cheaper mortgage or maximum we can afford?

keeli3 · 22 May 2009 at 1:32PM

We are looking to buy a flat in a few months and have £25,000 deposit, possibly a few thousand extra. I am just wondering if anyone could give me advice on whether to get a mortgage around £100,000 or go to our maximum £160,000 not including the deposit? which ever we decide we would like a flexi mortgage so that we can over pay as we can afford about £1000 a month. we thought this would be the best option to pay off our mortgage as soon as possible. We were quoted for £100,000 mortgage around £400 a month so we would be more than doubling the payments. But as we are first time buyers we don't know what is best to do.

Thanks

StuTheDon · 22 May 2009 at 2:10PM

Hi,

I guess it is all to do with your attitude to risk. Some questions to think about though:

How secure is/are your jobs? Do you feel secure in them?
What will you do if interest rates go up significantly (although it sounds like you'd be ok)
How long do you plan to stay in the flat? If you plan to stay for 5-10 years the 160k might be the best option.
Have you factored in stamp duty/legal fees/moving/factoring fees etc?

Hope this helps!

keeli3 · 22 May 2009 at 2:24PM

well i am starting a job as a teacher in a few weeks and my fiance is a consultant for a small asset management company that is going from strength to strength. We hope to stay for a maximum of 5 years because we will be starting a family by then. We have been told that we could stop a flexi rate if the interest goes too high so that isn't a problem. We will have savings from the next 3 months that can cover all fees and if not we can use some of the £25,000 deposit so that isn't a problem. I was thinking should be go for something around 100k so we can pay it off faster and then have all of that money to put into another place in 5 years or go for the more expensive option and possibly get that much return on it. As first time buyers we don't know what is best and a few people have told us to do different things. So other people's opinions would be great.

Cannon_Fodder · 22 May 2009 at 3:29PM

£160k at 4% is £533 Interest only, repayment £853. So you'd be able to overpay by £150...going with your £1000 figure.

Suppose the Interest Rate go up to 6%, means £800 just in interest, £1043 repayment, you lose the ability to overpay...

£100k on the other hand, is £333 IO, £533 repayment, huge overpay of £467 at 4%.

At 6% becomes, £500 IO, £651 repayment, still overpaying by £350...it would still be ok at 8%, £667 IO, £780 repayment, overpay by £220...

Play with the exact figures/rates/term you are considering here; http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

Another element to consider is LTV, Loan to Value. If you go for a mortgage of £100k, then £25k deposit will give you an LTV of 80%, leading to a reasonable mortgage rate.

If you go for £160,000 mortgage, then a £25k deposit is only a 86.5% LTV - that will likely be a slightly worse rate straight away, it might even be a bit tougher finding a flexible deal, perhaps.

Paying just 0.25% higher will be £33 per month more expensive on £160k, quite apart from the fact you are paying £60K extra worth of interest, too...

The closer to 100% your LTV is, means the gap remaining is all that stands between you and negative equity. No-one knows for sure which way prices will go over 5 years. But starting from 80% instead of 86.5%, gives greater leeway for a better rate when it comes time to re-mortgage, whatever happens.

As you are planning a family in 5 years or so, it would be sensible to make your plans based upon a single income. Even if you both remain at work afterwards, the childcare costs will eat up the second income.

For now, the second income gets to be the "baby fund" and/or getting a deposit ready for the second move...

imo.