Smaller mortgage vs larger mortgage for desirable location & property

Moonraker71

If anyone doesn't mind wading through this, could you help me see the wood for the trees? Trying to work out the best thing to do - from both a head and heart point of view.

Basically I'm trying to decide whether to be sensible and keep my borrowing down as low as possible (but make several big compromises on the property I buy in terms of size and location) or take out a larger mortgage in order to get the home I really want.

Dilemma is this: I have AIP with Woolwich for max of £132,000 (I also have £123,000 deposit) and get to keep excellent lifetime tracker on £86k of that amount (am porting existing mortgage). However, am really struggling to find a property within £255k budget. Looking for a good size 2-bed ground floor (non-basement) flat with good layout and private garden. (Soooo expensive where I live). Most are around the £275-320k mark. Been looking and researching for six months and prices are just skyrocketing.

On the other hand, Natwest (assuming they accept me) will let me borrow £218k according to their calculator!! (I don't want anywhere near that much). But I could borrow, say, £157k for a £280k property and still be within 60% LTV. But would this be madness - giving up a lifetime tracker for a 2 year fixed and taking on even more borrowing? And I'd have to use up my couple of ISAs for stamp duty too. However, by doing this I could get the home I want. I may well be living there for a decade or more so it's really important for me to get the right place.

I see my options as:

- Stick with the Woolwich. Have a smaller mortgage, much better rate, and move away to a different cheaper town (a genuine option as I work from home and have no dependents) and get the type of property I'm looking for elsewhere (but not know anyone) OR buy a smaller place here with maybe just a balcony instead of a garden. (But getting a garden is the whole reason I'm moving!! Haven't had one for 20 years!!)

- Stay where I am (where I really want to be and where my friends and family are) but take on a much larger mortgage to get the type of property I'm looking for.

In terms of monthly repayments, either option is well within affordability. I suppose I'm thinking of a longer term view. The first option I could keep the mortgage term around 18-20 years, the second I'd have to go back to 25 years. I'm 40, so no spring chicken.

Arrghh. I just cannot decide what to do. My heart is saying location is the most important thing, but I'm a natural born worrier about money.
PS. I live in Hove.

monty-doggy

You need to consider what would happen if your income was to reduce for any reason, could you afford the upkeep and repayments of a more expensive property? Do you want to be tied in for 25 years?
Or if you love the area and find the perfect property, is there an option to overpay so you don't have the full 25 years?

Have you spoken to an all of market broker to make sure there isn't a rate as good as what you have now or better? With the deposit you have I should think there will be plenty open to you!

Moonraker71

Monty - yes. My income decreasing in the future is a genuine worry as I'm self employed, but my mortgage payments on a new property would be roughly a quarter of my current income so I feel I could cut back if I needed to and make overpayments initially.

Def need to speak to a broker. Spent an hour on hold to L&C earlier but got bored!

monty-doggy

I'd go for an independent with whole of market access. Best by personal recommendation! Good luck!

kingstreet

I'm surprised there's such a big difference between Woolwich and NatWest. In my experience, both tend to top out at 5x(ish) gross annual income, less credit costs, childcare/dependents etc.

How have you reached this NatWest figure? Run the data through here and tell us what you get back;-

http://intermediary.natwest.com/tools/calculators/calculator.asp

Moonraker71

Hi Kingstreet. Thanks for that. The figure comes out the same at £218,122.

However, I think I've just discovered a major snag which probably cancels out all the above. I'm self-employed (2 yrs accounts) and my Woolwich AIP of £132k is based on 4 x net profit of my most recent year (4 x £33k).

Natwest's calculator on the other hand asks for average gross earnings over the last two years.

In my first year of self-employment I earned more than I did in my most recent year because I landed a one-off, short-term very lucrative contract during that year in addition to my regular work. Woolwich wouldn't allow me to include that first year to base the AIP on - only the most recent year.

However, I've just read this in Natwest lending criteria "Will consider declining profits? NO"

So does that mean they won't consider me at all, or that they will only accept the second year too?

Here are the actual figures:

Tax year 12/13: Turnover £37,723 / Net profit £33,047

Tax year 11/12: slightly more complicated. Total turnover £55,824, which was made up of £12,351 PAYE (didn't go self-employed till August of that tax year) plus self-employed turnover of £43,473 and net profit of £35,983 on that.

For the Natwest calculator I put in an earnings figure of £46,773 which is an average of the gross earnings of both years (£55,824 + £37,723).

As I said, I don't need anywhere near the £218k figure, but would there be anyone prepared to lend me around £160 - £170k? Thanks for your help.

Moonraker71

Monty I agree but I don't know anyone who can recommend someone - I've asked. All my friends went straight to their bank or did it with the EA. Feel L&C might be better bet than plucking someone out the phone book -? Anyone in the East Sussex area who can recommend someone, feel free!