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?

It depends on how you see your circumstances going in the next couple of years.

DH and I maxed out our affordability when we purchased our current house (literally there was about 1k in it) however did so knowing that my salary will have a definite increase when I qualified in the next 12 months.

We bought in May 2018 at 5x salary. Taking out the exact same amount with our salaries now, would be 3.51x (and that is ignoring any payments to date as the mortgage balance has reduced over time).

It's relative to your disposable income however we would not feel comfortable with our current mortgage payments if our salaries had not increased once we started paying for childcare this year.

As you are considering having children in the short term, you really should cost up how much childcare would be and make a mock budget to see what your disposable income would be and if you can live with it. It's not as simple as low disposable, don't do it; if you can feel like you can survive the struggle until school kicks in, then it might still be worth it to stretch.

I only say this as the extra space we have is a wonderful thing to have compared to our old house. Also, you have to bear in mind selling costs/stamp duty should you wish to upsize in the future if you opt for a smaller house now. We sold at 325k and bought at 425k, but legals, agent fees and stamp duty cost us another ~20k on top. I imagine moving in London due to higher sale values would be a lot more.

Why not take out a mortgage over a longer period, thirty, thirty five or 40 years? This would lower the monthly repayments and most fixed rate mortgage deals allow you to pay off an additional 10% of mortgage each year.

You could overpay whilst you can afford it and if times become hard during the fixed rate period you can revert to just paying the minimum amount. You would be only be paying more interest in the long run if you always paid the minimum amount throughout the fixed rate period but if you try to overpay up to the amount you would be charged on a 25 year mortgage there won't be a difference and you will have a "safety cushion" knowing you can ay less. At the end of the fixed rate period you can choose to reduce the term of the mortgage back to 25 or even 20 years if you can afford it or extend it further depending on your circumstances at the time.

The only one other thing I would say is - if you are planning on children - does this beautiful house have a good school nearby - otherwise factor in nursery / school fees ( if you are of the mind to pay school fees - many are not )

I am sure you have considered all these things so I wish you well. Sometimes making an ambitious buy is great. Sometimes it can cause stress. Previous posters have made very good points

All well to you

Very difficult to know what to do. Anecdotally friends of mine who massively overstretched in the the year 2000 when they purchased their first home (at one point having 30p spare money per day) have paid it down over time moved again and now live in a dream home much better than the rest of us! Who were more cautious. However as pp have said I would be nervous to take that on!

@sst1234

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.

It's really not. It's about risk. Most of us saying it's a step too far are not saying it is 'wrong' but that it is a very, very big risk. Yes. it may pay off. For some it has/does. And they will always tell you about it, just like people who won on a 200-1 outsider do. People who have had their fingers burned/lost their shirts tend to be less forthcoming. The debt doesn't get cheaper relative to inflation unless inflation goes up a lot, and also goes up less than wages. The old 1970s advice 'mortgage to the hilt' worked then, when wages were going up and inflation was going up. It has worked a lot less well in the years since, when many people's wages have fallen well behind rises in inflation. IIRC, nurses' wages are now 20% lower than 10 years ago relative to inflation. And there are signs of higher interest rates on the horizon, which could cripple people with too much debt. We have had historically low interest rates for a long time now, and people have got used to that. Some of us remember when interest rates were 15%. With current low rates, it would only take an increase in the rate of a few percent and some people's payments could double. Fixed rates help, but at the end of that time, suppose the rate is now so high you can't remortgage without paying a lot more each month?

@Grumpyoldpersonwithcats

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

^This. Us oldies remember all that, plus negative equity....

I agree, it may mean I’m risk averse but I remember all the repossessions as a child, people literally walking out their homes and putting the keys through the door because they couldn’t afford to stay there and live...and the current economic situation would really make me pause right now.