mortgage advice

dd95 · 26 Dec 2019 at 20:09

hi all,

other half and myself are looking to purchase our first home for around 100k (needs renovation) with a despot of 15k.

i have just qualified as a lawyer (earn 26k starting off) and my other half earns 22k.

our plan has always been to buy a cheaper home, pay off the mortgage quite aggressively and then move to our forever home when we are in equity - is this possible/a good plan?

we would pay 900pm between us which would mean we should pay off the mortgage in 8 years, save like hell for 2/3 years and then hopefully look at our forever home in the region of 500-600k..

your thought are much appreciated!

kaktus · 26 Dec 2019 at 20:41

dd95 said:
hi all,

other half and myself are looking to purchase our first home for around 100k (needs renovation) with a despot of 15k.

i have just qualified as a lawyer (earn 26k starting off) and my other half earns 22k.

our plan has always been to buy a cheaper home, pay off the mortgage quite aggressively and then move to our forever home when we are in equity - is this possible/a good plan?

we would pay 900pm between us which would mean we should pay off the mortgage in 8 years, save like hell for 2/3 years and then hopefully look at our forever home in the region of 500-600k..

your thought are much appreciated!

Not sure what your question is here.

If your question is, can one afford a 500k home using a fully paid off home with "100-115k" of equity, the answer is sure. This is dependent on a number of factors including whether you can sell that home in 8 + 2/3 years time for that amount and what your earnings are that point in time relative to the size of mortgage you wish to take to be able to purchase a 500-600k home.

With 115k deposit, you would need between 385k and 485k loan which assuming both of your salaries rose by 2% per annum would mean that at best you would be eligible for a loan of around 260k though more like 185k once you've netted off monthly expenses. So you would be around 200k-300k short for buying a dream house in 10 years.

All of this is dependent upon some assumptions: your house price stays the same over that period of time. Your salaries rise by 2% per annum, mortgage rates are no higher than 3% in 10 years time and you have no other savings/deposits to contribute towards your next "forever" home.

dd95 · 26 Dec 2019 at 20:45

hi,

based on industry values, after 8 years i would expect to be earning 54-50k with my o/h around 30k.

of course its all variable but i am good with money so would expect to save a reasonable sum too

Semple · 26 Dec 2019 at 21:10

dd95 said:
hi,

based on industry values, after 8 years i would expect to be earning 54-50k with my o/h around 30k.

of course its all variable but i am good with money so would expect to save a reasonable sum too

So based on that you're likely to fall a bit short. 80k combined will mean banks will lend you around 380k. So the property you're renovating would need to fetch a fair bit over the initial cost.

Obviously overpaying mortgage and keeping your interest paid down to an absolute minimum is the ultimate goal, and your circumstances etc may well change in many years.

I guess the only advice I can give here is that with quite a few FTB incentives currently available, I would almost be looking to get the most from that.

For example, have you had a look at the eye-watering amount of stamp duty you'd have to pay on a 600k property?

dd95 · 26 Dec 2019 at 21:13

hi, yes it is variable, i could well reach partnership in that time and be on 65k+ but at the same time lose my job..

yes, stamp duty around 30k isn't?!

without sounding awful i think my inheritance from grandparents will be quite a large sum which should help

koolpc · 26 Dec 2019 at 21:28

dd95 said:
hi, yes it is variable, i could well reach partnership in that time and be on 65k+ but at the same time lose my job..

yes, stamp duty around 30k isn't?!

without sounding awful i think my inheritance from grandparents will be quite a large sum which should help

Jackanory springs to mind

kaktus · 26 Dec 2019 at 21:56

Have you considered renting? If your area is indicative of averages in the nation, you should be able to rent that unit for approximately 350-500 a month? Given that it is highly unlikely your house price will appreciate much given its base you are better off sticking all the excess cash above the rent payment into a basket of investments which in 10 years will have grown far more than the value of the house.

