Should you take out the biggest mortgage possible?

[sandcup]

We are first time buyers, late 20s. In London. Due to our jobs we can afford fo borrow up to around £1mil. Obviously you can get a decent two bed flat in an ok area for about £550k.

Older people we speak to suggest taking out the biggest mortgage and not needing to move as it’s so expensive to move. But equally we like the idea of not being tied to our very stressful and long hour jobs.

It's less about how much you can borrow and more about how much the monthly payments will be. You need to think about whether you'd still be able to pay the mortgage if one of you got sick, lost job etc. But also think about other things - would you still have enough money left over every month for luxuries, meals out, to save for holidays etc.

Personally I work out how much I want to spend on a mortgage each month and then see what the borrowing amount for that would be.

They're right that moving is expensive but borrowing is also expensive - the cost of extra interest on a bigger mortgage will at sone point outweigh moving/conveyancing/ stamp duty costs. Think about what you want now and how long that is likely to last you, and compare that to how much you'd pay in interest vs moving costs in that time.

We were in a similar position but with smaller numbers, in that the bank told us we could 'afford' a mortgage up to £450,000 but in the end we managed to find a 'forever' sized home with renovation potential so we could build some equity, and our total mortgage is actually £100k or so less than what the bank suggested we could afford. We wanted to protect ourselves from interest rises and know that if things did increase we could still afford the mortgage.

I wouldn’t take out the maximum I could unless there weren’t properties that suited me for less than that. Sounds like you could get something that you could happily live in for a lot less than your maximum mortgage amount.

I would get somewhere you really like and use the money that would have been going towards a larger mortgage payment to overpay the mortgage each month, bringing down the overall cost of borrowing. Then, if you switch jobs or go in maternity, you can choose not to make overpayments if money gets tighter.

In 20s, yeah, you got good advice. Borrow the most.

A generation ago the difference was 10s of thousands not hundreds - salarys haven’t increased proportionally. I wouldn’t stretch to the max as it leaves you vulnerable if one of you for any reason can’t work or if interest rates rise or property prices fall.
Also quality of life now and for the next few years is important too. Having disposable income so you can afford to counterbalance a stressful work life is important too.

There are a lot of factors to consider here:

1. You say you can borrow up to £1m - what would repayments be in the event that rates went up 1% or 3% say? There was a looong period of low rates but that is well and truly over and things are just not predictable.
2. Most property rises in price over time at a rate higher than inflation BUT not everywhere and not every property so maxing out might be a risk if either of you were to lose your job or you have a baby and bear in mind that even the best planning can't allow for every eventuality life might bring.
3. DO you want to spend a big proportion of your income on the mortgage? Holidays are fun and plus a bigger house means higher bills, higher council tax and more stuff to buy! the house you buy and place you live needs to right for now but things change and it's fine to size up and move after a few years.

We deliberately didn't overstretch ourselves, which meant that when DH was made redundant (with a week's notice) we had a financial cushion while he found another suitable job, he didn't need to take the first thing which came his way. It also massively reduced how stressful life was at that time. I'm really glad we made the decisions we did.

Numbers are no where near yours. We were told we could borrow 250k ish and we found the perfect home for 172k. It was 2020. We would never have been able to afford the interest increase if we'd have maxed out

I think it’s now a bit of a balancing act between buying the best house you can to hopefully see you through as long as possible but also making sure you can save, have fun and change jobs. Especially if you don’t want to be tied to the corporate world forever.

Do you want kids in the future? Do you want to live in a trendier part of London whilst you’re young? How long do you feel you can work in your jobs before you want to change pace?

I would have a think about what you want the next 10-15 years to look like (knowing life doesn’t always go to plan). Then I would like to buy the property that you can be comfortable for that time and that you think will meet your needs for that. If you never want kids and are happy in a 2 bed flat, I’d go for a nicer area than an OK if you can afford it but you don’t need a bigger property. Focus on paying your mortgage off earlier and leaving the corporate world or enjoying your wage. If you want kids in maybe 10 years, then a 2 bed is fine but you might want to opt for a house rather than a flat. However, if you want 3 kids in the next 7 years then I’d probably look for a bigger property but make sure it’s manageable with childcare costs.

You should think carefully because a lot of people have done this during low interest rates and are now having to sell because of the new rates. Agree with people who are saying what kind of life you want. The stress of managing a big mortgage with rate rises and a tiny amount of equity is not to be underestimated.

