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?

I do think posters outside London don’t necessarily appreciate how it’s not really an option not to stretch yourselves, when buying here.

Don't assume that some of the posters thinking the OP is over-extending don't also live in London. I certainly do.

I live in London and it is overstretching. If you live in London, you almost always live in a smaller place -tiny terrace or flat. It's a sacrifice but you also save on commute costs (zone 5 is still lots cheaper than commuting from Guildford and St Alban's, esp for 2 people). Though bearing that in mind, it's also why I prefer zone 3 to zone 5 if I have to live in a smaller place anyway because then I get a genuine time and money saving in terms of commute.

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.

Yes, I think it's only been once in (recent) history actually - the crash of the early nineties. 2007-2014 you'd have made a healthy profit.

However, as I said in my first post, past performance is no guarantee!

@HundredMilesAnHour

I do think posters outside London don’t necessarily appreciate how it’s not really an option not to stretch yourselves, when buying here.

Don't assume that some of the posters thinking the OP is over-extending don't also live in London. I certainly do.

Me too.

Unless your salaries are guaranteed to rise in future (e.g. you are both on corporate graduate schemes with confirmed end jobs), it feels like a stretch too far to me.

It sounds like your mortgage payments would swallow close to 50% of your monthly take-home pay, when roughly 30% is usually suggested as the maximum to be comfortable with.

Some people know their salaries will absolutely rocket in the next 5 years or 10 years. In that scenario, stretching yourself can make make sense…..although can you ever be totally sure it will work out as you thinK? And then there’s the question of the stent if stretch. This one seems pretty huge.

I think going for this level of multiples and size of mortgage would be different if you were at a different stage of life…..ie had all your babies and past childcare phase and both working full time with big promotions very much of the cards or a huge gift imminent. But at the point where kids haven’t happened, such a stretch seems huge. This level of mortgage will remove any ounce of wriggle room about work and doesn’t factor in the extorbitant child care costs you will have to pay as the mortgage will require you both to work full time. With childcare costs and an interest rate you might well find it unaffordable and have to sell.

This property doesn’t sound like a first time buyer house, even for 2 people who earn well. Lower your sights to something sensible.

@onlychildhamster I think commute depends on specifics of where you live and work. I've recently moved to zone 5 from zone 3 and my commute is the same or thereabouts and my husband's is quite a bit quicker due to a direct train link. I agree, though, that moving outside of London to commuter towns is often a false economy given eye-watering commute prices (although perhaps for some these days with more wfh that's less of a concern) and not that great a differential in property prices.

Also agree with what others have said about it being quite a stretch for FTB - even if you can afford it, it is a leap into the unknown at the beginning of your home owning lives. Starting in a smaller, more manageable, less expensive property gives you lots of perspective that comes in handy when looking at your next step - I had a much clearer view of what I wanted and needed from my current property than when I was a FTB purchasing my two-bed flat (and what you need to have for a rainy day and maintenance - fixing roof, replacing boiler etc).

Don't forget you'll also have bigger bills - council tax band will be higher, your expenditure on maintenance will be higher, a detached property will be more expensive to heat etc.

OP, you speak about looking for a standard house and that £800k is what it costs in the area you're looking at.
Well I'd say a detached house in a London Borough isn't a standard house and isn't standard FTB style of house.

You could probably get a house which is as roomy and with as good a location for a good chunk less if you were prepared to look at semis or terraced houses. Agree that looking more like the £650k mark seems more sensible. You will find properties in that bracket. As FTB you have to be realistic and appreciate that the people who buy the £850k houses are not FTB but 2nd or 3rd step buyers, or those with incomes more than double yours if they are FTB. So I think you're not quite thinking sensibly about what is normal and affordable in your position and part of the world.

Sounds like you got carried away. And it's easily done....you let yourself look at properties which really are outside your price range....this included detached houses and Thais which don't need any work. And then you liked one and got a feeling that this was a 'normal' purchase and a normal kind of house. But it's absolutely not normal for a FTB who has your kind of income and deposit.

You are still in an amazing position in that you will be able to get a family house.

