where the money would come from if you any of these occurrences happen. (My guess is that a new boiler could be £3k on a small property).

I was actually in his position. Moving in with my partner (now dh) who earnt much more than me yet I still managed to save (albeit relatively small amounts) so I do understand his position. I wanted to feel equal, have some kind of financial control, and saving money was just a habit I had.

@StealthNinjaMum Yes, you're right in a sense - if I am totally honest, it has bothered me a little in the past, but that's more because if I was in his wage bracket I would still prioritise saving.

But I don't feel I have much right to say so because the margins for him are so thin each month.

For significant joint costs at the moment, I pay it all upfront then he pays me back from wages. So when we last moved rentals, I had paid the entire deposit but there was a deposit deduction. He just paid me his share of the deduction over a month or two from his wages. I imagine we'd do the same with boilers etc if we bought. I always get the money back and anything I put in is always as protected as it can be, so I'm happy to pay upfront in order for us to have an easier life!

It might work now, but could wear thin. I wouldn't buy a house again with someone who isn't on the same page as me when it comes to spending and saving.

I would keep hold of that deposit until after brexit. If the market ends up trashed by then, then you won't have lost out.

I understand you'd want an easy life, I buy dh smelly tinned mackerel for an easy life, but when it comes to saving and spending I think you need to have more similar values.

If you're ill, unable to work, need to take time off for a sick relative, having a bad pregnancy etc etc you need to know your partner has your back. It sounds like he takes you for granted. Anyway I know this wasn't a relationship thread, I am trying to be kind/ helpful not critical.

I agree beware of ground rent - ours is £2k a year (in 1k lump sums) for a flat in London

I think I would wait 1 more year and reassess. It's always a leap of faith but everything is so up in the air right now, I wouldn't make a move unless I had to.

400 less deposit 40 k i s 4.8 x your 75 combined income. Seems like a lot. Can you afford the mortgage on ypur own if you split? Go for 2 bed so lodger or kids later

With EU offering to extend transition to Dec 22 to agree trade agreements - is that more uncertainty or less for the economy?

I wouldn't buy with that fella. If saving isn't a priority for him you will quickly find that he isn't into the house, doesn't want to invest in it looking nice and soon enough you will be doing all the housework and earning the most and then also doing the childcare.

Buy with someone who has the same values as you.

Sorry to put a downer on it.
Speaking from experience...

I disagree re the saving point

When I was in my 20s I put nothing in to savings because it seemed so futile to save £50 a month, trying to get to £40k for a deposit

I imagine a lot of people feel the same and it’s only thanks to inheritances or gifts from parents that they’re able to buy