I wouldn’t overstretch, and factor in that you may want children in the near future, so having a smaller mortgage would tie you up less financially.

However, moving costs money. Therefore, don’t buy a small flat if you intend to live there for a couple of years only. If you can afford it, spend a bit more and go to the next size up. It’ll be worth it in the long run.

Would an option be to move further out and getting a larger place ?

Are you planning to have children? If so look at the cost of nursery fees.

We’ve never had a huge mortgage and twice managed to pay it off. It’s a great sense to be mortgage free!

This - always how much are the repayments

Personally I’ve always gone for about 80% of the max to give a cushion and allow for overpayments. We’ve also never borrowed more than the 3.5 times combined salary (the old calculation).
Depending on where you want to live in London, hopefully £800k would get you something that will be good for 10-15 years?

How big is your deposit ?

Alongside all of the good advice above, I'd try to ensure you put down a reasonable sized deposit (at least 25%) in order to access reasonable rates and protect yourself from any possible negative equity

What interest rate have you budgeted to? We borrowed at a high 4% but budgeted/stress tested at 10% and got to 9.02% before the rates started coming down. Therefore, we knew we could always afford it.

We paid fortnightly. https://www.savings.com.au/home-loans/monthly-fortnightly-weekly-mortgage-repayments

When we bought our house, there was a small govt subsidy. We kept this and, after making our first payment, paid the subsidy in. This gave us an immediate buffer and an immediate regular overpayment.

In Australia, there is a habit of overpaying and many mortgages are set up for this with no penalty. We were told our monthly repayment and overpaid from the first. Therefore, it took a number of rate rises for us to notice. We increased our payment and stayed covered. As rate rises came down, we didn’t reduce our direct debit and kept it at that rate for the rest of the loan life. We repaid a 30 year loan in less than 14 years.

I was in your position ten years ago. We chose not to go all out and we’ve been glad of it as it reduced the pressure during illness, redundancy and COL times. We’ve also been able to afford private school for SEN DS.

My DH and I are in a similar borrowing position but have chosen to look at much cheaper houses. The high repayments scared me a bit and even though the bank said it was affordable I worried about the lifestyle we would have with such high outgoings. Go with what you feel comfortable spending. My DH and I plan to overpay our mortgage significantly to reduce the term and interest and you can always sell and move again later if your needs change. We won't be stretching ourselves just because the bank says we can, they're in the business of making money by lending money so getting you to borrow more is in their best interests not yours.

We are London too. We couldn't borrow a £1m like you when we bought our flat but had we been able to afford a house in an area we liked then we would've borrowed what we could. We are now in the process of trying to buy a house but 'only' need to borrow £600k. We have a decent joint income but repayments will be £3k. Do you have a massive deposit so you at least get decent rates?

I think you need to think long term, so look at potential salary increases against interest rises, going down to one salary if you go on maternity leave, childcare costs if you go back to work. We never maxed our mortgage due to these considerations. Nothing worse than not being able to pay your mortgage.

We didn't take out the biggest mortgage ee could. This has seen us through redundancy x 2; mat leave x 2; nursery fees x 2 and always accommodated things like new boiler, broken down car etc., and all easily paid off in 20 years - just in time for the CoL crisis!

I think the older folks you have been talking to have rose tinted spectacles and are remembering the last 14 years of low mortgage rates when they could pay off their mortgages pdq and didn’t tell you how expensive their houses were for the first 11. Or - it didn’t matter quite so much, because people were actually being paid enough to afford them anyway and there was no COL crisis. There were pretty good salaries flying around from say 1990 to 2010 as well.

Have they been warning you about the financial risk of spending £1m with 4-5% mortgage rates? It’s possible they will go down, but it will take another economic meltdown to cause them to drop more than 1% below this.

>But equally we like the idea of not being tied to our very stressful and long hour jobs.

This is all you need to know really. Perhaps you are in conflict with older, perceived to be wiser people. If you want flexibility you should not do it.

There has to be a comfortable middle ground somewhere - try to find it. Stop listening to those around you who bought during entirely different circumstances and do what you feel comfortable with, not just for your current finances, but for your future, less stressful careers.

If you're only in your late 20's then also factor in if you're planning to start a family and how childcare fees and/or part time working will affect the affordability of a bigger mortgage. I think there's a fine line between borrowing more for a bigger or better property to avoid the cost of moving in a couple of years time, and still being able to afford to live.