OP, a question like this will naturally get the same response from most people on this forum, that you should borrow so much. But that is basically people projecting their risk averse nature on you without knowing how you are with your finances, how secure your job is, how you budget etc. Stretching now will mean you can buy a property that you may not be able to afford later. Also debt gets cheaper over time due to inflation. You should go for it, you will have to watch the pennies for the first few years and then it will get easier. Good luck.

Surely as long as we can more than comfortably afford the repayments we can afford the house??

House costs more than the repayment
Repairs decor new flooring or curtains or furniture. Garden maintenance. Insurance. Council tax
Etc

@GreenestValley

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.

Why are you assuming that when a few posters saying don't do it have already stated they are in London/the south-east?

Plus I've never paid less for a mortgage than rent!

I hadn't realised it might be different in different parts of the country.
It is very, very common here (Midlands) - and I also remember my friend in the NW telling me the same, when he literally bought the house he had been renting, off the landlord, and his mortgage payments were half what he had been paying his landlord.

@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.

They were not lower in 2017. Besides, trying to outsmart the market by waiting is a fools game.

I'd be very careful. It doesn't leave you much wiggle room. The past few months we've needed a new boiler, a partial new roof and a new car - all unforseen expenses that have really hit us hard. Luckily we have the money for now as we are not overstretching ourselves on the mortgage.

Crazy. I'm much better off than you and not in London but decided to stay in my owned outright semi rather than trade up to the salubrious (massive,) detached for 400k extra, although your planned house sounds smaller than mine.

Move further out? Or move north!!!! You can get a 3 bed detached in my pretty nice South Manchester suburb for £560k as my friend did recently. Big garden , needed a new kitchen. Period property. This is an expensive area of Manchester. A London cabbie told me I lived in the equivalent of Islington because I'm 15mins from the centre but I'm sure my town is not that chi chi!!

My experience of being in London is that people stretch to what they can afford if they are early ish in their careers which it sounds as if the OP still is.

Won’t the repayments be around 2k a month between two, with take home of about 5k a month between two? Seems manageable to me and that’s assuming income doesn’t rise which it may (no info on that).

I guess the risk averse view doesn’t seem - to me - to take into account the following factors:

1. the big compromise in lifestyle in dropping down a rung on the property ladder - it’s not a compromise with no cost
2. the likelihood of needing to move sooner rather than later due to outgrowing and costs associated with that - stamp duty, short term house price volatility
3. minuscule IMO risks of interest rate rises - as likely as a house price crash which (long term) is almost unprecedented
4. historic trends which suggest that the more valuable your house, the more money you will make on it (eg % growth on an expensive house is more in real terms than same % on a cheaper house)

Won’t the repayments be around 2k a month between two, with take home of about 5k a month between two?

Depends on the mortgage deal but a very quick Google shows a possible mortgage payment (over 25 years with 3% interest) of £3.2k. If interest rose by 3%, that increases to £4.4k. Of course the OP will hopefully get a much better rate and fix it but even so...

@GreenestValley I’m not sure the compromise is all that great to go a step below, perhaps a terrace or semi rather than detached? 1400 sq foot isn’t all that big, and OP has said it is not all that special. For 200k less in zone 5 you could get a house that might be a tad smaller (but with potential maybe to extend in the future) but still a family home.

@ZenNudist 120k is an average family income in London/surrounding commuter towns. Doesn't show up very well in stats because people with OP's income tend to be dispersed around the SE and most don't stay in London (leaving the young, poor and ethnic minorities in London which skews the average income lower) because they want a bigger house which just isn't available in their price range (but they do end up spending quite a lot in transport or more often than not, the mum ends up working locally while the DH continues with the City career to pay the big mortgage). But you can tell from how the likes of Beaconsfield and Weybridge pay the most in income tax.

But it indicates OP is middling in London/SE. If she moved to Manchester, she would probably still be middling unless she was working in NHS/civil service and that would not earn her the same income in Manchester so she would probably not be able to afford the 560k house either (cos that is an expensive house in Manchester). People in the south are not stupid, we pay so much for houses because we know we earn more here/have the opportunity to grow our incomes more here.

