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.

@StealthNinjaMum No I definitely get you, thanks for the advice! You are right on some levels, it is important to think about these things and part of the point of posting here was to be reminded of them from an objective outsider

@itsboiledeggsagain - No I do appreciate that, you're not putting a downer on it. It's a very significant decision after all so can't be taken lightly.

Part of the problem though is that he just doesn't have the spare money from wages to put away nearly enough to come close to my deposit. We would be talking £10s of pounds a month, not hundreds. I see where @Shirleyphallus is coming from in that if he was to save it would be a nominal amount each month. And over the course of a few years it wouldn't make much of a dent in what I inherited. If he was earning loads and frittered it all then it would be a different matter.

If I can protect my own deposit (which I can with a deed of trust), why shouldn't I use it for us to buy together? In our shared rentals he has always paid his rent, done whatever non-landlord DIY is necessary, etc. I've no reason to believe he wouldn't pay the mortgage, fix things up, and so on. He just wouldn't have the large equity stake I would have (at least not until we were married much further down the line), and that would be fine with both of us.

As someone who bought a house with a now ex and put in a much larger deposit, I'd never do it again. Luckily my solicitor was my friend and he made us sign a document that I owned 2/3 of the house. When we split the house had nearly doubled and my ex wanted 50% even though I'd paid the deposit and paid to renovate it. Luckily we had this document signed and I had bank statements to prove he hadn't paid anything towards doing the house up. It was an awful time I had to sign my mum over as power of attorney as couldn't cope with it all, so I ran away travelling for 6 months just to escape it all.
What will happen if the flat goes down by £50k when you sell it? Will you just lose all your deposit and inheritance?
I think over the years it will drive you mad with his lack of saving what if interest rates go up how will he afford that? I think having a £340k mortgage is worrying with someone who lives from month to month.
I moved out of Fulham last year and to sell we had to drop by £250k and since then prices have dropped even more. Personally with all the crime and Brexit London is a very unstable place to be buying I'd be either wanting to buy something heavily reduced or looking at moving slightly out and getting more for my money.
Apart from the commute what's the main reasons for wanting to buy in that area?

Have you done the sums on you buying as sole owner? With a large income discrepancy sometimes 4.5 x larger salary can be almost as much as 3.5 x joint salary (obvs ballpark calcs). In fact £400k on joint salary with £40k deposit is more than 3.5 x joint or even 4.5 x single so looks a stretch anyway.

So on basis of above would advise continuing to rent. You can't afford the downside risk of being a distressed seller in a falling market or the risk of significant interest rate rises.

If you could afford it would advise buying in your name and getting DP to pay you rent at the level he currently pays.

Who is paying all the sunk (wasted costs) when you buy (survey, legals, land reg, mortgage fee etc) and then if you had to sell (EA, legals) ?

You need to tot all these up as well.

If you are paying all the sunk costs - add these costs as a % to your deed of trust - it's a significant part of the investment.

Also where is his career going? If he is taking the back seat - how will this pan out when YOUR career and income takes a hit on mat leave and beyond if you want the flexibility to go part time.

I have done a similar move to this in London a few months ago OP. Very similar circumstances / income etc. What we felt was - as a pp has commented - we wanted to ensure we could stay in the new place for 5 years at least, as the expense of moving / stamp duty etc is to be avoided in the next 5 years especially if Brexit etc affects he economy. So with that in mind we looked outside our favourite area we used to live in and absolutely loved (smug zone 1/2) further afield to zone 3 in an area where excellent transport links will be coming in a year's time and really make transport super quick. Because the area was slightly further and not as trendy we got bags more space for our money and will easily be able to grow into our new flat for the next few years. I am really glad we made the move as now every month I know our hard earned income is going towards our own mortgage and not lining our old landlords' pockets. I also don't miss our old area anything like as much as I thought I would and have found loads of cool new places in our new area. So my vote is go for it.

Sounds like all the risk is in you. As someone above pointed out - if your property goes down 40k in 12 months time ... and you split up in 18... do you lose your deposit? Would seem fairer that your partner is also accountable for half of any potential loss. So would owe you 20k.

Just buy a 2 bed. then you covered for longer can rent a room out etc. A one bed you stuck . Unless it has large kitchen separate lounge. Buy for longer term e.g. lodger or a child.

Is his name going to be on the title deeds? Will he stay home with any dc you have? You don't want him to be awarded the house in any future break up. I would keep your money invested for another year, watch the outcome of Brexit and ask him to save something in the next 12 months to show he is serious about the future.

Have you done the sums on you buying as sole owner? With a large income discrepancy sometimes 4.5 x larger salary can be almost as much as 3.5 x joint salary (obvs ballpark calcs). In fact £400k on joint salary with £40k deposit is more than 3.5 x joint or even 4.5 x single so looks a stretch anyway.

howabout your calculations don't add up. Please explain.

If it was just an issue of whether to buy or not by yourself I'd say definitely buy!

But seems to be a different issue of finances between your other half. When I met my DH I had already bought a house - he had no savings. He moved into my house after we got married, He paid me for the mortgage and bills and I kept it in my sole name. We've since moved to a bigger and more expensive house in our joint names and he directly pays 100% mortgage and bills but essentially the deposit was mine as it came from the house I bought before. I got comfortable with that but I feel that as he's paying for the mortgage and bills it's a fair deal (though the deposit was a couple of hundred k). In this day and age, women are often the higher earners but I think it's an issue of underlying trust and values. Trust your instincts. If you aren't sure then don't do it with him right now. And if you do, make SURE you get a Trust Deed showing how you would split the proceeds should you sell in future - this will protect your deposit - I did this with DH and would advise to anyone buying with someone else (I'm a solicitor).

Good luck!

so £75k x 3.5 = £263k + £40k deposit = £303k

or £75k x 4.5 = £338k + £40k deposit =£378k

Both amounts less than £400k and in second case have assumed single salary of £75k when in fact part of this would be from 2nd earner and disregarded, so max is less than £378k.

(I am aware some lenders give higher multiples but it seems optimistic / unwise to stretch in the current climate given prices stagnant or downwards and interest rates upwards - unless of course you are on track for a hefty payrise soonish).