120k Mortgage --> baby on the way.. advice

floater_2

Hi all .. I have a couple of questions for you all.

I am fully aware that house prices must fall at some point in the near future .. however ...

My fiancee and I earn a combined salary of 38,000 (this should be boosted to 40k due to a new job) and we are looking to move in together.  I have my own house with a 65k mortgage but has been valued at around the 85k mark.  This gives us a 20k (roughly) deposit.  My fiancee currently rents.  We found out recently that we are going to be parents which we are both obvsviously exstatic about.  However my house is only a 1 bedroomed house and is clearly too small to raise a child in as I am sure you can imagine.  We have done numerous budgets for now and when the baby arrives and we believe that we would want (and could afford a 120k mortgage (+- 5k) plus our 20k deposit.  However, I realise that this is an awful time too buy but unfortunatley we do not have any real option.  I suppose that we could rent but then again house prices may not fall .. isn't this just all pure speculation?

My dad has told me he wouldnt want to buy at the moment but in our case we do not really have a choice.

Just wondering what peoples opinions are.  We are visiting our IFA tonight too see what she thinks but, would greatly appreciate any further feedback.

Thanks for listening!

lisyloo

Yes it is all speculation and there are certainly risks with renting.

Try this graph (bottom right) and see where you think we are in the cycle.
http://www.nationwide.co.uk/hpi/Monthly.htm

Unfortunately there are risks with whatever you do (including doing nothing).

In my opinion the risks of price falls are now higher that the risks you face if you rent.
Ultimately prices will have to come back in line with incomes as in general people have to pay mortgages with their salaries.

I think I would be tempted to rent for a while.

Bear in mind that your IFA has a vested interest (they want to arrange a mortgage and insurance for you and make some money).

At the end of the day you are going to have to make your own decision as no-one can tell you what will happen with prices.

I think I would certainly go and look at rented accomodation to see what standard you can get and what you are going to have to pay. You will the then be in a better posistion to make a decision.

floater_2

lisyloo ... thanks for the info ... I think that we will think about renting also.  Its quite a tough situation however it is one that will have to be made.

That graph shows that surely it has to drop ... sooner or later and in which case if I have rented for a year or 2 we might be better off if we put that 20k in some kind of saving fund. What to do ... hmmm

lisyloo

I would first worry about the housing decision first.
The afterwards worry about what you are going to do with the £20K.
If you are able to save at all e.g. rent is cheaper than mortgage, then you would be well advised to do so.
This will put you in a better situation when you do want to buy.

If your wife is not working then you can put all the savings in her name so you don't pay tax (getting married will help as spouses can gift money to each other tax free).

Woby_Tide

I still think you are being overly pessimistic lisyloo and advising everyone not to purchase a property is not necessarily the right case for everyone. As long as you aren't aiming for short term gains on a house then there is not necessarily any reason not to buy, holding on to see if prices do drop is not always feasible in cases where say you desperately want a certain house that may be available now and never on market in future or change in circumstances as above.

Even the Nationwides outlook is "However, in contrast to the early nineties, the economic outlook looks broadly positive and a repeat of a nineties style decline in house prices looks unlikely. The most likely conclusion to the current housing market cycle remains a drawn out period of low price growth. "

even a minor correction is not going to affect that many people too harshly. Horses for courses really.

lisyloo

I am not advising people not to buy.
But I am certainly advising people to consider the effects of buying at the top of the market and the effects of rising interest rates.
If they still consider it's worth buying, then of course they should go ahead.

As long as you aren't aiming for short term gains on a house then there is not necessarily any reason not to buy

I don't agree. Buying at the top of the market can affect your long term wealth in a BIG way.

holding on to see if prices do drop is not always feasible in cases where say you desperately want a certain house that may be available now and never on market in future or change in circumstances as above

I agree and I have actively said that holding on is A RISK. I jsut personally think it's LESS of a risk than buying right now.

Even the Nationwides outlook

And you don't think they have a vested interest .....
come on..........
They have a HUGE vested interest.

You might not agree with my opinions but they are truly genuine opinions from someone who gets no benefit from what the posters do.
The LAST people you should believe are lenders and estate agents (and anyone with a vested interest).

