Shortfall in savings for house purchase - to borrow or rent for longer?

James1715

After finishing our degrees, myself and my wife moved to jobs abroad a couple years ago and started to put money into savings each month. We would like to move back the UK at Christmas. By then I would estimate we would have a total savings of 65k.

We are both 26 with no children (as yet), and looking to buy a small starter home - around 100k in our area.

When we moved away, I was somewhat overoptimistic and wanted to have saved up enough during our time abroad for an outright purchase, but am now facing either:

- Renting for some time (600 - 650 pcm), to save up the additional 35k for an outright purchase, I would estimate this would be maybe another 2 years
- Or, applying for a mortgage and borrowing the extra 35k now.

Which of this two options would cost us less in the long run?

Thanks in advance for your advice.

sujman

Get a mortgage and buy a house now.

The interest cost of £35k mortgage is a lot less than £650 monthly rental cost.

If you can save £35k in two years but also afford to pay out £650 in rent, then you are effectively setting aside £50,600 over two years in housing costs (£35,000 + £650 x 24 months) - or £2,100 per month.

If you got say, an offset account, you could easily afford the £100 odd a month interest costs (£35k x 3.75% divided by 12 months) and over pay by over £2k per month.

You will have paid off the £35k mortgage in 18 months max!

In summary, max cost of interest (so ignoring a reducing balance amount) = £100 x 18 months = £1,800

versus

Rent cost of £650 x 24 months = £15,600

James1715

Hi Sujman,

Thanks for your reply. I thought I would be in the right place where someone would have the numbers to hand!

I didnt realise there was such a difference in cost between the two, I'll compare some offset accounts now. I wont tell my wife how much it saves, she will say we can spend the difference on things for the house (!).

sujman

James1715 wrote: »

Hi Sujman,

Thanks for your reply. I thought I would be in the right place where someone would have the numbers to hand!

I didnt realise there was such a difference in cost between the two, I'll compare some offset accounts now. I wont tell my wife how much it saves, she will say we can spend the difference on things for the house (!).

... or worse, she'll say you guys can afford a bigger house!!

Don't know your salaries but if you have £65k deposit saved up and assume that to be 20% of the house cost, then you could look at purchasing houses upto the value of £325,000!

evoke

Buy a nice property using a mortgage. A £100K house is going to be cr*p.

Suarez

evoke wrote: »

Buy a nice property using a mortgage. A £100K house is going to be cr*p.

No chance.. Just pay off your 100k house then start saving again to move up the ladder! Why waste money giving it to greedy bankers!

casper_g

Suarez wrote: »

No chance.. Just pay off your 100k house then start saving again to move up the ladder! Why waste money giving it to greedy bankers!

OTOH, why waste money giving it to greedy estate agents, conveyancers, surveyors and removal firms? Don't work your way up to your dream home by taking a tiny baby step every couple of years: it'll cost you many thousands in fees for every step, plus immeasurable amounts of stress and upheaval.

You need to find the right compromise. Starting small may very well be a sensible option, if you will be happy for several years in a £100,000 place. If you can pay off the mortgage in a couple of years and then spend a few years living mortgage-free and save up a meaty deposit in cash for a more substantial family home, great! But if you will quickly outgrow a "starter home" and want to start a family, might you regret not getting a slightly bigger place to start with?

somethingcorporate

Suarez wrote: »

No chance.. Just pay off your 100k house then start saving again to move up the ladder! Why waste money giving it to greedy bankers!

You would rather give it to the wasteful government and the greedy EAs/solicitors in selling and moving costs?

There is a balance to be struck but with such a big deposit don't be too worried about casting your net a little wider. The costs of such a mortgage have already been spelt out so doubling / tripling this to get to a £150k house is still reasonably modest (depending on your income of course!).

Good luck in your hunt and well done on saving such a large amount!

Edit: must type faster next time!

Suarez

casper_g wrote: »

OTOH, why waste money giving tit to greedy estate agents, conveyancers, surveyors and removal firms? Don't work your way up to your dream home by taking a tiny baby step every couple of years: it'll cost you many thousands in fees for every step, plus immeasurable amounts of stress and upheaval.

You need to find the right compromise. Starting small may very well be a sensible option, if you will be happy for several years in a £100,000 place. If you can pay off the mortgage in a couple of years and then spend a few years living mortgage-free and save up a meaty deposit in cash for a more substantial family home, great! But if you will quickly outgrow a "starter home" and want to start a family, might you regret not getting a slightly bigger place to start with?

On a mortgage of £100,000 you would pay back £177,000. Do you really think EA fees would be anywhere near that? 3/4k at most.

casper_g

Suarez wrote: »

On a mortgage of £100,000 you would pay back £177,000. Do you really think EA fees would be anywhere near that? 3/4k at most.

If you overpayed a £100,000 mortgage at the rate the OP would be looking at, you would pay back nothing like £177,000.

Edite to add: let's say the OP and his wife pay a total of £2000 each month towards a £100,000 mortgage. They can afford this, based on their combined rent and saving potential. IF the interest rate is 4.5% (which they could easily get as a 5-year fix if they bought today), they'd pay off the mortgage in year 5, and they'd have paid a total of £112,000. I think that £12,000 in interest is made up for by saving the costs and hassle of a sale+purchase transaction. It could take many months to sell an entry-level house these days, and in the meantime they'd be stuck in a house they were no longer satisfied with.

PJD

evoke wrote: »

Buy a nice property using a mortgage. A £100K house is going to be cr*p.

I agree. Money is SO cheap at the moment, - you're not going to see loans this cheap for a long time....

The market is so volatile as well, - seek out a bargain on a decent property, - get a nice 5 year fix, or blended fix/tracker maybe, overpay the mortgage - and in 5 years time you'll have a lot of equity in a decent property.

In percentage terms, the more expensive your house is, the more it will go up - ie, 15% of 250k is a lot more than 15% of 80k.