Buy small now or push ourselves and buy big?

SnowyPea

Hi everyone, we're in the market to buy our first home and wanted some advice.

Are we better off buying a smaller, cheaper property with the potential to turn it into a buy-to-let in future when we've got enough capital in it? Buying another home in the meantime?

Or should we scrap that and just go for a long-term home that has a larger mortgage but we stay in for a longer time? Something we can grow in to?

We have a deposit saved for either option. My worry is that - even though our salaries are great now, in future - we might not be able to turn that smaller property into a rental home.. We might need to sell it to move up the ladder.

Neither of us have our pensions sorted so we're looking to invest in something that will contribute towards our retirement.

The smaller property in question would be around £120,000 and the larger properties we like are around £200,000-£220,000.

Thanks in advance

SP :j

ruggedtoast

You'd need a crystal ball to answer that question. Just looking at the maths the more affordable your mortgage is the better, and as house prices are unlikely to be rising for some time to come you'll "lose" less on a cheaper place.

There is no point trying to guess what the mortgage will be like years from now. BTL mortgages may not even exist then, as it is it has become very difficult to get consent to let for a place you have on a residential mortgage.

I can't help but think your train has left the station.

If you want to plough equity into your savings then get the small mortgage and overpay it as fast as you can.

princeofpounds

Whatever you do, if you are pushing yourself consider very carefully fixing your mortgage rate for a long time. Otherwise you leave yourself little margin for error on repayments. It's one thing to lose the capital value of the house you live in, because it only has to be crystallised as a loss in an unlucky scenario, but failing to make repayments is a certain way into trouble.

If you can't afford a fixed mortgage rate, that is the market telling you something, because crudely-put it represents market expectations of the average mortgage interest rate over that term.

Otherwise it's just a question of risk. If you have high job security and you do not both have to be working to afford it then stretching is more understandable. If you do not, then I would be more cautious. Taking risk always paid off as long as house prices spiralled, but now that is certainly not a sure thing.

SnowyPea

ruggedtoast wrote: »

You'd need a crystal ball to answer that question. Just looking at the maths the more affordable your mortgage is the better, and as house prices are unlikely to be rising for some time to come you'll "lose" less on a cheaper place.

There is no point trying to guess what the mortgage will be like years from now. BTL mortgages may not even exist then, as it is it has become very difficult to get consent to let for a place you have on a residential mortgage.

I can't help but think your train has left the station.

If you want to plough equity into your savings then get the small mortgage and overpay it as fast as you can.

That's good advice. I guess essentially - I want to start thinking about having a roof over my head that doesn't have hefty rental/mortgage payments.

I don't want to still be working when I'm retired. A middle ground wouldn't be too bad at all. Thank you

SnowyPea

princeofpounds wrote: »

Whatever you do, if you are pushing yourself consider very carefully fixing your mortgage rate for a long time. Otherwise you leave yourself little margin for error on repayments. It's one thing to lose the capital value of the house you live in, because it only has to be crystallised as a loss in an unlucky scenario, but failing to make repayments is a certain way into trouble.

If you can't afford a fixed mortgage rate, that is the market telling you something, because crudely-put it represents market expectations of the average mortgage interest rate over that term.

Otherwise it's just a question of risk. If you have high job security and you do not both have to be working to afford it then stretching is more understandable. If you do not, then I would be more cautious. Taking risk always paid off as long as house prices spiralled, but now that is certainly not a sure thing.

We're thinking of putting down 20 percent and having an initial three-year fixed rate with the ability to over-pay. I'm not too bothered about buying a big house, I just don't want to be spending money on rent anymore. To me - it makes more sense to be investing our money into something - even if it just means we'll be rent/mortgage free by the time we retire.

I've seen my own parents and too many of their friends buy big homes, slave away their whole lives to pay them off, only to find they're too big once all the children leave the nest. And now they can't even sell them to downsize because of the way the market is.

Seems daft - or maybe I'm not seeing the big picture here - but I'd much rather get an affordable house, in a nice-ish location. One that serves my needs over 10-15 years. That I can pay off pretty quickly. While having a nice life, nice holidays and more money leftover to put into savings.

I've been on the housing ladder before. The house we bought was way too big for our needs. We just filled it up with loads of 'stuff' that essentially we didn't need.

If I'm ever lucky enough to finally get pregnant, I'd be happy with one. A two-bedroomed house for two adults is perfectly fine. Especially when you look at the tiny apartment we're living in now - in this big city.

I guess I'm just trying to figure out what's best for our needs. We are lucky to go down either road. I suppose it really comes down to what we're after.

Thanks for helping me figure this out!

Mrs_Z

Just to add that often the requirements for BTL and residential home can be somewhat different. Nothing to prevent you to start with a smallish property to start with (as your home) and see how it goes. By paying off the mortgage early gives you options in the future! YOu can upsize later on or if you like it, stay where you are and still get another BTL property. That's what we did. We can't decide where to move (area) and whilst an extra bedroom and bigger garden would be nice, they are not necessities. In the end we ploughed the deposit/moving money into a 1 bed BTL flat.

ReadingTim

SnowyPea wrote: »

Neither of us have our pensions sorted so we're looking to invest in something that will contribute towards our retirement.

I don't know what sort of pensions you mean (personal or occupational), but I don't think you should be ignoring them in favour of property... (and if you're not contributing to an occupational scheme, you're potentially throwing away the employers' contributions, which is wasting free money!)

princeofpounds

We're thinking of putting down 20 percent and having an initial three-year fixed rate with the ability to over-pay. I'm not too bothered about buying a big house, I just don't want to be spending money on rent anymore. To me - it makes more sense to be investing our money into something - even if it just means we'll be rent/mortgage free by the time we retire.

Your feelings make total sense, but do be aware that buying with a mortgage is renting money from the bank instead of renting a property from a landlord. Doing the former is not any better than doing the latter unless a) house prices rise in real terms and/or b) mortgage interest rates are or become suppressed. a) is not likely to happen, but b) is more arguable given what the bank of england have been doing.

It's not necessarily a good time to buy a house, but it might not be a bad time to get a cheap mortgage if you have the necessary deposit.

3yr fix is great, but it's not a long timescale. In 3 yrs your outstanding principal will be similar to what it is now. Perhaps that gets eroded ~12% in real terms due to inflation (3x4%) but your wages will probably not inflate with general inflation if it is that high, and if you then have to pay 7% interest rates on exit (not too dissimilar to the long term average in UK) that would probably be a 100% rise in payments which kind offsets the of inflation benefit.

The point I am making is not to force you to fix - variable is totally fine as there is every possibility that interest rates will stay lower for longer than expected - but just to give you a sense of the safety buffers you might wish to incorporate. If you can afford a 10yr+ fix, then by all means go and get a 3yr if you think you'd prefer to take more interest rate risk.