I don't expect everyone to agree with me, but I sincerely hope that people take on board some of the issues that are being raised.

floater_2

WobyTide and lisyloo .. thanks very much for your differing opinions. It is good too hear both sides of the argument from non-affiliated people who aren't trying to seel you something. Thanks,

lisyloo

BTW - WobyTide - I bought a house in Decemeber 2002 for some of the reasons you state.

I was concerned about the prices at that time (and our jobs) but we were buying long term (about 40 years) and bought our dream house that may not be available again.
In addition to that the style of house is no longer available because of new planning regulations.
We believe the design (which will be in short supply) and the location is sought after (next to 2 excellent schools with outstanding view, close to motorway and train station).

We have been lucky because our jobs are going well and prices have been rising since then, so I do appreciate and agree with some of your points.

Still from my point of view, houses look very overpriced at the moment, and there are some signs that the market is cooling after interest rate rise (latest hometrack report shows prices falling).

It is a very personal decision.
Some people see renting as highly undesirable, whereas some see the flexibility, lack of maintenance etc. as highly desirable.

I found that you could read as many house price reports as you like and look at as many charts as you like, but at the end of the day you still have to make your own decision.

Also I have come to recognise that anything you do has risks associated with it (including doing nothing).
You just have to make the best assement you can of those risks and try and do the best thing.

There are so mnany factors outside of your control that it's very difficult.

Woby_Tide

Buying at the top of the market can affect your long term wealth in a BIG way.

Can you explain your theory on this one for me I'm interested to see your take on this. Long term I see that apart from a catastrophic drop, probably towards the end of your term this would be affected. Over 25 years I'd say there's minimal risk of damage to long term wealth with a correction at the start of the term.

and for floater taking on board lisyloos points

if you are happy that you can afford any interest rate rises etc and aren't forseeing selling property in the short term or making short term gains I would still go the route of purchasing as I don't ever beleive it's possible to then predict the reverse in when prices would stop dropping, much like we can't predict when/if prices will stop rising. I suppose I'm just more anti seeing money being paid in rent with no forseeable return than gambling on any potential short term loss in value being compensated for in the longer term i.e. 25 years.

However if you are unsure or aren't prepared to take that element of risk and/or are not overly heart set on a certain property then maybe rental suits you better for now and see the lay of the land in 12/24 months say.


also just to add my disclaimer: I'm not involved in property trade or anything and my views just reflect my own take on things and my attitude to 'risk' on these situations currently

lisyloo

Here's a very rough formula for the benefits of STR (assuming you are mortgaged).
It would be something like this.

sale price of house - buy price of house - rent + mortgage interest + maintenenance

Now rent will be largely offset by mortgage interest that you would have to pay and maintenance if you lived in your own home.
The BIG gain is the difference between the sale and buy price.
For example I bought my first house in 1991 at a costs of £70. If I'd waited I could have bought it for £45K saving myself £25K.
Of course I would have to deduct rent but would still be in for a big profit.

Let me anticipate your arguments to save time.

1) You'd have to time the market perfectly which is impossible.

Agreed but if you can even get anywhere close then it can still be worthwhile. You don't have to time it perfectly to get a benefit.

2) Gradual slow down over long period as opposed to quick crash.

A gradual drop in prices as well as certain other scenarios (increasing prices) are a nightmare for GSD.
Those who did it in 2001 are pig sick and regret it right now. I am not denying that it its a risk.
However I would point out that a gradual return to average prices is historically unprecendented.

The capital costs of paynig too much for your house (as well as the increased interest) could be huge.

Pal

House price falls do not damage wealth by themselves but instead are one of the factors that you need to take into account.

If someone buys a house and lives in it all their lives, the price they pay for the house is the deposit, plus the mortgage capital, plus the mortgage interest.

House price fluctuations after you buy do not impact any of these factors, so the cost of buying remains the same.

It is interest rate rises that impact your wealth, so people who are stretching themselves financially at the moment are at serious risk if interest rates continue to rise. If in the future they find that they cannot meet their mortgage payments they can be forced to sell. In the worst case scenario their house price will also have fallen below the level of their mortgage, meaning that they have to find money simply in order to sell their house. At this point, they have a serious financial problem.

If someone's income is secure enough and high enough that they can cope with significant interest rate rises, then there is not really any problem at all with their buying now. It is those people who are stretching the multiples who may have a problem.