Am I mad to want an unnecessary mortgage?

WashingTime

After a decade of working and saving hard, we are thinking about buying a house.

Ages: 29 and 28
Salaries: £32k and £25k
Total savings: £260k spread across bonds, S&S ISAs etc.

It's likely that we would want a house for around £250 which means we could obviously buy outright.

But to my mind, that seems stupid. If I can borrow say £100k @ 2.99% over 5yrs (or 1.99% over 2) with Yorkshire BS, surely I should have a reasonable chance of beating that significantly with investments?

One final question - do you know of any simple way to incorporate all of the "associated" mortgage fees into the whole price (arrangement/booking/survey costs)? It drives me mad not getting a simple number that I can use to compare!

somethingcorporate

As long as you are comfortable with that level of debt and can access the savings if you ever need them then I think your idea is reasonable.

Credit for mortgages is as cheap as it will likely ever be and you should be able to beat that 2% mortgage in easy access accounts.

You are right to be mindful of the impact of charges on your calculations and also that if you do go for investments you need to be considering long-term time frames (10 years plus) otherwise risk being forced to cash out at a low point.

Edit: being a genuine cash buyer does make you a very rare beast so will be able to potentially access better levels of savings in negotiating to buy a house, this is also something worth bearing in mind.

marathonic

If your investments and house prices were to drop by 20% over the next two years and rates were to rise to the long-term average of 4%, your balance sheet would look like this:

Initial
Salaries: £32k and £25k
Total savings: £260k spread across bonds, S&S ISAs etc.

Future
House Purchased for £250k: Value £200k
Mortgage of £100k at 4% (less the small amount of capital you’d have repaid in the early years)
Investments: £88k (£110k remaining from current investments less 20%)

In other words, if you’re willing to accept the risk of having the house but not enough investments to pay off the mortgage (about £15k short) in return for the potential reward of the increased potential return, go for it.

getmore4less

WashingTime wrote: »

One final question - do you know of any simple way to incorporate all of the "associated" mortgage fees into the whole price (arrangement/booking/survey costs)? It drives me mad not getting a simple number that I can use to compare!

The easiest way is to add the fees to the debt make the payments the same and you get the break even date by looking at the amount owing month by month.

Depleting all your casha may not be the best option and for a one off cost you can set up a cheap line of credit for the next 25-30 years.

One option that allows you to move the cash from the mortgage to investments and back as returns vary is by getting an offset.

If you go 100% offset it will cost nothing(ither than setup costs) and you can then look for the investments.

WashingTime

If house prices and investments were to fall 20% I'd be doing cartwheels!!!

Because there's this really nice house that I'd like that's worth £500k at the mo.

That would fall to £400k. I'd only have to extend my mortgage by another £20k to buy it. :T

If prices were to rise 20%, I'd have to double the mortgage to afford the same place .

With life as it is, I'm not sure we're likely to see either of these extremes. Something down the middle would be fine with me though so I think I'm gonna go for it!

But I do have two very practical questions for the mortgage insiders:

i) How can I best take account of the whole price of a mortgage product including its rate, arrangement fee, booking fee, legal fee etc.?

ii) How little do I have to tell an Estate Agent about my financial position in order to submit an offer and convince them that I am a genuine cash buyer?

ValHaller

Even if you don't borrow to invest, it is a good idea to buy on a small mortgage. It ensures that the property you buy is mortgageable. As an FTB with funds to buy outright, beware - EA's can often see you as an opportunity to offload unmortgageable property - which might only come to light when you try to sell.

marathonic

WashingTime wrote: »

That would fall to £400k. I'd only have to extend my mortgage by another £20k to buy it. :T

Where do you get this figure? With 20% falls across the board, I see your future net worth as £188k - meaning finding an extra £212k and a total mortgage of about £300k - £310k. That's almost 5.5 times joint salary and would not be possible.

Look at the figures under the Future heading above.

Whatever you do, make sure you understand the maths before you do anything

WashingTime

marathonic - on looking at the figures again, I think we're both wrong!

400-188= 212 total mortgage (i.e. existing one of ~95k + new one for ~117k). That would be about 3.7x earnings, which is just about ok.

To put that in perspective, I would currently need to borrow ~240k to buy the £500k house (before fall) which is 4.2x earnings.

Motto: I'm still a relative winner on the housing ladder if there's a crash. But I'd feel more of a winner if there's a boom.

Good old behavioural economics!

marathonic

Yeah, you're correct on rechecking the figures.

However, should you buy the current house cash and experience a subsequent 20% drop in investments and house prices, your house would be worth £200k, your investments would be worth £8k and you'd be mortgage free.

That'd require a new mortgage of £192k.

FWIW, I reckon 3.7x earnings would be tough in todays market - but doable.

somethingcorporate

WashingTime wrote: »

ii) How little do I have to tell an Estate Agent about my financial position in order to submit an offer and convince them that I am a genuine cash buyer?

This differs EA to EA.

Let me illustrate with a little personal experience story.

A house was for sale for £320k. We offered £300k and had no chain but were buying with a mortgage. Competitive bidder bid £300k but was a B2L investor. We were told that the seller would rather sell to a family.

On the day the seller was to make the decision the EA rang us to ask for proof of deposit so they could "recommend" our offer as being genuine. My wife was on business in Switzerland and I was out of the office for a week and our money was spread across a number of accounts - neither of us had access online to everything to pull it together, especially not in the 2 hours we were given by the EA.

We couldn't get any level of proof to them in time and the seller accepted the other party's offer.

You live and learn!

Oh yes, a piece of advice, do not trust an EA as far as you can throw them. You'll know when they're lying as you will see their lips move.

WashingTime

Somethingcorporate - thanks, that's really interesting.

Out of interest, what proof of deposit did they require? Do they actually want to see the zeros on a bank statement?

Ultimately, when you get into the realms of talking about house prices 200k+, everyone knows there's always room for another thousand here or there. The question is though what the buyer is prepared to pay.

All this EA rubbish makes the auction route look more interesting. Does any wonderful person know if I could take a mortgage out on a house after buying for cash at an auction?