5% Mortgage or push for 10% opinions

[neonplanet40]

Hi folks, just looking some opinions.

Me and my wife (just got married!!) are looking to get our first home soon.

However we are currently deciding whether to go a 5% Mortgage now or wait and gather a 10% Mortgage?

I know the interest rates are higher for 5% but we currently pay 650 a month on rent. Would paying the higher interest rates be better than paying rent which is, in many ways, dead money?

All feedback welcome. The houses we are looking at are costing around £220k.

Thank you

[jim]

IIRC the rate leap for 5% is pretty huge, which would put me off doing that, but it's difficult to say without more specific figures to refer to. If it's a question of waiting 2-3 months, that seems like a no-brainer (and besides, it could take 6 months to find somewhere!). If it's a case of waiting 3 years, then absolutely you've got a decision to make.

There is a good calculator here which might help: http://www.nytimes.com/interactive/2...ator.html?_r=0 and that will take into account figures that you might not want to share on HEXUS.

As a third option, have you considered shared ownership? I have no idea if you would qualify (it's primarily dependent on income) but as the rent is subsidised it can be a great option that allows you to get a 10 / 15 / 20% mortgage on a portion of the property and save up until you can buy the rest.

The most important thing to remember is that rent isn't 'dead money' - it's paying for somewhere to live. In exactly the same way, when you buy, you have to pay out money for upkeep, stamp duty, legal costs, mortgage fees and so on. So there is never a one size fits all answer, despite people often over-simplifying.

[Output]

No advice to give on the mortgage, but:

(just got married!!)

Congratulations.

[neonplanet40]

Well I would say we have about £11k now. So I would say it would take another 12-16 months to double it depending on thing popping up like car needing fixed etc etc.

I will check out the link.

Thanks

[Kanoe]

Also if you are first time buyers check out the ISA's for mortgage saving, they could give you a good boost to your deposit, (some info here) or look at the help to buy schemes they might help!

Wish they had all this when I was buying my first house 4 years ago!!!

[Flibb]

We are currently going through similar stuff, but hopefully going to get a completion date next week When you are trying to get money together the extra costs can be a decider.
Conveyancing
Stamp duty
Surveyor
Last month rent

I used a variety of online comparison websites for the mortgage, but ended up using a independent mortgage advisor, with a bit of fiddling the saved me £1200 on up front fees and cost £300.

Conveyancing I phoned around and went for a middle quote from a recommended (by a friend) company.
Surveyor I used an online quote and went for a cheep bloke thats local, he did a full building survey cheaper than the middle homebuyer one through the mortgage company.

Have found that a lot of company's are bad at responding to email, end up chasing quiet a few by chasing them.
If your looking at shared ownership make sure you check out various schemes, around here there are newbuilds, but the housing association list resale's of existing shared ownership houses separately. Just be aware that the English/Welsh system is different to the Scottish system (I am in Kent). Can shove some prices of surveyors etc up if that will help give you an idea

[Bagnaj97]

If you do go with a 5% deposit, then it might be sensible to keep the initial term short. That way it's not long until you remortgage again and you'll hopefully have enough equity to get get you into a better band. But then you have to take into account the costs of re-mortgaging...

[peterb]

Congratulations on your marriage!

Nothing to add to the above, except that although interests are low at the moment (and although the base rate may fall further, mortgage rates are no likely to follow) but if/ when interest rates do start riding, make sure you are not in a difficult position.

And house prices may fall and you don't want to be caught in negative equity with an unaffordable mortgage, so from that point of view a larger deposit may be a safer option....

BUT...

I do understand why you would prefer to buy sooner rather than later

[cptwhite_uk]

Also if you're taking a short term fixed rate, make sure there's no up front fees. As the fee should be divided by the number of years of the term, to give you the "fee per year". General rule I wouldn't consider any fee much above £200 for a short (1 to 2 year) fixed term, probably zero fee to be honest. Once you're in a position to settle for a longer fixed term (probably your second mortgage) then fees can be calculated in to measure their impact, but they're almost always worth avoiding for shrot term offers.

If you're planning to over-pay on the mortgage, then check your mortgage offer has a no fee on over payments upto x% clause. Typically this is something like 5% per year over payment free of additional fees on the outstanding balance. e.g. Year 3: £180,000 on the mortgage...you could pay your regular mortgage payment and overpay by 180,000 x 5% = £9,000 without occurring additional early repayment fees in this example.

Edit: ...and congratulations

[TeePee]

[Saracen]

First, congrats, Neon.

....

The most important thing to remember is that rent isn't 'dead money' - it's paying for somewhere to live. In exactly the same way, when you buy, you have to pay out money for upkeep, stamp duty, legal costs, mortgage fees and so on. So there is never a one size fits all answer, despite people often over-simplifying.

