Are we stretching ourselves too far?

[Belinda2000]

My husband and I have been property hunting for a while now, without finding anything we really fell in love with. We started looking in a higher price range just to see if we would have more luck, viewed a beautiful house a few days ago, ended up offering the asking price (lots of competition) and our offer got accepted. Now that it starts sinking in we are really concerned that we are stretching ourselves too far. We are on a combined salary of £120k, have a deposit of around 185k and would therefore need to borrow 675k to buy the house for £860k (we are first time buyers). While the monthly repayments shouldn't really be a problem, we are concerned about all this talk about future interest rate hikes and what it would mean for us once we will remortgage such a large sum - we would probably for for a 5 or 7 year fixed but still we feel so exposed.
Are we overthinking this or just getting cold feet? Has anyone borrowed similar large sums?

We are looking at buying a 3 bed detached in zone 5 in London. It's a beautiful little home (1400sqft) with a small garden, built 12 years ago but nnothing exceptional (no bi-folds to reply to some of the comments here). The house is in excellent condition, with no work whatsover to be done.
In the areas we are looking at unfortunately £860k doesn't buy us a mansion

It sounds a bit of a stretch, and I'm surprised a lender would go that high.

My salary is higher than yours, and I'm buying a property by myself for a £150k less than yours with a 15% deposit. Monthly mortgage payments will be about 20% of my monthly take home, however my DC are now into primary school so childcare is just about behind me. At its peak, when I was with my EXDP, nursery for 2 DC was £2.5k per month. I wouldn't have wanted to provide for two big expenses concurrently like that for years as it would be difficult to save much for those unexpected expenses.

Ideally you should be trying to find a place for about £650k, which would be far more manageable on your salaries and with your future plans.

There must be three beds in zone 5 for much less
....

But it s up to you to work it out if it is worth it

If the bank is giving out such mortgages, it's unsurprising the house prices are so high. If so, it's a bubble. When we got our mortgage in 2019, we got it for 334k for a 392k London flat. It was slightly more than 4.5 times of our salaries. I don't think we would be able to afford to pay more without a salary rise. We are currently overpaying by around 1k per month but that's cos the interest we get for our ISA is very low.

I always thought that London properties were not in bubble territory due to inherited money floating around but this thread is making me rethink it. The prices could really come down if it's based on debt...

You obviously feel uncomfortable about it so, personally, if I were you I wouldn't do it. I am certain you can get a three bed in Zone 5 for less.

I agree it’s a big stretch and wouldn’t be for me. I also think zone 5 areas will deliver a nice house for less.
You are giving yourselves years of stress financially and if you want another child I would pick a cheaper option that still delivers 3 bed with garden etc.

@ayegazumba Glad to hear we are not the only ones considering such a large mortgage. Totally agree with you, in our area £800k buys you a standard house, nice but nothing exceptional. We have been looking at houses in lower price ranges for quite some time and they are either very small or require lots of refurbishment. Are you also planning to go for a 5/ 7 year fixed to reduce your risk?

I think £675k mortgage is high on your salaries. - however lovely the house it could well need maintenance etc. Have done similar - but it can be stressful.

The house I have now now I bought with my head not my heart - the first time ever in 4 houses - lovely road - smaller than I wanted - looks nice but not as pretty as the ones opposite - but have made it so ( I have had two couples taking a photo outside my front door - ha ha ) - I am so happy with it.

I can understand you - there are houses you fall in love with. There are houses with sensible glasses on you can make just lovely - but whatever you do I wish you well . I have gone down the huge mortgage route - but it is sometimes a road you want to get off.

Your choice and only you can tell

Makes me shudder, but I’m old enough to remember interest rates in the 80s.

Perhaps the compromise is a semi-detached.

How secure are each of your jobs? What happens if it means you couldn't afford another DC, after all you wouldn't be able to afford to take out a loan to pay for nursery fees/take the extra expense.

How much money are you putting in savings each mont at the moment, are you used to living off the amount you would be living off?

@Belinda2000 we haven't gotten that far yet to be honest. We've just been weighing up whether to move or improve and it seems we don't make the money back on our current house if we improve which is a shame as we love the location. Mortgage advisor only just told us what we can afford if we buy but we might wait until our current mortgage term ends in 18 months. I'd take counsel from your mortgage advisor, that's what they're there for. Good luck

We have the same combined salary but bonuses on top. Our mortgage repayments have been £3k a month because we bought the house when I earned a lot more money (lifestyle move to have kids).

It's been a real struggle and we dip into savings all the time. Things go wrong - roof repairs, plumbing issues that aren't covered, car issues, loads of little things I can't think of. Insurances and bills are nearly £1k. We live really cheaply and are wearing clothes that are 10 years old most of the time. We're remortgaging soon on a 29 year term and repayments will go to £1.2k. We've been living for this moment!

