When does saving become more beneficial than getting on the ladder?

Toryas

Hi there,

New user here. Apologies for any missed rules and mods move/delete as appropriate.

I'm 28 and I am currently renting at a cost of £250pcm + bills. My partner and I live together and her rent is the same, so between us we pay £500 + bills. Council tax is band E, bills are a mediocre £45pcm each at worst (very well insulated flat, low water, electricity and gas usage).

I currently have £25k in savings, partner nothing. I earn £62k per year, partner £19k going up to £20k in September. We both have student loans, I pay 6% pension partner 3%. At the moment, I am predicting that I will be able to put away £20k per year, partner maybe 2 or 3k.

My mentality is, that because I am able to save £20k a year, I am better off saving more money towards a bigger deposit/down-payment than we are getting on the property ladder. However, I spoke to my old man about this and he was adamant that with house prices in our area going up 8% YOY, on a £200k property the longer I wait to buy the worse off I'll be.

I'm pretty good with numbers (and money) but I cannot get my head around whether or not I should be rushing to get on the ladder, or if sitting back saving £20k a year is more beneficial.

I would appreciate your input, as it's driving me mad at the moment!

Thank you.

dgtazzman

With saving rates as low as they are at the moment, why wait, it's not like that money on your account is making you anything, likely the annual interest rate is below the rate of inflation, thus that money is relatively loosing value by the day.

A lot of people seem to come on here with your question and the general answer given is 'if you can afford to get on the ladder, do it'. Your personal circumstances might have a bearing on the answer though. If you buy a place now, while you might move in 1 or 2 years, then wait, as any advantage will be eaten up by fees, stamp duty etc.

Toryas

dgtazzman wrote: »

With saving rates as low as they are at the moment, why wait, it's not like that money on your account is making you anything, likely the annual interest rate is below the rate of inflation, thus that money is relatively loosing value by the day.

A lot of people seem to come on here with your question and the general answer given is 'if you can afford to get on the ladder, do it'. Your personal circumstances might have a bearing on the answer though. If you buy a place now, while you might move in 1 or 2 years, then wait, as any advantage will be eaten up by fees, stamp duty etc.

Thank you for your quick response.

You're absolutely right that the money is getting a measly 1% as it is at the moment. I guess what my question is, though, is if I am able to put a larger % down (I understand a larger deposit/ better LTV gets you a lower percentage?) and the eventual interest on mortgaging that amount as opposed to paying it off (I understand for every £1 you mortgage you pay back £1.50), does saving as aggressively as I am doing on a £200k-£250k first time buy price make me better off in the long run?

Sorry if that's not clear, it's a real tough mentality to describe...

dgtazzman

Right now, again, I would say no. Interest rates on mortgages are already inching up as the country is out of recession and the economy is growing. It probably won't be long before the base rate starts going up, so if you wait for a better ltv rate, by the time you get it, the interest rate on the lower ltv might be higher than the rate you get now.

You could always fix for 2 years and overpay to get to a better ltv rate when the 2 year fix ends.

ch3101

In the most basic terms it is best to just save when you are paying less in rent than you would be paying in interest on a mortgage on the kind of property you live in.

You do however have to factor in several other things such as discounting your savings with respect to the rate of house price increases and the mortgage rate you'd be paying.

You also would have to think that if something breaks in your house it currently wouldn't cost a penny but could cost you 10k if you owned the property. 10k plus any interest you could've gained/ are going to pay through a loan.

To be honest, it's up to you what you feel best doing.

In your position, I hope to be in 8 years, I'd already have bought. Another thing to consider is, if you're putting in the entire deposit, are you just going to buy YOURSELF a house or would it be shared?

P.s. 62k at 28, if outside London, very well done indeed

Wilkins

Toryas wrote: »

However, I spoke to my old man about this and he was adamant that with house prices in our area going up 8% YOY, on a £200k property the longer I wait to buy the worse off I'll be.

The risk you run is that, after you have bought, property prices might go down 8% yoy. A smaller LTV gives you a buffer against price volatility, especially when you might want to move again. Overpaying for property can be a bad mistake to make.

However, no one has a crystal ball, and you really have to think through what seems right for you.

amnblog

If you dad is right you are 'losing' capital growth equivalent to 80% of what you can save each month.

He would have told you the same in 2007!

Just buy when it feels right for you and your partner not because of some mystic meg style calculation.

Toryas

dgtazzman wrote: »

You could always fix for 2 years and overpay to get to a better ltv rate when the 2 year fix ends.

Overpaying is something I am seriously considering. IE take a 25 year mortgage to keep the monthly payments "reasonable" and then overpay as much as we can. Then, if one of us loses our job, or we need a bit of extra cash for a few months, go back to the standard mortgage rate.

ch3101 wrote:

P.s. 62k at 28, if outside London, very well done indeed

I live in the North of England. Lots of hard work got me to where I am. However I am living proof that if you work hard enough you can do well. I left school with 2 GCSEs!

amnblog wrote:

Just buy when it feels right for you and your partner not because of some mystic meg style calculation.

I guess what I am scared of is saving aggressively thinking it's doing us a benefit, to then find out I'm actually worse off than if I'd bought this year.

Thanks for the discussion, guys. It's apparent there's no easy answer!

SG27

If I was in your position considering prices in the north of england I would save for 6 or 7 years and by mortgage free. Dave yourself a fortune in interest!

dgtazzman

And in that 6-7 years, they will have paid 36k-42k rent, part of which would be paying off a mortgage.

Just do what you feel is best for your circumstances. Personally, I hate renting, just the thought a simple letter could see us without a roof over our heads in 2 months time is enough to make me buy...

SG27

dgtazzman wrote: »

And in that 6-7 years, they will have paid 36k-42k rent, part of which would be paying off a mortgage.

Just do what you feel is best for your circumstances. Personally, I hate renting, just the thought a simple letter could see us without a roof over our heads in 2 months time is enough to make me buy...

True, forgot about the rent. Although it will probably still be less than the mortgage interest over a 25 year term.