Planning to buy in a year's time - is our plan sensible?

Whirlybob

Hello moneysavers,

I'd like to know if our plans are sensible and whether anyone has any suggestions for us.

We're planning to become first time buyers next summer/autumn.

It looks like our first rung is going to be quite a step - prices around here for what we're looking at are around the £300k mark.

Currently we have about £15k in savings and a £50k inheritance and are saving around £1200 a month (or have been for the past 4 months at least).

I'm employed full time on a base salary of around £47k and my dear missus is self-employed earning around £11.5k pa (this is her net profit as reported on her tax return) although her earnings over the past couple of years have been lower due to her being out of the country. She's back now and we expect her earnings to be stable from now on.

I've done a few affordability quotes and they all come in with a maximum loan size of around £240k.

That, coupled with our savings (15k) plus anticipated future savings (14k) plus inheritance (£15+14+50 = £79k) would give us a total moving fund of around £319k. Most of our savings are locked up until at least May 2013 or so.

Currently we are sitting on about £7k of credit card debt, but that's all at 0%. Adding up our total credit card limits and overdrafts comes to a total of £26k in credit lines, leaving £19k credit available and unused.

Taking around £9k of stamp duty :mad: and maybe £5k in fees & other expenses (is this reasonable?) that would leave us with either £65k cash for a deposit or £58k if we pay off all the credit cards.

So, a £58k deposit and £240k loan would bring us in roughly on budget with an LTV of almost 25% (so, 20%) which seems afffordable to me - currently we're paying £1050pcm in rent, and repayments on a repayment mortgage of that size look to be around £1300 a month.

The main complicating factor appears to be my wife's immigration status - she's currently on a 2 year limited leave to remain visa as a spouse, which should become indefinite leave to remain at the end of August 2013 (whoops, another expense of £1400!).

Her earnings have also been rather variable over the past few years, but from the quotes I've had so far the lenders appear to be OK with that. Natwest took the average over the past 2 years on their website calculator, for example. They all seem happy so far to take self-employed earnings provided there is official documentation. She's been self-employed for 4-5 years and her earnings have been stable apart from the past 18 months.

So, given all the above my plan looks something like:

Cut the credit - cancel some the cards we don't use. Pay off the 0% deals as they come to an end (they will all have expired by next August). Is there any benefit to doing this early to give it time to filter through to our credit file, or is it OK to leave it to (say) next July just in case the unforeseen happens? Does it make much difference?

Use a broker - they should be able to help us get the best deal, what with one of us being self-employed, right?

Start looking for properties when we get back from a holiday (already booked & paid for) next March (5 months should be enough time, right? ).

The limiting factor for our borrowing seems to be earnings at the moment - I think I'd be happy taking a 15% LTV mortgage if they'd lend more. There might be a small raise & bonus in the works before now and next August, but let's assume not. I changed jobs at the start of last year.

Savings at the moment are spread across regular savers (FD and HSBC at 8% and 6% gross) and ISAs paying ~3%. I haven't factored the interest into the above - it's not really going to amount to much.

I'm happy to put all our cash into the house move as if we have an unexpected need to borrow we can go to family or maybe a 0% credit card temporarily. That first month can be beans on toast and soup with a sprinkling of sawdust and the aroma of paint fumes.

Am I right in thinking that mortgage provider will mandate that we take out buildings insurance (we have contents insurance at present) and life cover?

How much should we rely on the affordability quotes that lenders provide? How much do they tend to differ from reality?

Sorry for the length of the post - there always seems to be so much to cover!

ShALLaX

It sounds like you could get away with this (you seem to have given it a lot of thought). It seems a tad tight, though. I always keep some float available for emergencies as I wouldn't consider it fair to rely on my family for that, nor would I want to put such things on credit - even if it is 0%.

I'm not too sure about your partners earnings. I'd think you'd need to demonstrate some consistency rather than simply saying that you "expect" the earnings to be stable. Even at earnings of £60k per annum, £240k seems like a stretch (by your own admission, it's right at the top end). Have you worked out what the cost of a mortgage would be at your likely interest rate? Could you afford it if the rate went up? What if your partner's earnings don't pan out as expected?

You're right in assuming that building insurance will be required, however, life insurance is not.

What about expenses after moving, such as furniture (or do you have all the furniture you require already)? What about moving expenses? I think I spent around £10k immediately after buying my house on turning it into a home as it was my first place and I had no furniture (or even floors!)

I'd definitely be clearing down the credit cards ASAP to avoid potential issues later when applying for a mortgage.

Thrugelmir

Whirlybob wrote: »

Start looking for properties when we get back from a holiday (already booked & paid for) next March (5 months should be enough time, right? ).

As your not in a position to apply for a mortgage. Then rather to early. Vendors aren't going to wait 5 months too see if you can obtain a mortgage.