PS we bought our house for £620k and expect to seek for £700, also in London

As someone who remembers my mortgage rate go up 5% in one day (from 12.5% - 17.5%) in 1988 and also had my property drop in value by 40% between 1988 and 1995 (London suburbs). I wouldn't touch a mortgage of that size with a bargepole

We did this. Back in 2007. The rest is history. Still trying to sell (I doubt we will ever recover what we paid for it). Six figure combined income became less than £50k pretty well overnight. Ironically, we had been looking at much cheaper properties, but like the OP we were in an area where even an "average" house set up back 5 x combined salary. Fortunately we had a much larger deposit as we weren't first time buyers.

What killed it for us were the maintenance costs. We had plans for major renovations but they never happened. If the house is in immaculate condition and you reckon you could cut your losses and sell quickly if your situation changed, then I would still consider it.

Op if you’re planning a second child then unless you’ve big salary escalation coming, I think you’re stretching youtself too far unless you like counting the pennies

Kids are expensive, they get more expensive as they get older, exc child care costs, and you could likely end up counting every penny to make ends meet.

Also what happens if your next child is twins - that's happened to two people I know recently. Could you really afford three sets of nursery fees at once as well as a huge mortgage?

We overstretched on a mortgage once and it took all the shine off the house purchase. Luckily it lasted only 6 months before promotion.

It wasn't fun cutting back and wondering if I could afford to do things I'd normally do without thought.

I would also worry about dropping house prices in this crazy market.

Jesus that's a scary amount of debt to be getting yourselves in

I wouldn't borrow more than £300k on that wage.

Me and my husband were in a similar position, salary-wise, and bought a doer upper 3-bed terrace (needs modernising but fundamentals all fine) in leafy zone 5 for 550k rather than a “done” house for 200k more in the same area. It is all down to your own risk appetite but we saw potential to put money in and build some value over time rather than put all our eggs in one basket. It may not be our forever home (or it might be - who knows!) but we can control the finances around it a lot more. It also meant we could go with a lower mortgage term and overpay a bit. In 5-10 years that could put us in a really good position to get a bigger / swankier house without a mahoosive mortgage or it could enable us to work a bit less.

It is very personal and you need to consider your longer term plans. You might want to think about what you want from the home over the next 5-10 years and think through all the pros and cons (and risk scenarios). It is true that we are going into a period of inflation and interest rates will likely rise (although possibly not as much as everyone expects given property market over the last 15 years has been dependent on low rates continuing).

It depends a lot on your income expectations over the next few years. If either or both of you are on a trajectory to high City salaries then this seems fine. By the time your fixed-rate expires all your finances can be recalibrated. But if you're looking at not much more than minor pay increases then it is a gamble.

I'd say it's unlikely that house prices will be lower in seven years than they are now. There have been very few points in history where that's been the case. In which case your escape route if the mortgage is a stretch at that point is to sell and move further out. But there's no guarantee, and the UK has just voluntarily committed the two biggest acts of economic self-harm in history, so we are sailing into uncharted territory.

the UK has just voluntarily committed the two biggest acts of economic self-harm in history, so we are sailing into uncharted territory

This is why I'd err on the conservative side right now OP. All bets are off, no-one can predict what is going to happen over the next few years. Most FTB work their way up the property scale. They don't start with a 3 bed house needing no work that stretches their finances that much. You sound very millenial wanting everything right now and in your specific (expensive) area. Most people, especially FTB, make compromises. Yes, you may get lucky and it works out okay. Or you may not. Given the current economic uncertainty, you're taking a huge risk. Not the smartest. If it pays off, it will due to luck rather than judgement.

I'd say it's unlikely that house prices will be lower in seven years than they are now. There have been very few points in history where that's been the case.

6 years after 1977 prices were still lower
7 years after 1988 prices were still lower
10 years after 2007 prices were still lower

It's actually the extended and very steep rises in prices between 1995 and 2007 that is untypical.

I don’t think it’s a completely daft idea. Especially if your earnings are likely to increase. I’d try living for a bit with that kind of expenditure and also mat leave childcare costs.

It’s a big mortgage, but that is the situation if you want to live comfortably as a family in London.

Going for something cheaper would have risks too - you’re likely to outgrow it sooner and want to move on which could leave you vulnerable to fluctuations in house prices.

If your jobs are secure and you can see yourselves staying for a good while, I’d do it. I do think posters outside London don’t necessarily appreciate how it’s not really an option not to stretch yourselves, when buying here. There’s never money left over or a buffer! On the plus side, earning potential is greater.

@Grumpyoldpersonwithcats

I'd say it's unlikely that house prices will be lower in seven years than they are now. There have been very few points in history where that's been the case.

6 years after 1977 prices were still lower
7 years after 1988 prices were still lower
10 years after 2007 prices were still lower

It's actually the extended and very steep rises in prices between 1995 and 2007 that is untypical.

10 years after 2007 prices were lower?? Not in London.