Cold feet about big mortgage

[haveiahealthyheart]

Hi,

I posted this on my other thread, but really it's a new question so I'm making a new post.

Today I put in an offer on a house of £218,500. I have a deposit of 10% and will need a mortgage for the rest. I've got an agreement in principle from my bank, but it's the absolute maximum they will lend me (over 4.5 x my salary, but under 5x).

I was excited until I actually sent the email with the offer, but now I am panicking thinking I would be overstretching myself by borrowing so much.

There is much talk of interest rates and living costs going up, what would the worst case scenario be if, in 5 years time when fixed term comes to an end, I can't afford the mortgage due to higher interest rates? I'm guessing it would just be a case of selling the house?

What is negative equity? Is it that I can't sell the house for as much as I paid for it, or that I can't sell the house for as much as remains on the mortgage? In 5 years when the fixed term is up I think my mortgage would have been brought down to around 177,000. So, am I right in thinking that as long as I could sell the house for £177,000 or more, I wouldn't be in negative equity? Is that how it works?

So if I couldn't afford it any more, I could sell up for at least £175k, rent somewhere cheap and start saving up a deposit to buy again (something more affordable second time round!)

It obviously wouldn't be fun, but it wouldn't be a total disaster either?

A bit of background on my finances - I am a single person. The mortgage I would be applying for would be over 32 years. My mortgage payments would be in the region of £745 per month and council tax another £150 on top. My monthly take home salary is approximately £2400. All being well it will have gone up to around £2650 by the time the fixed term comes to an end. After that it might go up a bit, but not by much (hitting the ceiling of my pay scale).

Any reassurance / warnings with what I (may be) about to embark on?

Thanks

I think in your situation it sounds ok, what is your job security like?

I think it sounds ok too, assuming you have reasonable job security. It’s scary to contemplate a mortgage alone on a single salary but you’re in a far better financial position than many, to be able to consider it. As a single person then it’s more important than ever to invest and hopefully build security for yourself. Does the property have a spare room that you could rent out if needed? I know that’s not ideal but even for a short term cash injection it would be better than having to sell. A lodger for a year at the start would also enable you to build up a savings buffer that may help you to relax longer term?

Thanks @Hollyhead. Job security is good, I'm in a public sector role that is always in demand. I will never be rich, but I am confident of always being in employment (as long as I remain healthy of course).

And yes, negative equity is when the property is worth less than the outstanding mortgage so you have a debt to pay to the bank even after the property sells. But that’s highly unlikely if you have a decent deposit, are not overpaying for the property now, and can stay in the property long term. Negative equity is only actually a problem if you need to sell-if you can stay put and keep meeting the mortgage payments, at some point the value will come up again

Oh and make sure you have insurances in place ie critical illness. As a solo buyer who can’t rely on another salary that will also give you piece of mind.

*peace

Thanks @TrufflesAndToast. There is a spare room, so a lodger could be a possibility, I'll have a think about that, thanks!

The house needs a bit of updating, it's not a total doer-upper, but it does need redecorating throughout. I see this as a forever home though so there is no immediate rush.

I think it sounds affordable - well done.

You have to pay to live somewhere. So the reality is that most people are better paying mortgage than rent, even if interest rates rise (which I believe they’re going to).

You sound exactly the same as me right down to age, term, income and mortgage balance! We complete this month.

What's the alternative? Houses are expensive so it is what it is. I can't get worked up over it.

Have you done a projection on how much your repayments would be if interest rates went back up to the rates they were throughout the 90s and early 00s, say 5-7%? Your figures add up now but the problem comes if lots of people are in your position and need to sell up if their repayments become unaffordable as the market could become flooded and prices could drop causing massive negative equity.

Good luck with your move @OneRingToRuleThemAll glad to hear you'll be completing soon and are relaxed about it!
I'm feeling better about my offer after getting these replies. Fingers crossed now that it's accepted!
I suppose the alternative in the back of my mind would be to buy somewhere cheaper like a flat. But, I have been renting a small flat for years now while saving and am desperate for more space and a garden!

I don't think you would have paid off anywhere near £40k in 5 years. The interest on mortgages is loaded more at the start so initially you are paying much more interest than any actual repayments. As time goes on the amount of capital you actually pay off increases.
Would be worth getting a proper calculation of this.

If it’s potentially a long term home, a house with a spare room, then I say yes definitely go for it. You sound sensibly cautious but I would absolutely do this in your situation. Enjoy it!

@TwigTheWonderKid Yes, this is what worries me. I don't really understand interest rates well. When you say 5-7%, do you mean the interest rate on my mortgage would be 5-7%, or that the base rate would go up to 5-7% (so the interest on my mortgage would probably be higher - maybe 9%?)

I could probably JUST afford it if the interest rate went up to 5% (it would be nearing half my take home salary at that point though). If energy prices, cost of living, tax went up too, then I would be in trouble.

Op's calculations seem correct.

There's a really handy reduction calculator on MSE.

In case of any confusion, the overpayment I input was £0

How much would you be paying in rent if you didn't buy? If it was anywhere close to your mortgage it will be better to buy, especially if you could have a lodger if times got difficult etc. As PPs have said make sure you have some insurance in place (but you need to look at this very carefully as some of the policies aren't great) and work out what your worst case scenarios are. Overall it sounds like you are making a good decision.

Have you done a projection on how much your repayments would be if interest rates went back up to the rates they were throughout the 90s and early 00s, say 5-7%?

What if they went to the 14% of the early 90s, or the 17% of the early 80s 😱😱

If people made decisions based on such extreme what ifs, nobody would even buy property. Sensible to think about a change of a couple of percentage points but beyond that, people need to be able to assess risk on a likelihood basis and not catastrophes.

@BoredZelda

Have you done a projection on how much your repayments would be if interest rates went back up to the rates they were throughout the 90s and early 00s, say 5-7%?

What if they went to the 14% of the early 90s, or the 17% of the early 80s 😱😱

If people made decisions based on such extreme what ifs, nobody would even buy property. Sensible to think about a change of a couple of percentage points but beyond that, people need to be able to assess risk on a likelihood basis and not catastrophes.

Yes, but the OP has admitted she doesn't know much about interest rates and I doubt she is old enough to remember what it was like when interest rates were that high. There must be many young people with big mortgages who have absolutely no idea that it is unusual for interest rates to be so low and for a long time nothing has happened to suggest any rise would be necessary but now that isn't the case. I am absolutely not suggesting she shouldn't go ahead but she is sensible enough to be asking these questions and going into it with her eyes open.

I was in a similar situation and it was ok. You need job security or work in a field where there won’t be an issue getting another one. Getting a lodger- or planning for that possibility is a great idea

It IS scary but also satisfying. And a better idea generally than renting indefinitely

I was the same as this, time last year. Pretty much same age, deposit and house price (also single). Yes it's really nerve-wracking at first but I am so pleased that I have bought it. I went for a 5 year fixed mortgage to give me some peace of mind. Much better than renting IME. Sending you lots of reassurance!

If the interest rises went up to 5% do you have a spare room you could let to a lodger?

Your five year plan looks good and well thought out. I'd go for it.
I would also get a lodger straight away (assuming you aren't someone who absolutely must live alone). Look up rent a room scheme, any rent the lodger pays (up to a limit) is tax free. You could put this money away in savings or use it to reduce your mortgage.

As a little push, calculate how much youd be paying in rent over the next five years and post that figure.