@HundredMilesAnHour @GreenestValley I did a calculation of £675k at 2.5% interest over 25 years, and got just over £3k for mortgage payments. Assuming OP and DH are bringing in equal amounts, £60k gross amounts to about £3k net including deductions for minimum pension and perhaps student loan, so £6k net monthly income.

While bringing in £6k per month is decent, if 50% is gobbled up solely on mortgage, you probably need to add another £1.5k to the £3k mortgage for all utilities, food and petrol. Then childcare fees easily add another £1k, and suddenly you're looking at £500 left for 2 people to spend on everything else (clothes, shoes, going out, lunches, entertainment etc), plus anything else the DC needs. It really is very tight, there's no wriggle room for anything going wrong in the house, or needing maintenance.

[quote Starseeking]**@HundredMilesAnHour* @GreenestValley* I did a calculation of £675k at 2.5% interest over 25 years, and got just over £3k for mortgage payments. Assuming OP and DH are bringing in equal amounts, £60k gross amounts to about £3k net including deductions for minimum pension and perhaps student loan, so £6k net monthly income.

While bringing in £6k per month is decent, if 50% is gobbled up solely on mortgage, you probably need to add another £1.5k to the £3k mortgage for all utilities, food and petrol. Then childcare fees easily add another £1k, and suddenly you're looking at £500 left for 2 people to spend on everything else (clothes, shoes, going out, lunches, entertainment etc), plus anything else the DC needs. It really is very tight, there's no wriggle room for anything going wrong in the house, or needing maintenance.[/quote]
1.5k for bills, food and petrol seems a lot to me.

100 quid a week on groceries (upper end surely) = 430 a month, and you could trim if needed

400 on bills (again upper end I’d think)

Petrol - depends how much you travel - in zone 5 it might be more TfL costs but with wfh this could be fairly low - say 300 on travel between you.

So just over 1k?

We did it years ago and don’t regret it as our house has increased in value. Ignore the risk averse mumsnet doom mongers, do it. Ifyou fix your rate even better.

@GreenestValley I'm an accountant so apologies in advance for this imaginary list, but this is how is how I estimated bills:

Council tax £250
Electricity £100
Gas £100
Insurance (house and car) £50
TfL x 2 at £200 = £400*
Petrol £100
Food £500
Total = £1,500

*To be fair to you, I didn't explicitly mention commuting originally, but OP had said they both needed to get into town.

OP could probably cut down on electricity and gas use, plus reduce petrol and food, but that would probably only save about £100, and make for a poorer quality of life.

@RealhousewifeofBarnardCastle

We did it years ago and don’t regret it as our house has increased in value. Ignore the risk averse mumsnet doom mongers, do it. Ifyou fix your rate even better.

We did as well. In our case and yours we took a gamble. It's only with the benefit of hindsight that I can see what a gamble it was. By good fortune it paid off. That doesn't mean that every gambler wins.

The problem with this whole discussion is no one has a crystal ball.

So yes, it would be better if the OP had a bigger deposit, or a bigger income so that she was taking less risk. But, buying a smaller house that you grow out of quickly isn't a great choice if prices continue to rise at a rapid rate, or even a steady rate over five years - I can speak from experience that bigger detached houses rise in value much faster than smaller semis, meaning that they get out of reach fast. We made an interim choice five years ago and it really would have been better to stretch for a long-term house that would have lasted, risen in value and had the potential for improvement beyond the market. Instead we're now having to move up the ladder after five years of rising prices, with all the stress, stamp duty and moving costs that entails.

Sounds like the OP and her husband are young. If they are in stable jobs in good industries their salaries are likely to rise then hopefully they can feel more comfortable in time. Yes, interest rates could go up but if you fix for five years that's a lot of horizon to work out what you might do when you come to the end of your mortgage. While the Tories are in power they are very unlikely to allow interest to go through the roof in the way some people are saying. Everyone thought that the property market would crash with the pandemic. Quite the opposite. We have no idea if the inflationary and economic fears will come to pass this time either, but in the meantime still have to try and make decisions that work for our own families.