To give you an example, my investments in stocks, reits and bonds have grown by an average 9.2% per annum since 2009, my house has increased in value approximately 1.8% per annum over the same period. Owning property is one of the most inefficient uses of capital and only makes sense in a rising market. All I ever see is people talking about getting on the housing ladder but hardly anyone talks about the opportunity cost of using that capital more productively

Generally speaking, buy when the market is depressed so you benefit from paying down the mortgage *and* rising capital values otherwise you're just paying off capital that produces no return.

dd95 · 26 Dec 2019 at 21:58

do you purchase/sell stocks yourself or do you pay for someone to do it, stocks and shares ISA etc?

kaktus · 26 Dec 2019 at 22:07

No I just do it myself. It's fairly simple. REITs for example are all trading at discounts to net asset value. Pick a basket of them which have exposure to markets you're comfortable with, have low leverage (<40%) and high cash yields.

But if you're relatively inexperienced in this space, better to pay a professional to do it which will cost you more in fees but someone else is doing the work for you. Anyway this is not investment advice, just something to think about before you plug 10 years worth of cash into an asset which may hardly appreciate and worse, cost you a lot in maintenance and repair

BUDFORCE · 27 Dec 2019 at 07:30

I don't think putting your money into investments and renting is a good idea.

Once you have your own home sure, but if the financial markets/world goes to **** your investments are just numbers on a computer that will cease to exist.

DarrenM343 · 27 Dec 2019 at 08:09

dd95 said:
do you purchase/sell stocks yourself or do you pay for someone to do it, stocks and shares ISA etc?

Just do it yourself. If you have no idea about buying company stocks, or it scares you a bit, then look at purchasing funds within an ISA, rather than individual shares. Funds can be actively managed or tracker type, which may track an index like the ftse 100 for example. The costs associated with tracker funds are lower than actively managed funds and to be honest a large % of fund managers fail to beat the indexes.
Just remember that any investment into the markets should be done for the long term so not always a good thing to do if need the money in next few years.
it's good that you are formulating a plan by the way. Many don't and wonder why they can't afford a home even when earning a decent wage.

Buffman · 27 Dec 2019 at 08:44

kaktus said:
Given that it is highly unlikely your house price will appreciate much given its base you are better off sticking all the excess cash above the rent payment into a basket of investments which in 10 years will have grown far more than the value of the house.
.

The increases from stocks may be higher, but that's on available cash (/equivalent to deposit) rather than total property value.

Your stock gains would also have to appreciate more than the net differential of cost of rent minus the cost of mortgage interest cost epr month.

For your situation a 100k house sounds fairly low but dont know how big the house/flat is. For me if youve just qualified and salary will inflate well id maybe rent for a year and buy something bigger. I doubt that it will overall be financially better than buying a house though.

Isnt there a fair resource of documentation online identifying that those who self invest generally do worse than a managed fund?

DarrenM343 · 27 Dec 2019 at 09:17

The Craig said:
Isnt there a fair resource of documentation online identifying that those who self invest generally do worse than a managed fund?

Tell that to those who invested in the super star Neil Woodford's funds

. Not only have his funds underperformed, one is currently being liquidated. You're not wrong but the same can be applied to managed funds too. Few fund managers outperform the index's, so you might as well just buy a passive tracker or index based ETF, which is what Warren Buffet would advise his own family to do I believe.

dd95 · 27 Dec 2019 at 10:01

we can get a nice three bed terraced house in a good street for around 120k with the ones needing a bit of work at around the 100k mark. Yes we could probably get a better house that's more expensive but i thought buying cheaper, paying off mortgage and being in equity quicker would be the way to go..

ive always ben good with money (been saving my HTB Isa for around three years) so should have around 15k deposit with my other half around 7.5k

tamzzy · 27 Dec 2019 at 10:03

do you have enough cash for said renovation?

