FTB Mortgage

bromine

Asking on behalf of a friend. This is their message:

"I have a bit of a dilemma and I really need some advice. I was born outside UK and come from a culture where mortgage is not the norm and people rent most of their lives before buying a house in cash. It has taken me very long to understand the basic concepts around mortgage and equity.

The reason for this query is that my offer on a house has been accepted. This has triggered a lot of anxiety in me because I find the idea of mortgage absolutely terrifying, even more than marriage or having children. It's about losing my freedom to move and to change jobs. This fear has resulted in me renting for more than 10 years and not having a lot of savings due to high rents and being the sole earner of the family, while living in south of England. I feel that either I should move to a lower cost of living area or get a mortgage. The thought of changing my job also triggers anxiety because of a very bad experience in a past job and I don't feel ready to leave a relatively well-paid job with very understanding and helpful colleagues.

On the other hand, I have been dithering for too long and my age is against me. If I don't buy now, I don't think I ever will, as the mortgage duration would be limited by the retirement age. I don't want you to dwell on my anxiety because it's something I have to overcome myself. What I want your help with is to check if my financial calculations are sound, and whether I am missing something or not. Here's my current situation:
Age: 43
Salary: ~55k
Savings: ~30k
Rent: £1000 pm

Mortgage: (based on MSE calculator:)
Debt: £254k
Equity: 10% (~£28k)
Interest: 3.5% (not sure, but I'll be using Nationwide Helping Hands)
Monthly payments: £1191

After 5 years:
Debt: £226k
Equity: 20% (~58k)

This means I would have doubled my savings simply by living in the house. I know there are buying costs (~6k) but still this is a big increase, primarily because my initial savings are so low. If there's any house price appreciation than that would be on top of this. I would be paying £200 pm extra, but I would have at least £500 going towards equity every month.  

Here are my questions:
1) Is this a good time to buy, given the cost of living crisis and inflation? I can probably ride out a short dip as long as I am in profit after 5 years. I withdrew an accepted offer at the start of pandemic and look what happened to house prices afterwards. The houses being sold at £230k at the time are now being sold at around £275 or more. I know the standard answer is that no one can predict the house price, but please try to have an educated guess based on UK economic conditions and the housing market.
2) My monthly payment would be £200 higher than my current rent. Currently, we save around £300 pm on average so it will be just about affordable, but do you think this is too close to the edge? I can get some funds from family overseas in case of emergency once or twice, but not all the time. The bank thinks I can afford this loan but I am worried if I am being too optimistic.

3) We are wiping off our entire savings for the deposit and buying costs. I am in a stable job so I hope to be able to build up a rainy day fund in a few months time.

Thanks for any advice."

canaldumidi

1) Trying to judge the best time to buy is next to impossible, and pointless as

a) you are primarily buying a home, not an investment, so wheneveryou buy, you get a home that is yours

b) even as an investment it's a long-term one; 5, 10, 20years, so any dips or rises in the prperty prices will be ironed out

c) anyone who could predict future market trends accurately would be a multi-billionaire...!

2) sounds affordable. What'syour lifestyle? Exepensive tastes? Eat and party out all the time? Or modest lifestyle? Google a few more online affordability calculators. Also see an independant mortgage broker

3) As long as you keep an emergency fund, your savings will build up again. Or buy a slightly cheaper new property and keep a bit more savings aside.

The anxiety is another matter. Either overcome it or keep renting.

K_S

@bromine What canaldumidi said above. I would also stress that when you're comparing renting vs owning, it's important to keep in mind that a typical mortgage payment is on a capital repayment basis, so will include both capital and interest. So not comparable like for like with a monthly rental payment.

Plus, also look up the concept of imputed rent.

london21

Majority of people will need a mortgage to buy a house.

For a lot of people renting is more expensive than their mortgage.(depending on the length of mortgage and deposit etc)

In the last 10 years of renting have they stayed in the same area? Does their role mean that they need to change locations every few years?

Perhaps buying in a central area you can easily commute to different areas.

Age 43 depending on their planned retirement age can still get a mortgage for up to 27 years.

Really depends what they want, me personally prefer owning than renting because over time property will appreciate and you have equity.

Certainty also because with rented properties you are at the mercy of the landlord to a certain extent.

1.      Hard to time the market and no one kno=ws the future but over the long term prices will increase.

2.      you are depositing 10%, with a slightly higher deposit this will reduce your monthly repayment but 10% can work also, only you wpould know the answer to this question. If you are worried maybe max the years of the mortgage and can overpay by 10% depending on your circumstances.

A lot of people feel anxious to some extent as it is a big amount and commitment but try not to let it cripple you. 

[Deleted User]

At 42 you can't wait much longer. Retirement age is 68 so if you want a 25 year mortgage you need to get one before you turn 43, or agree with the bank to keep paying it after you stop working.

Choirgrl

[Deleted User] said:

At 42 you can't wait much longer. Retirement age is 68 so if you want a 25 year mortgage you need to get one before you turn 43, or agree with the bank to keep paying it after you stop working.

UK state pension age is (or, I think, will be) at 68, but retirement may be earlier or later. Age/time/length of mortgage are all considerations, but the OPs friend doesn’t need to panic even more by thinking they only have a year left.

I’m heading in to being a FTB myself (in my late 40s) and recognise a lot of the concerns raised, including the one about geographic flexibility. From my point of view, I don’t see it getting any easier, or cheaper to buy a house if I wait longer, and having bought and paid off a mortgage will enable me to have a much better retirement than I would if I were still renting at that point.

K_S

[Deleted User] said:

At 42 you can't wait much longer. Retirement age is 68 so if you want a 25 year mortgage you need to get one before you turn 43, or agree with the bank to keep paying it after you stop working.

For the benefit of others who may come across this thread, with respect to maximum term and age for a mortgage, most mainstream lenders will allow a maximum term that falls into one of the following buckets -

1. Lower of intended retirement age or 70. This is the most common approach.

2. Lower of intended retirement age or 75/80 (depending on the specific lender). If going above 70 lenders will also usually assess plausibility. Usually ok for desk based roles but might question if it's a manual job.

3. Even if retiring early, will go to 75/80 (depending on the specific lender) if some form of pension contributions can be evidenced. Typically payslip deductions for employees or SIPPs for self employed applicants. Importantly, you don't need to evidence that the projected pension amount will meet affordability, just that you are contributing to a pension.

There are a few variations and additional criteria to the above depending on how close you are to retirement, differences between how employed and self-employed applicants are treated, etc.

With respect to the question in the post, if the applicant is 43 at their next birthday, they may potentially be able to access a term of up to 37 years based on their current income.

bromine

Thank you everyone for you replies. Will read them properly when I get back from work.