I know what you mean, Jim, but rent is "dead" money in the sense that it's never-ending. So Neon will be paying £650/month, or £7800 / year, indefinitely. If you have a mortgage then, all other things being equal, it's for a defined period. In my case, 25 years. But then, typically, as time goes past, incomes tend to rise a bit faster than mortgage payments so the proportion of disposable income eaten by mortgage tends to drop. And depending on mortgage type, so does outstanding capital, so you overpay a bit, thus reducing capital even further, and thus the future interest yet to be incurred. Then, a few years from the end, you look at the outstanding balance and think "aw, nuts to that" and just pay it off.

So ..... we paid off a 25-year mortgage about 7 years early, not only saving a lot of interest but also meaning we saved, using Neon's example, £650 / month for the rest of our lives. That's worth about a £10k / year gross pay boost because you deduct tax before paying mortgage. As we're now free of mortgage OR rent for 11 years (7 paying off early, plus now being 4 years after when it would have been paid off anyway), that's saved about £86k over that period, during which disposal income has been higher by that £650 / month, had we been paying rent, and will continue to be £650 / month better off in disposable income, for the rest of our lives.

Yes, there are some expenses to owning rather than renting, but with that also comes the option of what you do to the home, much of which landlords would refuse to renters. And, on top of that £85k saved, we have a house larger than we need, so are planning on moving, downsizing, and trousering a very substantial chunk of change, by which I mean in the hundreds of thousands, in the process. That sum gives either a source of additional income, or a buffer zone, or both.

Had we rented, we'd have neither the £85k we've saved so far, nor the lump sum. And if we live our expected average life spans, at £650 / month, we'll save something like £175k more, still on Jim's current payment levels, over paying rent.

So think in terms of £250k savings, plus several hundred hundred thousand in capital gain, provided of course house prices don't collapse.


There are things to offset against that, the biggest being that moving is expensive. So if your career requires you to move far enough to require moving home, it can get expensive .... unless you can get the new employer to pay moving costs.

So sure, it's complex and not for everybody, but I can only say it's suited us very, very well indeed.

Neon, I can't advise you other than a couple of vague points. Firstly, generally, the sooner you get on the ladder at the start, the sooner you get off at the other end. But given Brexit, these might prove to not be typical times. It's plausible that waiting a year will see house prices drop 5%, 10% or whatever. Or, current predictions might be wrong and they'll be 10% higher. You have to make that call.

Second, again generally if you push the finances fairly hard at the start, what is barely affordable in year 1 becomes bearable in year 5, easy in year 10 and chump change by year 25. This is due to normal income progression paths.

Just be aware that by "push finances fairly hard" you MUST take account of the risk of, for instance, mortgage rate rises. Around 1990, I saw rate rises nearly double my monthly payment. That nearly sank us, but fortunately, we hung on by the skin of our teeth and now those times are a distant but painful memory. Push "fairly" hard, but not right to the limit. BofE rates can't stay at 0.5% indefinitely ... even if they do go down a bit over the next few months, in line with what "economists" predicted for today.

Anyway, no answers in there, Neon, but perhaps a bit of food for thought.

[scaryjim]

... Me and my wife (just got married!!) are looking to get our first home soon. ...

Congratulations, and, are you sure?

About buying a house, that is, not about getting married

There are 2 big advantages of renting; your housing costs are relatively fixed (i.e. you're insulated from the financial shock of having to do structural or systems repairs when things go wrong), and you have a lot of flexibility in terms of when and where you can move. So you need to ask yourself if now is the right time to give up those advantages.

Saracen's covered the dead money bit, so I won't say much about that apart from that there are HUGE benefits to not having to pay for fixing stuff when it goes wrong (like having to drop £1000 on a new boiler, for instance ). Houses are money pits, and when you first buy a house you'll want to spend quite a bit of money getting it just how you want it (particularly if it's your first house, and particularly if it's as a new couple, as you'll be forging your ideas of what being an "us" rather than a "me" means).

It's also worth remembering that for the first few years your mortgage payments are mostly interest - you pay very little off the capital in the first few years of a mortgage. That means that in the short term home ownership will generally leave you no better off than renting, and potentially worse off - particularly if your house doesn't appreciate enough to cover the money you've poured into it. So a big question to ask yourself is "will I still be living here in 3 - 5 years' time?".