dd95 · 27 Dec 2019 at 10:30

Plan is to do rooms out one by one so I think (hope) so

Mercenary Keyboard Warrior · 27 Dec 2019 at 10:33

dd95 said:
we can get a nice three bed terraced house in a good street for around 120k with the ones needing a bit of work at around the 100k mark. Yes we could probably get a better house that's more expensive but i thought buying cheaper, paying off mortgage and being in equity quicker would be the way to go..

ive always ben good with money (been saving my HTB Isa for around three years) so should have around 15k deposit with my other half around 7.5k

Not necessarily

if your looking to a target house it makes less diff. Key being really where you are placed relative to decent deposit, then a roll of the dice

The roll of the dice is what house prices do, if you borrow more your potential gain is more or loss is more as the house prices move.
Its your relative position vs your long term house thats the key.

If its £600k now what will it do if average house prices go up by 10%? It wont necessarily be +10%

But if house prices consistently go up 3% a year your going to be far better off in a £200k house than buying a £100k doerupper.

Other factor is are you doing the work yourself or getting people in. If your getting in your probably not really adding value above what you spend, even doing it yourself doesn't necessarily add more value than what you spend. One the advantages of a doerupper is you can put your style on it, but if its not the house for life I wouldnt stress too much on that personally, focus on the value maximisation first. Buy the £120k, enjoy living in it, work to get the LTV down, but there is no advantage under 60% typically so that could be a good point to look at investments or savings, depending on what rates do, how long you are fixed for at what rate etc

The_Abyss · 27 Dec 2019 at 10:38

dd95 said:
hi all,

other half and myself are looking to purchase our first home for around 100k (needs renovation) with a despot of 15k.

i have just qualified as a lawyer (earn 26k starting off) and my other half earns 22k.

our plan has always been to buy a cheaper home, pay off the mortgage quite aggressively and then move to our forever home when we are in equity - is this possible/a good plan?

we would pay 900pm between us which would mean we should pay off the mortgage in 8 years, save like hell for 2/3 years and then hopefully look at our forever home in the region of 500-600k..

your thought are much appreciated!

You make some relevant points in this post, but some are completely irrelevant. The last point - buying your forever home in 10 - 11 years for between £500k - £600k is irrelevant, with the greatest respect. However, how you plan to get there is very relevant and I think that you’re approaching it in the wrong fashion.

Your plan can be summarised as buying a house now and then moving to another house in 10 - 11 years time. Let’s consider some of the other points you’ve raised around those facts:

- you state that your aim is to pay the mortgage off on this first house, then save before going for the next (forever) house. Why? It will make no difference whether or not the mortgage is paid off in full when you next decide to move. What if you bought a more expensive house and paid off 70% of the mortgage when you moved - how would that be different? You’ll still be in equity. Think about buying the house you want and need now (that doesn’t mean that you can’t buy something needing renovation)
- this is your first house purchase. Even with the financial means in 10 - 11 years time, you’re statistically unlikely to:
1) stay in the first house for all that time
2) stay together (sorry)
3) find your ‘forever’ house at the second attempt
You just need to be realistic about this - it is good to have plans but it is better to have ambitions and have plans that are flexible for them.

At this point, basically, you just want a mortgage that allows you the flexibility to overpay, aggressively if required. I think that you need to separate your mortgage requirements from your plans on what you want from a home. Although inherently linked, they’re not the same thing.

dd95 · 27 Dec 2019 at 11:43

Thanks, I was using the 500-600k as a father really just to give some background.
I appreciate what you’re saying and understand completely, however if I were to pay, say, 900 off mortgage each month and then pay it off completely in 8-10 years, wouldn’t it be more beneficial to be mortgage free for a few years than to keep on paying a higher mortgage on a higher value property?

thanks

The_Abyss · 27 Dec 2019 at 13:54

Not necessarily. It could be argued that you’d benefit more from buying a more expensive property and then seeing greater benefit should house prices continue to rise.

You don’t need to be mortgage free to buy another house. Few people ever are, other than their first or, in some cases, their last purchases.