Buy Now Vs Saving a bigger deposit

clayton86

Me and my partner are first time buyers who are struggling to get our head around what to do; whether to buy now and get a mortgage, or whether it is actually better to continue renting and saving for a bigger deposit, so that you end up paying less interest.

What is confusing us is how much interest you pay on a mortgage - we have worked out that at the moment, if we borrow £105,000, then if you include interest, you actually end up paying back £177,000 based on an interest rate of 4.5% over 25 years. Does this sound right or have our calculations gone wrong somewhere? If they are right, despite our initial thoughts, it makes more sense to continue saving for another 2 years so that we can put down a bigger deposit and borrow less money and get a better mortgage rate than it is to actually try and get on the property ladder asap.

At the moment we have a deposit of £35,000, however according to our calculations we could have over £50,000 within two years if we continue renting and saving. Therefore we are trying to decide whether we should continue viewing properties and buy, or whether it makes sense to continue renting to save money in the long run by paying less interest.

Another important factor is that we are not planning on living in our current location for the long term, we have moved here for job purposes, and whilst here the money we have is 'only' enough for a 2 bedroom flat, back home, for the same money, we could afford a 3 bedroom semi - therefore this complicates the matter further.

Any advice would be much appreciated, are heads are currently spinning trying to take all this information in!

Many Thanks

WelshNic

If you're not planning on staying in the area long term I wouldn't buy there, especially if you can only afford a flat. Rent, save and buy the larger property in your preferred area.

The interest thing is a little bit of a red herring as it will depend on how you can overpay to bring the term down etc.

Save4ArainyDay

From what you have said I would suggest you continue saving. If you buy a property now you may find that when you need to move that it will take a very long time to sell or that prices may actually have fallen - neither of these scenarios is good for you.

Also the figures you quote Borrow £105,000 pay back £177,000 are correct at 4.5% over 25 years

Get yourselves as big a deposit as you can and find a long term home to purchase.

Good Luck

butterfly72

We are in a similar situation that we could buy now. Like you, we don't want to be in this area long term and houses are much cheaper where we planning on moving to.

So we've decided to rent and keep saving. Its expensive to move.. fees, removals etc and if anything major goes wrong the landlord pays not us. I guess the gamble is house prices, interest rates and inflation.

Oh and 2 years will go in a flash!!

brit1234

With house prices continuing to fall it makes sense to save a bigger deposit. Not only will you have £50k deposit but the house you want will be a lot cheaper or bigger houses out of your price range will fall into it.

Buying now you will lose a fair bit of equity in 2 years, possibly making it harder to get a more favourable re-mortgage.

geoffky

wait...you will be rewarded for your hard work..well done for having the sense to even ask the question as so many people just rush in and buy..i waited three years and got the right house with a massive discount (39%) if i had bought it straight away and paid the massive asking price at the time i would be 120k down..

clayton86

Thank you all for your responses - it is quite telling that everyone is telling us to hang on, which is what we are siding towards.

One of our worries is if house prices do start to increase - we are currently in Hampshire which from what I have read is one of the few parts of the country that may experience increase in house prices sooner rather than later. Would your advice differ if house prices were to actually start increasing by the end of 2011 or beginning of 2012?

Another thing to note is through a mortgage calculator, we have worked out that with a mortgage of £105,000 and a deposit of £35,000 - we would be paying around £590pm, compared to now when we pay £700pm (rent) - this obviously impacts on how much we can save, at the moment we can save around £8,000 a year.

tyler80

We are in a similar position in that although we are happy to hang on and wait, our rent is more than our mortgage would be.

Annisele

clayton86 wrote: »

Another thing to note is through a mortgage calculator, we have worked out that with a mortgage of £105,000 and a deposit of £35,000 - we would be paying around £590pm, compared to now when we pay £700pm (rent) - this obviously impacts on how much we can save, at the moment we can save around £8,000 a year.

Yes, but you need to think about the *total* costs of renting compared to buying and then selling. For example, if you're renting and the place needs a new roof / the boiler packs up / the windows go rotten - it's your landlord's problem. With renting you don't need to think about capital losses or gains, but with owning you do. If you're only going to be there a couple of years, then the legal fees and estate agents fees associated with buying and then selling could wipe out most of your potential £110pm saving on their own.

Generally speaking rent is more than an interest only mortgage on the equivalent property would be - landlords have to make their money somehow.

brit1234

clayton86 wrote: »

One of our worries is if house prices do start to increase - we are currently in Hampshire which from what I have read is one of the few parts of the country that may experience increase in house prices sooner rather than later. Would your advice differ if house prices were to actually start increasing by the end of 2011 or beginning of 2012?

The only way house prices will go up from here is if they cut interest rates and return to irresponsible lending.

Interest rates can't really go down as they are at rock bottom and under extreme pressure from high inflation to rise.

The banks simply haven't the money from savings to lend irresponsibly. House prices went so high because banks could sell off the mortgage debt and use that money to source even more mortgages. That practice ended after the credit crunch and they have to rely on traditional savings instead which aren't in sufficient quantise to fund this, especially after new banking laws require them to hold more funds.

House prices will continue to fall especially with all the austerity cuts, higher taxes and high inflation. You won't need to worry about rising prices for a fair few years yet.

Orpheo

Annisele wrote: »

Yes, but you need to think about the *total* costs of renting compared to buying and then selling. For example, if you're renting and the place needs a new roof / the boiler packs up / the windows go rotten - it's your landlord's problem. With renting you don't need to think about capital losses or gains, but with owning you do. If you're only going to be there a couple of years, then the legal fees and estate agents fees associated with buying and then selling could wipe out most of your potential £110pm saving on their own.

Generally speaking rent is more than an interest only mortgage on the equivalent property would be - landlords have to make their money somehow.

This is quite correct. Don't forget that your £35k savings will be earning interest, albeit small. My deposit is currently earning me £115 per month, this offsets the additional money I am spending on renting compared to a mortgage - on top of that house prices are falling. I have owned 2 houses prior to renting and, in my experience, home ownership has been more expensive overall even though the mortgages were cheaper than renting. This could be worth it while houses are appreciating in value, but currently they are depreciating.