mortgage advice for someone having a baby

cuprajake

hey guy's and gal's,

after a bit of help really,

will give a bit of info first,

we bough our house about 4yrs ago, for around £108k we had a small deposit so got a mortgage of £103k, this was fixed for 2yrs to find our feet then we moved at the end of the term to abbey, where we also took a little money ontop to fund our wedding and consolodate a little debt, we took £6k at the time the house was valued around £125k which will have dropped drastically to £110-£115k where they were originally,

so heres the question:

our fixed term finishes in april 2010, my new wife has a job but is only on maternity cover contract for 9months which will roughly end then also, were thinking about children and at a push my wage will just cover everything but it will be tight, im wondering if switching to a interest only mortgage for say 2-3yrs while we have a child and she can then go to part time work, would this be worth while, we currently pay £700 this is overpaying £50 per month over a 30yr term, dont really have any debt, but all the savings went on the wedding.

we dont intend to stay in this house for ever if that helps

jake

cuprajake

bump for some help

blueberrypie

How long do you intend to stay in your current house? To sell it and "buy up", you are going to need some equity or a cash deposit. Your outstanding mortgage now is probably not very much less than the value of your house - you put £5k in at the beginning, but the early payments on a mortgage are mostly interest, so won't have made a huge difference on the amount you owe - and then you borrowed another £6k.

You say you don't plan on staying in that house forever, but unless you move to a cheaper property, or sell and rent, you aren't going to have any choice.

To be honest, and without wanting to cause any offence, your financial history suggests that you haven't been managing money well to this point: you've had to borrow on your mortgage in order to consolidate debt, you went into more debt to pay for a wedding, you borrowed a very high proportion of what you paid for your home (more than you'd be allowed to borrow these days), and you haven't managed to get your mortgage balance down. You might find that you can't even get a new mortgage in April - you don't have enough equity. That doesn't mean you'll lose your house, but it does mean that you are going to be forced onto your lender's SVR - which is probably fine for the minute, but when interest rates rise, your payments will too. If at that point you have increased expenses (with a child) and/or lower income (loss of wife's wage), it will only be more difficult to manage, not less.

I'm not trying to be unkind, really I'm not. I just think that you need to take a long, hard, realistic look at your finances and how you manage your money before you do anything else.

dunstonh

im wondering if switching to a interest only mortgage for say 2-3yrs while we have a child and she can then go to part time work,

The problem with that is there is always an excuse to stay on interest only and the longer you leave it the more expensive it becomes, until it is no longer affordable.

Children get more expensive as they get older. So, if you cant afford it early on then you are unlikely to later. With a 30 year mortgage, the cost difference between a repayment mortgage and interest only is likely to be very low. So, if you cant afford the repayment mortgage then that indicates there are bigger issues with your finances than perhaps you want to admit.

Also, with current interest rates at all time lows, if you cant afford those now, then what hope do you have when the interest element goes up by around 3 times more than it is now?

Generally, the FSA has put pressure on lenders (bit too late but thats typical), to not use interest only as a way for people to afford to buy a house.

Maybe it isnt sensible for you to be considering children and increasing your debt at this time. Wait until you have built the savings up and the overpayment has had a chance to bite.

cuprajake

cheers for the advice guy's

were not struggling, we do save around £250 permonth as we did for the wedding, the debt was minor to be fair, id say staying in the house for another 10years wouldnt be optomistic, i just meant were not going to retire here, we could have two children before the need for room was needed,

we do over pay £50 permonth currently, i was just worried that when the time comes and she does need to look for another job, we wont be tied into a crazy deal which leaves us struggling, hence why im looking at options.

now the wedding is out of the way the savings could be used as any sort of capital in the future,

when we fixed it was 1 1/2 years ago just before the market dropped,

if it helps, we can pay for everything on my wage alone, just not save haha

dimbo61

If you can manage on your wages why not try as a little test to live off just your income for the next 6 months!
Every penny your wife earns should be put into savings and overpaying say 50/50.
In April 2010 your mortgage may well ( if rates stay low) come down so carry on overpaying and saving.
If your wife gets a full time job ( dont mention the planned kids!) then carry on overpaying and build up 3/6/9 months of income in cash ISA,s as an emergency pot.
You need to build up the equity in your home and then hopefully get a long term 5 year fix so you have security while your wife has time off with the kids!
GOOD LUCK

gratefulforhelp_2

dimbo61 doesn't live up to his/her name, that is excellent advice.

jamesd

You may have difficulty remortgaging because the loan to value has increased as the house value has dropped. It looks as though the current loan to value may be over 90%.

If you can only manage everything on your wage without saving that means you can't really live on your wage alone because you don't have the necessary safety margin and can't handle the extra costs of a child. This means that you can't afford a child at the moment.

It also means that with long term low for interest rates normally meaning around 5-6%, not the very low levels we can have now, you need to work out how you can afford to pay for several years at 7-8% interest rate and for a year at 10-12%. Because those are what a government might do to control inflation. Your description of only just making it on your own wage means that you would be heading for repossession when interest rates return to more normal levels.

Assuming the 8% mortgage interest rate that prudent planning requires using, each £1000 paid off the mortgage will reduce your long term outgoings by £6.67 a month. At 5% by £4.17 a month. Your minimum prudent target is getting the mortgage balance owed down to the point where you can pay it on only your income at 8% mortgage interest rate.

What this means is that you need to very aggressively cut back on expenses and save enough money to reduce your long term outgoings. And to save money for the costs of a child and your wife not working for a while. Assuming that you are committed to having that child, enough to do something about making it a sensible option instead of an invitation to financial collapse, which is what the situation you're currently describing for your income alone is.

cuprajake

cheers for the advice guys all taken on board, but kinda needs to be changed now,

were fixed till aug 2011, not next april, so dont know where that date came from ( the mrs haha)

out goings can be brought down more if needed, and i can over pay more if needed. i just didnt want to get stuck in a situation of her with no job and the new deal comming up, but thats not going to happen now well not for another yr

cheers for the info you guy's have given, all taken on board. ideally children wise we'd like to be under 30 (26 now) so that gives us good scope to save money etc