My personal experience of buying a house gives me a strong bias to getting a large mortgage. However, it is worth bearing in mind that my experience may not be beneficial for everybody. When buying my first house in 2004 my circumstances were:
- Income £20,000
- House Price £185,000 (+ extras such as solicitors fess e.t.c) (In Oxford, there was little choice of cheaper housing at the time)
- Deposit £45,000 (£36,000 which was a loan from parents)
- Previous cost of renting a house £715 a month.
- Mortgage repayment on loan of £140,000 – £810 a month.
It was a lot to borrow, but from my perspective the monthly cost only increased by £100 a month. It is true that this was taken out when UK interest rates were low 4%. Since then interest rates have increased to 5.5%.
However, it is worth noting that my monthly repayments haven’t increased, because I recently extended the mortgage term from 32 years to 47 years (the maximum the bank would allow)
Advantages of getting mortgage 6 or 7 times Income.
- You gain ownership of the house. You don’t have to worry about landlords asking you to move out at short notice.
- In the UK the cost of renting is only just less than the mortgage repayments on a similar property.
- Renting a house means that the cost will continue to rise each year. This may be inline with inflation; however, in Oxford the cost of renting has often risen faster than inflation. This means in 10 years time the cost of renting, will likely to be much higher than at present. Assuming long term interest rates stay the same, mortgage repayments will decline in real terms. This is because mortgage payments are fixed for 30 years. £800 a month is a high % of my income now, but in 20 years time, I hope, it will be a much smaller %. Therefore, there will soon come a point when mortgage repayments are less than renting.
- The end is in sight. When renting there is nothing to be gained. With a repayment mortgage there will come a time when the debt is paid off and you can live rent free.
Disadvantages of Borrowing 5,6, or 7 times income
- It is risky
- If interest rates rise a small amount it can make repayments unaffordable. This leaves your home at risk of repossession.
- It’s difficult to get. In my case I used a self certification mortgage and a generous loan from my parents.
- Buying a house creates additional costs like home insurance, repairs. These do not have to be considered when you are renting.
Conclusion
Getting a mortgage 7 times my income was a good move for myself. I’m glad I did it because my monthly payments have been only slightly higher than renting. If interest rates increased dramatically I would be in trouble. However, I coped with rising interest rates by getting a longer mortgage term. During the first few years I stopped making any pension contributions or savings. I see a mortgage as the best investment for retirement.
Would I advise others to get a mortgage 7 times income?
It depends:
- How much do you pay to rent, how much would it cost to pay the mortgage?
- Don’t just look at the short term cost. Be wary of mortgage deals that offer a special introductory rate.
- Could you cope with a rise in interest rates?
Well, they sure do things differently over there! There are a couple of flaws in your arguement as far as I can see.
1) You may have a time when you are no longer spending and can live “rent-free”, but by your own admission, that time for you is at least 47 years away. How much extra inteest are you paying over the incresead term? If you had gotten a lower mortgage, you would have been able to handle the payments, and wouldn’t have had to spread them over your entire lifetime.
2) I don’t know how it works in Britain, but don’t you have to pay property tax yearly? And what about maintenance and improvement? I think your housing costs have gone up significantly more than 100/month.
3) You don’t consider the effect of the loan from your parents in this. Aren’t you paying that back? And don’t forget, if they hadn’t lent it to you, they could have bought stock and experienced very nice gains over the last few years. That should be figured into your cost analysis.
What happens the next time interest rates go up? Can you re-finance again?
Hi agog,
I’m very bad in that I’m haven’t been paying my parent’s interest free loan back.
If rates go up I can’t refinance.
I think longer mortgages are a response to the fact house prices have increased much faster than incomes. I think 50 year mortgages will become more common soon – like Japan.
But house prices are a real problem because there is a redistribution of wealth from young generation to old
Wait a second. Did you get an adjustable mortgage? 47 year term? What the heck!
Are you making extra payments or anything to bring down the mortgage?
My bank allowed me to extend the term, this reduced the montly mortgage fee by £100. I’m not making any extra payments to bring down the mortgage
Get a room mate…
I’d like to see what you say about your personal experience in 10 years…