Whirlybob

We have some furniture - a bed, officey chairs, desks, coffee table, etc.

The main bits of furniture I think we'd need would be a dining table, chairs and sofa as well as white goods.

My parents have already offered to lend us some money if we need it to get started. They're both retired and have their savings so as long as we returned it by the time they needed it, it'd be fine.

One card at £2.6k of debt will be going next month.. the other two are due July 2013 and Oct 2013 (£2k and £2.3k respectively).

Our credit files are spotless, which is presumably a help. We're both on the electoral roll and our names are on the council tax, bills etc.

At the moment, we're saving £1150 without scrimping too much. No expensive holidays or big luxuries, but we're comfortable enough. I'd say if the repayments were much above £1800 it would begin to compromise our ability to put some money aside each month.

Saying I "expect" my partner's earnings to be stable is more that I expect her tax return in April 2013 to show earnings of at least £11.5k and the reasons for her earnings being unstable in the past are behind us now and she will at least have a full year's earnings to show any lender by April 2013.

I know it's a tad tight, but I was thinking at least if we're starting with £0 debt (student loan's paid off finally!) and a 20%+ deposit we might get away with it. I think we're constrained by Mrs Whirlybob's immigration status to not be able to do anything until at least Sept 2013 anyway so that's some expectation management right there!

Current rates appear to be around 3.9%, 4% for a 25 year 240k mortgage with 80% LTV. Who knows where they'll be in 12 months..

Thrugelmir

Whirlybob wrote: »

Current rates appear to be around 3.9%, 4% for a 25 year 240k mortgage with 80% LTV. Who knows where they'll be in 12 months..

One day interest rates will return to more normal levels. Will you be comfortable if rates were to rise to 6% -7%.

Whirlybob

7% would put repayments on a 25 year, £240k mortgage at around £1700 a month.

Yes, I think we could live with that. Like I say, £1800 would probably be the point at which we'd begin to think about affordability. That equates to an interest rate of £7.7% for the above.

In fact, if we were paying £1300 per month (~4.2%) we'd probably overpay or set aside £300 a month.

I view our current rent + savings as a mock mortgage and that totals about £2200 a month and has been that way since the last of the wedding bills came in.

One thing I didn't mention was that we plan to start a family - presumably adding a dependent counts as a change in circumstances and therefore we'd need to tell the lender and they might change the deal?

thegirlintheattic

Could you afford the mortgage with the addition of children?

Children cost a lot and would also mean your partner would be off work for at least some time. You need to factor it in.

Whirlybob

I think we'd do it the other way around - work out if we could afford the child(ren) on top of the mortgage

I know children cost a lot (although I'm sure it will still come as a surprise just how much), hence the £600 "buffer" between what we're "spending" now (£2200pcm) and what we'd likely be spending & saving for the mortgage (£1300+£300 = £1600).

Does that seem too tight?

Have to say, it's brilliant that I can just put these questions out there and you guys are taking the time to reply.

Supreme_2

I would be holding back £15k-£20k for savings. You dont want to stretch yourself and have nothing to fall back on!

ShALLaX

As I said, it sounds like it's possible for you to go ahead with this, but it leaves you very little wiggle-room in the event of your circumstances changing. I only pay about £428 per mensem for my mortgage (with about an extra £200 for bills/ utilities and maybe another £250 for groceries, fuel and various sundries - I guess I'm pretty tightfisted with spending money when I look at it in actual figures!) The point is, don't look at just your mortgage, also consider monthly and annual expenditure (bills, utilities, insurance, council tax, car running costs, home improvements...)

I earn a similar amount to your combined income but I then plough the rest into overpayments on my mortgage (hoping to pay off my 30 year mortgage in about 4 years). If you're happy to let your mortgage (mostly) run its course and feel you can afford the inevitable rate rises (on top of whatever else life may throw at you), then your plan seems achievable.

I always keep back £10,000 in an ISA in case of emergency. You should strive to have enough in savings to be able to live for at least six months in the event of your income becoming nil.

As already stated, don't start looking for a property too early, you need to be in a position to proceed with a purchase to be taken seriously. This usually comes from getting a mortgage agreement in principle, though this is not a guarantee that you will actually get the mortgage requested.

Whirlybob

I'm definitely content ("happy" might be pushing it!) to let the mortgage run its course - if we don't buy, we'll be stuck renting at over £1000pcm which is something I've been doing for nigh on 8 years in London now and I'm fed up with it.

The way I see it at the moment is that even with pessimistic figures, we could cut our accommodation expenditure in half (i.e. paying interest on a mortgage instead of paying rent).

Looks like it's time to start cancelling some unused credit cards - First Direct gave me one about 3 years ago. It's had one transaction on it, which was more to see if it worked than anything else!