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

@Kendodd

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.

^ This Even if you don't fancy a lodger, see if you can get a Monday to Thursday type lodger who's there for work. That little extra will make a huge difference in savings for the eventualities. Also do not skimp on insurance, you'll need to cover being unable to work (critical illness) plus contents (check if will allow a lodger ) and buildings insurance.

Is the house excessive or could you get something nice for much less? If so, YABU but if the house prices are such that you are going for an average property and not a show stopper, then I think that is just the way the housing market is. Good luck with your new home!

OP the red flag in your scenario is not just that you're maxed out on the multiples, but that you're borrowing over 32 years. That is a very, very long time. Is that to make it affordable in the short term? In the long term, all you are doing is paying more over all to your lender.

Interest rates (and inflation) are going up IMO, and I'm old enough to remember them being in double digits. Interest rates have been low - very, very low - for a long time but that doesn't mean they will stay low forever. I read the other day that inflation could hit 6% by the end of the year, and if that happens just watch what the BofE will do to interest rates!

I'd be doing 2 things in your shoes OP: getting the longest fixed term on the mortgage as possible; building up savings again. A lodger sounds like a relatively pain free way of doing that.

@lollipopss

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.

She has stated that she has put down a 10% deposit so that is nearly £22k of the £218. Thus she is anticipating paying off another £20k not 40

Thanks for all the replies!
@Daisydoesnt yes, it’s to keep it affordable, 32 years takes me up to retirement age.
I thought I would try to overpay £10 a month to try to bring it down a bit and pay lump sums if I ever get the chance.

I could get a cheaper house for around 170-80, but it would mean compromising on location, size of house, and no parking or garden, so I’d want to move again in 5-10 years. With this house, I’d stay put.

yes, it’s to keep it affordable, 32 years takes me up to retirement age. I thought I would try to overpay £10 a month to try to bring it down a bit and pay lump sums if I ever get the chance

That was my worry OP, that it was to make it more affordable. I am sorry but IMO you are in danger of over stretching yourself. I am not saying this to be mean, but a £10 a month overpayment will not even touch the sides in terms of paying down a £200,000 loan any quicker.

My other concern would be as a public sector worker (I think that's the case?) If inflation & high interest rates do kick in, public sector wages are really unlikely to keep pace, given the current state of public finances. I'd honestly be having really hard think about this if I were you, OR I'd get that lodger in! A buffer of an extra few hundred quid a month would make a difference.

Thanks @Daisydoesnt I know you’re not being mean, that’s really helpful and I appreciate your frankness!

With the lodger (or it might be a weekend job like some tutoring) are you thinking that this money should be spent overpaying the mortgage? or kept by in savings?

Thanks!

I’d keep it in savings. That way you have options should the sh!t hit the fan. If you’ve already paid it back to the mortgage company although you’ll owe marginally less you won’t have as much flexibility in any potential difficult period. Wishing you the best of luck.

Your numbers sound fine. All the best with your purchase.

I was in a similar situation to you. Bought last year, the house was £240k and I put down 15% as deposit, mortgaged over 25 years, with a fixed rate for the first 5. I don't have any regrets at all. I paid off around 10k in the first year, the house value has gone up, and so has my salary.

You need to remember that with inflation and interest rate rises, rents will rise as landlords pass on the extra costs. You're in a better position with a fixed rate mortgage as your costs will be stable, and as your salary increases with inflation, you can overpay. I had an excellent mortgage advisor who told me how much my repayments would be if interests went up to 10% (highly unlikely). Banks are much more cautious with lending now than they used to be.