Borrowing Advice

TheGame21

Me and my partner are first time buyers and we are currently looking at purchasing our first home. The area we are looking in has quite high prices and we are concerned about stretching ourselves. We are currently considering a property worth £335,000 and if say we can get it for £315-320,000, we could potentially afford the deposit of around 15-17% however will be looking to borrow around £260,000+. We are also considering family planning and the costs associated with this if my partner goes onto maternity leave. We are desperate to buy a property however do not want to get over stretch ourselves. The added problem is that we cannot discuss possibly monthly repayments until we make an offer however we don't want to then mess vendors around if we then pull out due to the mortgage. Do people have any advice on if this is too much borrowing?

hamster2013

well the key elements you havent given, and which the bank will ask first is what you and your partner earn + what your current loans/ financial debts are.

to buy a house at £320k with a 15% deposit, means in terms of breakdown:

house: £320k
stamp duty: £10k
15% deposit: £48k
legal+bank fee's: 3k
(i have rounded figures up to give some contingency)

so:
total borrowing needed: £272k
total cash needed: £61k

so step 1: you need £61k cash

now, step 2: to borrow £272k I will assume you are in your early 30s so can borrow up to 30years.
at an interest rate of around 3% - that would mean a monthly payment of £1146.

a lender will stretch up to 4x your annual wage if you are a single application
so you will need to earn £68k gross annually


however, if its a joint application, im not 100% sure as each lender varies, but lets say 4x your wage + 2x that of your partner,
in that case you would need to earn 50k and your partner 35k

scenario 1:
you earn above £68k - meaning you net £3860ish... (excluding pension contributions... so take that into account please) - if you pay the £1146 you are still left with a good solid £2700 to bring up your kids and run household - it should be doable comfortably.

scenario 2:
you earn 50k and your wife 35k.... but your wife stops working after you have got the mortgage... so household income is 50k
which means a net of around £3k (again excl. pension) - after the £1146 you are still left with £1.9k
you can still live comfortably with that amount of monies if you spend cautiously but your savings will take a hit.

TheGame21

Many thanks for your reply and apologies for the lack of detail. I've had an informal discussion with the bank and based on the information which we've provided they have said the max we can borrow is £277,000. This the extreme though as its 5x joint income. Our income is lower than you've speculated. I only earn £26,200 and my partner around £29,000. However if we have kids and for any reason my wife has to stop working, we are worried that if she does, my current income alone is not going to be enough. Currently we have decided against going for this house even though we really want it. May I ask how you have calculated the monthly payments? Also the interest rates for mortgages seemed to be above 3%. So what would your opinions be with the information provided above?

Thrugelmir

Lower your sights to a property far cheaper. Start on a lower rung and as money allows over time. Move up the ladder. Decide which is your priority as well. Family or property. As you don't have the income to do both with the plan you've outlined.

xyz123

OP you are right to ask the question. We had a slightly similar situation though with higher salaries than yours. We bought a house for £350k. What we felt comfortable was that we should be able to make mortgage payments with just one salary coming in, should something happen to our jobs. in addition we keep 6 months mortgage payments as savings.

Based on your salaries you realistically need to look at the lower priced properties. I am slightly surprised a lender has agreed to give 5 X joint income. they usually restrict to 3 to 4 times joint or 5 times for single applications.

Do a budget first. there is a tool on this website. Include possible future expenses with child and then see how much you can afford towards mortgage payment. then decide.

TheGame21

The chat with the lender was just an approval in principle however he did point out that figure was the max depending on checks etc. I know you are right and I did think it was a bit too much but wanted to see what other people thought. We have done a budget and that's where we had concerns. What do people think is the highest we should be aiming for? we currently have around £63k of savings. Also how much do people account for children when doing a budget?

DoubleOhScrimp

TheGame21 wrote: »

, we could potentially afford the deposit of around 15-17% however will be looking to borrow around £260,000+.

I think you will find a dramatic difference in monthly repayments for a 20% vs. less than 20% deposit.

TheGame21

DoubleOhScrimp wrote: »

I think you will find a dramatic difference in monthly repayments for a 20% vs. less than 20% deposit.

The amount of borrowing was the major concern.

kingstreet

Use lenders' affordability calculators to run different scenarios, such as loss of one income and a couple of kids and see how the output changes.

Use the mortgage calculators to see monthly payments at different borrowing levels, and use more realistic long-term rates, perhaps 5% to get a better feel for what is affordable to you.

hamster2013

TheGame21 wrote: »

What do people think is the highest we should be aiming for? we currently have around £63k of savings. Also how much do people account for children when doing a budget?

your combined earning is 26+29 = £55k
I would not borrow more than £150k on that ground- considering you want to start a family and your spouse might have to leave work for a considerable amount of time.

I would keep 10k on the side from your £63k saving for that period of time when she is not working.

That would leave with a £150k mortgage + £53k cash.
if you look at a house worth £200k, that only gets a 1% stamp duty - so 'only' £2k + £1k various fee's - so your deposit is of 50k
that means you are on a LTV of 75%
you should without much difficulty secure a 3% interest rate - if not better, which means over 30 years, your monthly repayment would be £632 - the 10k you kept aside will allow you to pay the mortgage without stress for atleast 15-16 months before you have to start digging in your savings or tightening your belt - therefore your wife might already be at work by then.

now - as for cost of a child - that depends on your lifestyle.
simply put- if you need a new car because you have a 2 seater, or when you go on holiday - count for an extra ticket (with low cost airlines, its as expensive as an adult.... )... milk/nappies etc
all these are the 'minor' costs I would consider - as they can be covered if spent cautiously - i.e stocking up on nappies when there are sales or baby events in supermarkets

however, a cost that will be considerable, if you do not have family support (a retired granny for the child) is child minder cost.
count anything from £5/hour to more.
So if your child is with one for 8 hours a day, that is £40/day at least, i.e £200/week, i.e £800/month.
there is a contract with a child minder, where they are entitled to paid leave or benefits as such, you should keep that in mind. and if your child is sick or you take a day off, or you go on holiday -depending on how flexible your child minder is, or how you negotiated the contract, you will still need to pay them. I managed to negotiate with mine that when I take holidays- so does she. that said, she doesn't have any other child but mine.

so this is a cost that lenders think of when they think of joint application and family planning.

now, your wife earns currently £29k, which means she nets in roughly £1870/month. If she continues to earn that after child birth (i.e she can afford to do same working hours - full time...etc) then almost half her pay will go towards the childcare, and remainder towards mortgage payment.
which leaves your 26k/annum to run the household - and saving and other expenses.... which should be able to be managed 'comfortably'

TheGame21

Thank you very much for your reply Hamster2013:), we are now looking at properties valued lower and have some possible interests. The are we are looking at is still pricey. The latest house we are looking would require borrowing of upto £160-170k and we need to buy an additional car. I've been looking at Co-Op mortgages as they seem to have more fixed lower rates aligned with the BoE. Do you know any better places? I would also be looking to not have a mortgage for 30 years and try to have it for 20 or 25 at most, I know that is additional monthly payments.

Whether we have possibly 'granny' support depends on my in-laws moving a bit later so that may be a possibility however not guaranteed. We have discussed reducing my wife's working week to 3 days and then paying for childcare for the remaining 2 days. For holidays we could possibly take leave or use in laws. Do you hire a full time childminder and not drop your child off at a nursery? Those figures hit home at how expensive it is to have a child.