Genuine question - how does anyone afford to buy a house?!

Caveat_Mortgagor

Running_Horse wrote: »

We afford it by going without all kinds of things others apparently take for granted. It's up to you what you choose to spend your money on. I can remember double digit interest rates, and interest rates rising twice in one day. It may be unlikely that will happen again, but there was a time when you would have been considered insane if you predicted BOE rates would be 0.5% for years. That's the thing about unexpected events; no one ever expects them.

Possibly the least helpful comment Ive ever read on these boards.

If you were affected by two rate rises in one day, then you certainly bought when the average house was a much lower multiple of the average salary.

The Op has the problem that the only reason prices are so high is because interest rates are so low. Some current buyers are happy to trade off the higher price they pay now for lower interest rates. That is to say that they lose on the cost of the house, but gain on lower interest payments.

The OP is cautious of losing on the purchase price of the house and then losing again if and when rates go up.

If only a few more people exercised their level of prudence over the last few years then maybe people wouldnt have so much debt, perhaps the economy might not be quite so screwed from a banking crisis and house prices might not have become quite so insane.

princeofpounds

yet we've been advised to base our calculations instead on the average interest rate from over the last 25 years, to try and predict how our 25-year mortgage would fluctuate. It seems the average mortgage interest rate over the last 25 years was around 8.5%

This is a good test to determine how safe it is to have a variable interest mortgage, as most people in the UK do. In fact in times of extreme stress interest rates can leap up much more than that, so the actual crunch is even more painful even if you can afford the loan over its lifetime.

You are absolutely right to ask how anyone goes and buys a house based on this sort of risk. The truth of the matter is that they don't do the sums. I work in finance, and you would be amazed how the general thinking process for your average person considers nothing more than the affordability of the first month's payment.

For example, in your situation let's assume you have 800pcm per month to spend on housing in the new place. Let's assume a variable rate of 3% (you can get as low as 2% if you have a big deposit). That's 9600 per year. That allows you to spend up to £320k on a house (plus deposit). Great, houses are cheap!

In a nutshell, that is why you have astronomical house prices preserved at the current time.

Now a rate rise to anything remotely normal would destroy the housing market, but we may be in something of a 'new normal' now. If we are in a depressionary environment then we could end up like Japan where rates stay low for decades and the value of housing in real terms erodes at a snail's pace rather than in a crash.

I don't know what will happen, but I can suggest another way of looking at things; look at fixed rate mortgage deals. These, in simple terms, contain an estimate of what will happen to interest rates throughout the length of the fixed period. Try looking at longer terms (5, 10yr) for a longer perspective.

The advantage is they are a more genuinely forward-looking. The disadvantage is that they don't give you a sense of the actual downside if rates soar due to a black swan style event and you are on a variable mortgage, but they do give you a sense of the chance that you are likely to be ok given all we know at the moment.

And of course if you want the security you can just get a fixed rate mortgage.

antrobus

Idiophreak wrote: »

If interest rates hit anything like 8.5% now, there would be absolute chaos - most of the homes in Britain would need to be repossessed - so I wouldn't worry about them going that high, but certainly consider affordability with more moderate rises...

A bit of an exaggeration given that something like one-third of homeowners don't even have a mortgage in the first place, whilst a good chunk of the remainder bought their homes years ago when prices where, how shall we say, a little more moderate than they are today.

DannyboyMidlands

Idiophreak wrote: »

You mean they should be able to save around 1700 out of the 3500 (ish) they'd earn each month?
So given that OP's stated they pay 950 in rent, you're allowing them 850 for coucil tax, utilities, food, fuel/travel, social, holidays etc, tv, phone...I can't speak for OP, but in my own budget that stuff adds up to around £1200/month, easy...

It may *just* be possible for OP to save 20k in *a* year, but to do it *per* year would result in a fairly lousy quality of life...

It's all about priorities isn't it and everybody will feel differently. To get my first deposit together I went without lots of stuff for 3 or 4 years. The same expenses that you spend £1200pcm on cost me and my OH no more than about £750pcm and in order to save we rented a dirt cheap flat for £600pcm. We felt that it was a price worth paying in order to buy a place of our own and far better than spunking all our cash whilst moaning about not being able to afford a house.

claire16c

DannyboyMidlands wrote: »

It's all about priorities isn't it and everybody will feel differently. To get my first deposit together I went without lots of stuff for 3 or 4 years. The same expenses that you spend £1200pcm on cost me and my OH no more than about £750pcm and in order to save we rented a dirt cheap flat for £600pcm. We felt that it was a price worth paying in order to buy a place of our own and far better than spunking all our cash whilst moaning about not being able to afford a house.

I agree that you need to give things up, but where in London could you rent a flat for anywhere near that? I live in the South but not in London and you still couldnt. My friends who live in London pay about that much for 1 bedroom in a shared house. If theres 2 of you the price generally goes up to around a grand or more. And if you live outside of London but travel in on the train to get to work like many people do where I live, there goes another £350 a month down the drain.

DannyboyMidlands

claire16c wrote: »

I agree that you need to give things up, but where in London could you rent a flat for anywhere near that? I live in the South but not in London and you still couldnt. My friends who live in London pay about that much for 1 bedroom in a shared house. If theres 2 of you the price generally goes up to around a grand or more. And if you live outside of London but travel in on the train to get to work like many people do where I live, there goes another £350 a month down the drain.

In Wallington (SW London) I rented a room for £350 pcm including bills back in 2008. Then "upgraded" to a room in Streatham for £475pcm including bills. Then I moved to the south coast and rented a 2 bed flat with sea view for £600pcm. I now work down here and wages are only around 10% lower than the London equivalent. Property is about a quarter of the price.

princeofpounds

In Wallington (SW London) I rented a room for £350 pcm including bills back in 2008

I'd never even heard of Wallington... A suburb of Croydon, delightful.

DannyboyMidlands

princeofpounds wrote: »

I'd never even heard of Wallington... A suburb of Croydon, delightful.

Exactly. It wasn't glamarous but was a price worth paying in order to buy my own place. What kind of a divvy spends loads of cash renting a flashy pad?

poppysarah

How long have you been saving?

[Deleted User]

Did you consider that your wife might want to go back to work full-time when your child is in school? Also, if you have the space and you are struggling, you can take in a lodger? I did that for a while years ago.