Help req - budgeting for rise in mortgage rate interest as a FTB.

JustAnotherSaver

We will soon be FTBs (i say soon - hopefully). We have an unusual deposit for our situation (in that we've both just turned 30, the wife earns £16.2k & i earn £18.5k (£4.5k of which is overtime)), but due to hard saving over the years we have £50k deposit. This has enabled us to afford a mortgage higher than what most others our age & situation can. Obviously this is a positive, but the negative to this is that it's given us a distorted view of reality. We have spent months looking for houses that we can afford to buy, budgeting on what we can afford to be spare each month.

But then last weekend the realisation hit - what we can afford NOW, isn't necessarily what we can afford tomorrow.

Before it's said, i understand nobody here possesses a crystal ball, but at the same time i'm hoping there's people who can talk from experience.

The way i see it, bills will be bills. Mobile phone will cost £10pm wherever we go. Freesat will be free wherever we go. Car tax will be car tax wherever we will go, but there are things that we can massively change ..... council tax is one, depending on where we stay, but the big one is the mortgage repayments. A £120k house with our deposit wont be costing nearly as much as a £160k house each month.

I've looked at a few sites, & i'd link you to 2 but i'm not allowed. 1 is a 2011 article from the guardian "interest-rates-financial-ruin" & the other is "house price crash dot co dot uk" & the "graphs base rate" extension to that URL.

I believe so/too many people these days are buying right on the brink of what they can afford, when rates are so low. So it's my belief (yes, with my years of knowledge! :rotfl:) that when rates start rising there'll be so many people having their houses repossessed as they can't afford. This is obviously something i'm wanting to avoid while at the same time, not being TOO cautious.

I don't really know how a rise in mortgage rates would link in with a rise in savings interest rates (if at all) and how that could lessen the blow.
To those who say - but your pay rises will help you with that. Well news for you is that since 2003 i've had 2 pay rises. My last was in 2007 which was 10p. The company tell us they can't afford it - yet they can afford to give damn near every other dept a pay rise & buy themselves £50k cars every few years, but that's by-the-by. So the only time i expect a pay rise is when minimum wage catches us up.

One of those sites showing in 1998 the typical variable being 9.25%. That'd be a huge jump. I wonder if when the rates start to rise would it be gradual or a huge spike. That'd be crystal ball territory though.


So, bottom line here is how on earth can you plan for it? Which in turn would then help us to get a better idea of what price bracket house we're looking at.

R_P_W

You can plan for it by either planning to increase your income or overpay your mortgage so that any impacts of a rate increase are minimised where possible.

You earn 30k excluding your overtime. If that was me I would be looking at the 120k properties rather than the 160k ones!

JustAnotherSaver

I just plucked 120 & 160 sort of out the air. The £160k would've been really top end of what we could've afforded. The most we can borrow is £174k + our deposit of £50k, but then who in their right mind would live right on the edge?
There are houses for £120k around these parts, but they're in quite rough areas. To get something semi decent you're looking at the £130k-£140k bracket, but this takes you awkwardly over a bridge which divides 2 towns & is bottleneck at tea time. Living on the cheaper side would in turn push fuel prices up for us with travelling to work, so we need to look at the long term whole package.

Getting back on topic, increasing our income is going to be zero chance. Short of lotto win or quitting our job to take the risk of training in something else & hoping there's a job at the end of it.

Which leaves us at your other suggestion - overpaying mortgage. I was wondering how this worked...

Say you take out a £100k mortgage for 5 year fixed @ £500pm. Let's say by the end of those 5 years you've also overpayed an additional £10k. So that's £30k in your monthly fee + £10k overpayment totalling £40k.
Your fixed term has now ended & you're on the hunt for the next best deal (probably another fixed as we like set amounts). How is this calculated when you come to renew? Do you repay on the original £100k still or is it now on a figure of £60k (i know it wouldn't be £60k due to the interest, but for arguments sake...)? Which even though mortgage interest rates could've risen, it may mean that your monthly payments haven't (or even ideally gone DOWN) because your mortgage has decreased?

Have i got the right or wrong idea there? Would like to know the response to that one before i follow up with the next query.

Thanks.

R_P_W

You will pay very little off the capital in the first few years. So for example, you had a 100k mortgage you might have paid 30k in payments but maybe only 5k off the capital.

So if rates rise the interest will be on the 95k in 5 years time. If you doubled your mortgage payment and paid an extra 500 a month for 5 years, you would pay extra 30k off capital. So in 5 years your mortgage would be 65k rather than 95k. So any rises would have less impact. Also you will save a shed load in interest payments and pay your mortgage off much quicker

JustAnotherSaver

I knew about that one which is why i said for arguments sake, but thanks for clarifying as that was helpful.

When there is a cap on overpaying (i see 10% mentioned quite often) can i check i've understood that one proper - Say the mortgage is £100k & you're paying £500pm & you can overpay up to 10%. Is this of the full mortgage (therefore you can overpay up to £10k per year)?

