Coping with overpaying for house.

[Orchidgal]

I bought my tiny 2 bed starter home last year for £195,000 (offer accepted February 2022). There was so little coming on the market at the time, and even less in my price bracket that wasn’t a total do-er upper, I pounced on this house and felt fortunate to have found it.

Now I’m seeing similarly sized houses on the market for £160,000 and I could get a 3-bed house with a lovely garden for £200,000.

I know that there’s nothing to be done about it and I couldn't have known this is the way the market will go, but I’m sad because I feel as though I have wasted money my parents left me. I also worry that I won’t afford to move again, I am grateful to be on the property ladder and my little house is great for now, but I wouldn’t choose to live here forever.

Is there a more positive way I could be thinking about this?

If u had bought the same house now probably end up paying same mortgage but more in interest due to current rates and also one year of rent you have saved, u did the right decision at that time please don't feel bad about it
We also bought in July 22 offer accepted in Jan 2022 but if we had waited till now we wouldn't be able to afford this house as our mortgage payments would have been 30% more which we couldnt have afford and anyway everything will even out in 6 to 7 years

Have you considered how much money you’ve spent building up equity instead of paying rent to someone else in the time you’ve had the house?

Think long term. You now own some house. This will hopefully increase in value.

You have my sympathies here, biggest purchase you’ll ever make and no one wants to get it wrong. But ultimately you did what you could at the time. No point wondering about what if.

Just focus on loving the home you have any not trying to predict the future. Remember that a house is first and foremost a home and not an asset.

The purpose of life isn’t to make as much money as humanly possible. The benefit of money for most of us is that it gives us some security; you’ve got the security of being a homeowner right now.

Keep paying your mortgage and creating a house that brings you joy. If your situation changes later down the line then I’m confident you’ll have some options. I had friends who bought just before the market crashed in 2008; it did take a long time for their properties to be worth selling but most were able to rent out in the interim.

Honestly try not to stress about it.
We exchanged contracts the day before the market crashed in 2008!
We were in negative equity for approx 7 years. We stayed there and eventually the market bounced back and we ended up with a healthy deposit to move to a much bigger house

If it helps at all, I know people who at peak market paid close to £1,400,000 for a house that needs total renovation, where similar places in the area are now around £1,200,000.

You didn't make a mistake. If you tried to get a mortgage right now you probably wouldn't qualify. You'd be stuck renting.

Bet you're on a really low interest rate. Got in just in time!

Overpay your mortgage if you can.

Build up your equity and move up in a few years if you need to.

We actually bought at peak market in July and didn't even get a particularly good interest rate. But if we were looking now, there's no way we'd be able to buy the house even if it was 10 - 20 % cheaper. Everytime I start feeling silly I remind myself why I liked this house etc etc.

Swings and roundabouts.

Thank you everybody for your answers, you all make very sensible points and I already feel much better about it!

We moved into our current house and rented it to secure purchasing it and then the markets crashed and we couldn't get a mortgage for three years! Yes deeply frustrating however we have a house we love and have lived in for 16 years so far!

There's always a tenancy for us who have to stick to budgets to want more.

So much so that we forget to appreciate what we've got.

You have a good home and a roof over your head that you cannot be evicted for.

You bought before crazy silly interest rates.

You made the best possible use of your inheritance with what was available to you at the time, within your means.

In a few years if you are still feeling the same way, you can probably port your mortgage to upsize a bit.

I am sure your parents would be pleased about your choices and be relieved you have a stable roof over your head.

Negative equity is only an issue if you wish to sell.

Prices change for assets all the time.

in 5 years time, you’ll be fine.

Assuming you have a 25 year mortgage (300 months), you have paid off a 20th of your mortgage. If you had been paying rent for those 15 months, instead of paying a mortgage - even at £500 a month rent, that is £7500 you have saved yourself.

Hope that makes you feel a bit better OP

If you fixed for 5 years at 2% instead of 5%, then that’s £1000s saved in the 5 year period. Plus no rent for 1 year. You probably aren’t even that much down.

Your council tax will be less in your current house than a 3 bedroom, as will your general bills.

Win, win!

A note for OP: if you're on a low interest rate, it's no longer good practice to overpay your mortgage. There's easy access savings accounts available at close to 4% now: put your money there instead, as if you're on a 2.5% interest mortgage your money will give you a better return in savings than it would by paying off the mortgage. When the time comes to remortgage, you can then pay in this money and interest as a lump sum.

(I should caveat that this works best if you can trust yourself not to spend that money)

We’re the same, we bought last year and things are being reduced to a price we could’ve afforded that are much bigger! And our house is probably worth less than we paid for it, but we see it as long term and plan to be here for 10 years. In the long term I imagine your house will increase so if you’re planning on staying there a while then you won’t lose any money. Plus you’ll be paying off your mortgage faster than if you were paying high interest rates of today.

Surely it depends what the interest is ON? I imagine 2.5% interest on your overall mortgage balance could still be more than 4% interest on savings not equal to your mortgage balance. You need to use a proper calculator to compare the compound interest in these situations - I believe MSE has one knocking around.

Simply comparing interest rates is misleading.

They’ve just lost 35k in equity…

No they won’t. At the beginning the principal payments are tiny compared to the interest. Interest payments are not ‘saved’ - they are paid away to someone else just like rent.

This is true I recently compared paying. A lump sum. Mortgage payment versus 4 percent saving, clearly it is advantageous to overpay because of compound interest, I would gain three times more by overpaying

on the positive side in 10y this will look like a blip and in the meantime you’ll have had your own home that no one can end the tenancy on and which you can make your own.

PensionExpert on YouTube did a comparison of overpaying on mortgages vs investing…

Lots depends on what rate you are paying and what level of investment return you get, or of course, what savings rate you get.

its closer than it has been for a long time, but you have to be a real outlier if you think there’s better money to be saved and earned. But you can’t look it at is as a 5 year difference, you have to look much longer term, 10 years or more and if you compare it over 25 the numbers a big.

it’s common financial knowledge amongst those who can and do invest, that’s clearing down your mortgage is not a financial decision, it’s a psychologically safe decision. That’s right for some, but don’t be fooled, if you are building wealth, you don’t put all your eggs in your home basket.

Wish I had invested in Amazon, Apple, Dominoes and the list goes on and on. You live and you die money and possessions are all relative to that fact. I’ve learnt to appreciate what I have and not what I could have.

Long terms trends suggest otherwise.

4% savings is of course your benchmark and hopefully that lasts more than 2 years, but uk equities return average of 6.8 and US equities it’s closer to 9%.

all depend on your time horizon. Over 2 years, you are probably going to be accurate. Over 5 you’ll be losing, over 10 you’ll be kicking yourself and wished you popped it into a simple Vanguard Etf.

Savings interest rates will be back lower as soon as inflation is down…. If inflation doesn’t come down, we’re all screwed anyway.

A lump sum overpayment of £1000 will save you the interest on that amount. So you can either save £25 on this year's mortgage at a 2.5% rate, or save £40 in a 4% account, so you'll come out ahead if you save.

Compound interest works the same for a debt as it does for a savings account (of course if you're saving in a regular saver account like First Direct for example, not the same situation as the interest doesn't compound as after a year the money has to be withdrawn.

You may prefer to overpay than save and that's fine, but saving money at a rate higher than your mortgage interest is always going to make that money work slightly better (plus you have the access to it if you really need it).