If the answer to that question is "probably not", don't buy. You're currently spending a lot less on rent than you would on the size of mortgage you're after (based on my much smaller mortgage, anyway), and you'll be better off using the flexibility that renting provides, and the excess income you seem to have, to save like crazy so that, when you do decide you want to settle down somewhere, you've got the money not just for the deposit, solicitors fees, stamp duty, etc. but also to think about a new bathroom, kitchen, decorating, furniture - all the stuff that will go into making that house you buy your home.

OTOH, if you're ready to settle down now and you're sure the new house will be your home for years to come, buy now. The savings on interest between a 5% and a 10% deposit will pale into insignificance compared to the savings you'll make from buying early and overpaying your mortgage. It's just about the best way to use excess income in terms of return, and if you know where you want to settle down the sooner you start paying - and overpaying - a mortgage and sooner you can be mortgage free.

If you think you'll probably want to move away, but not in the next 5 years, it's a trickier equation. The chances are that when you're ready to move, not only will house prices have gone up, but you'll want to move to a bigger house, which means that you're likely to still need a significant mortgage. it's the big part of the house-buying equation that a lot of people gloss over. Buying a house early is fantastic if you never move house, or you never move to a bigger house, or you never move to a more expensive area of the country, or ... you get the picture

Only you can really know if the time is right to buy a house. It took my wife and I ten years to decide we were at a point where buying made sense. So I'd say it's something to consider carefully; don't just do it because it's what other people think you should. Weigh up the pros and cons. Remember that houses are money pits, and you will need to keep sinking money into repairs, redecoration, new fittings ... it's not like renting, where that's all taken care of for you. Remember that you can't just give notice on a mortgaged house, and if you're careless or unlucky in your choice of house you could be lumbered with it (my first house took around 9 months to sell) when you desperately want to move away from the area. It's a decision you'll literally be living with day-in day-out for the foreseeable future. Make sure it's the right one

[virtuo]

My thoughts would be on how much you'd need to spend on the house once you've got the keys (provided as scaryjim points out you are absolutely certain it's right for you).

I bought my house about 8 years ago (poor timing). It was in a terrible state of repair and needed a lot doing to it to even make it habitable. We had enough money for over a 10% deposit but decided to go for for a 5% so we had a cushion of funds to get repairs and modernisation done. Fixed rate for 3 years and then remortgaged on to a better deal at the end of that after we had put on a significant amount of extra value on to the house with the money we could have put in to the deposit.

I think that worked out well in my case, if we'd have put everything we had in to the deposit and done repairs as-and-when we had saved up, it would have taken longer to do and we'd have less negotiating power after the 3 years fixed rate had ended.


One other thing to do is make sure your mortgage allows for penalty-free overpayments - any windfalls or residual cash piled in makes a heck of a difference towards the end of your term.

[Dashers]

My advice would be don't worry too much about the distant future with your mortgage. Plan for the next five years, but anything beyond that is too unknown.

Assuming you're young, don't worry about the length of the mortgage. Go for as longer term as makes sense (the short the term, the cheaper it is in total, but the longer it is, the cheaper it is per-month). When you come to remortgage (which you will do after any fixed period, or otherwise periodically as it makes sense) then you can change the term and other parameters then.

Again, if you're young, it's likely that things will get financially easier for you as you get older. You'll get pay rises and what not. So even if you're at the upper limit of what you can afford now, it's unlikely to be like that forever.

It is worth stressing interest rates and how much impact they can have. If rates go up to 5%, which is roughly what we were at before the credit-crunch for a long time, then you will be paying a lot more on your mortgage. That said, it currently looks unlikely for that to happen. Make sure you wouldn't lose your home in that situation, even if that means living off Tesco's Value food and giving up the Internet connection for a while.

Mortgage rates are tied to the LTV (Loan-To-Value) of the property. The lower this is, the better deals you can get. So there may be a significant difference between a 5% deposit and a 10% one. You'll have to shop around and do the sums. There are plenty of mortgage repayment calculators out there that'll tell you how much you're paying over a term on a given interest rate. Don't worry too much about total cost over the term of the mortgage, but what it's going to cost you over the next 2-5 years.

I'm just remortgaging and was almost lured by a recent 0.99% rate on offer, but the setup fees were so expensive it was cheaper to go for 1.8% (ish, I can't remember exactly) rate over two years. Which is the fixed term we've selected.

[kalniel]

Congrats!

Many good opinions here, I won't give mine since circumstances are too individual, but I would also highly recommend dipping into forums like moneysavingexpert - they probably have some ready built tools to help with the calculations as well.

[scaryjim]

... I would also highly recommend dipping into forums like moneysavingexpert - they probably have some ready built tools to help with the calculations as well.

Good call. Their mortgage overpayment calculator is a real eye opener... http://www.moneysavingexpert.com/mor...ent-calculator