Another thing your post made me wonder - you seem to suggest that your monthly payments go towards paying off interest and capital (knew this already), BUT that overpayments go towards paying off totally the capital only & not interest. Is this correct, or was it just correct for your example & that it can go towards capital, interest (pointless?) or capital & interest if you so wish?

Yorkie1

Overpayment limits will be defined in the particular product's T&Cs, but it is often 10% of the balance at the start of the e.g. calendar year.

If you have fears about coping when interest rates go up, you could try seeing what your repayments would be at 6% interest rates, and how affordable that would be. Overpay to that amount (if within limits) and then, if rates go up, you're already used to spending that amount.

But don't focus solely on overpaying the mortgage. Make sure you have about 6 months of outgoings in emergency savings, and also look at other issues such as pensions.

JustAnotherSaver

Yorkie1 wrote: »

Overpayment limits will be defined in the particular product's T&Cs, but it is often 10% of the balance at the start of the e.g. calendar year.

Risking seeming dim here, but what is "the balance"? Is it the mortgage (as in the above examples - £100k (so £10k overpayment is allowed) or is it some other figure (such as the £500pm (so £50 overpayment is allowed))or is it something else altogether?

If you have fears about coping when interest rates go up, you could try seeing what your repayments would be at 6% interest rates, and how affordable that would be. Overpay to that amount (if within limits) and then, if rates go up, you're already used to spending that amount.

Good call

But don't focus solely on overpaying the mortgage. Make sure you have about 6 months of outgoings in emergency savings, and also look at other issues such as pensions.

I've discussed this with the wife recently. She generally leaves the money matters to me as she has a lot more difficulty wrapping her head around it (but does try to understand & i always try to explain everything as best i can). I said how before any overpaying was to get done that we would need a minimum of 6 month emergency fund in place. Ideally a 6 month each fund (so 12 month combined).

We currently don't pay enough into our retirement (S&S ISA) plan (£100pm each) but this is because the bulk of our savings is going towards building the deposit. Once we move out, our retirement fund needs to start getting bigger contributions due to us only starting it when we were 28 & 29.

Thrugelmir

JustAnotherSaver wrote: »

This has enabled us to afford a mortgage higher than what most others our age & situation can.

Larger deposit doesn't equate to a larger mortgage. As the mortgage offer is based on affordability, i.e. your income. Buy sensibly well within your limits and overpay the mortgage. Your dream home can follow later.

JustAnotherSaver

Thrugelmir wrote: »

Larger deposit doesn't equate to a larger mortgage. As the mortgage offer is based on affordability, i.e. your income. Buy sensibly well within your limits and overpay the mortgage. Your dream home can follow later.

True

But in turn, a large deposit will help us to afford a higher mortgage. Continuing with the £100k mortgage theme, the monthly repayments on that would be so much higher if our deposit was say only £10k, which would maybe mean that we couldn't afford a £100k mortgage & only instead a £70k mortgage.


As for dream home - we're really not looking to move. It costs money, so wherever we decide to move to as our first home we plan on that being very very VERY long term. Things chan change, but those are the plans now.


As an aside i wonder how people of the future will be able to afford their homes.
My parents bought our house for £20k in the 80s. It'd probably be worth about £180k now at a guess. I doubt either of my parents wages for their jobs at the time would've increased by x9.

So with people coming in to those jobs & other low-average paid jobs, i wonder if the only thing they'll be affording is a small box somewhere & the only folk affording houses will be the rich.
Even bringing it forward from the 80s - the house we viewed the other week was built in 2001 & sold for £80k. 7 years later it sold for £180k. I know my ages sure haven't doubled in 7 years. In fact my hourly rate only went up 10p.
So i wonder what those in the future will be able to afford.

R_P_W

JustAnotherSaver wrote: »

True

But in turn, a large deposit will help us to afford a higher mortgage. Continuing with the £100k mortgage theme, the monthly repayments on that would be so much higher if our deposit was say only £10k, which would maybe mean that we couldn't afford a £100k mortgage & only instead a £70k mortgage.


As for dream home - we're really not looking to move. It costs money, so wherever we decide to move to as our first home we plan on that being very very VERY long term. Things chan change, but those are the plans now.


As an aside i wonder how people of the future will be able to afford their homes.
My parents bought our house for £20k in the 80s. It'd probably be worth about £180k now at a guess. I doubt either of my parents wages for their jobs at the time would've increased by x9.

So with people coming in to those jobs & other low-average paid jobs, i wonder if the only thing they'll be affording is a small box somewhere & the only folk affording houses will be the rich.
Even bringing it forward from the 80s - the house we viewed the other week was built in 2001 & sold for £80k. 7 years later it sold for £180k. I know my ages sure haven't doubled in 7 years. In fact my hourly rate only went up 10p.
So i wonder what those in the future will be able to afford.

Your income determines what mortgage you can afford. You earn about 30k, so some would say you can only ever afford a 120k mortgage. If you have 50k deposit you can then buy a 170k house. If you have 20k deposit you can only buy a 140k house.

Bigger deposit doesn't mean you can borrow more money!

JustAnotherSaver

Just a quick one while I'm at work-

Overpayments, I asked in an earlier post (but I waffled on so you probably missed it) do they go towards paying off just the capital then?