I recently discovered that a good salary does not make house-buying much more affordable.
More Income ≠ Bigger House
A few years ago, I could have only dreamed about the income I am earning now. Back then, £1,500 per month would have been a good monthly take-home salary for a full-time job – last month, I earned 3 times that working a few hours a day around my family life.
I’m so grateful for being able to do what I do and maintain a good work-life balance, whilst having the financial freedom to afford pretty much anything I need (although I am still as thrifty as I was all those years back).
Except, it seems, a bigger house!
The other night, the family and I were talking about how cramped our home is becoming. There’s 5 of us living in a small 3-bed semi in the centre of England. My girlfriend and I have one room, our youngest daughter has the box-room and the third bedroom is the domain of my two older boys. Downstairs, there’s a small lounge and kitchen/diner.
We decided to look into getting a bigger house, perhaps a 4 or 5-bed with a bit more space for all the clutter and an office for me to work in (rather than be sat at the kitchen table). Every time I’ve bought a house in the past, it’s been at the low-end because this is all I’ve been able to afford – it was a case of doing an online search and sorting the houses by ‘price low to high’ and hoping there was something I liked on the first page.
“Not this time,” I told myself. I was wrong.
How much is a mid-range house?
Looking on right move, the low-end price for a detached house within a 15-mile radius of our current area that has off-road parking and 4 bedrooms is about a quarter of a million pounds!
Not being familiar with property prices (and having not really looked at property for over a decade) this came as a bit of a shock to me. I quickly crunched some numbers in my head:
- 10% deposit @ £25,000
- Mortgage of £225,000
- Mortgage @ 3% over 25 years = £1,067 per month
Although I can afford this at the moment, the nature of my business means that income can potentially be volatile so I was cautious about committing to something that I may not be able to afford in the future.
How does that compare with my current mortgage?
My current home and mortgage details are below:
- Value of home: £140,000
- Mortgage balance: £115,000
- Equity in home: £25,000
- Monthly payment: £511
- Remaining term: 22.5 years
So, to more than double my monthly repayment for an extra bedroom and a little more space does not seem like a good option.
How do people afford big houses?
This was quite disheartening. I was expecting to be able to afford something a bit nicer without breaking the bank.
I also became quite perplexed at how other people could afford such a big expense. I see quite a lot of people that live in big houses, go on multiple foreign holidays each year and own expensive cars. I’m sure they have good jobs and work hard for their money but I find it hard to believe that they are earning enough to pay for this. Surely they cannot all be lottery wins, rich families or financed up to the eyeballs! Or maybe I am just missing something.
My plan to afford a bigger house
Although the cost of moving had given me somewhat of a reality check, I made it my goal to be able to afford a bigger house during 2021.
And this required a plan.
How much would a bigger house cost?
Firstly, I needed to decide (along with my family) how much our desired house would cost. Now, we had to be realistic here – personally, I would love a multi-million-pound house in the country with 6+ bedrooms, a swimming pool and surrounding acreage but this was simply out of our means at this moment in time. Even with my current income of over £4,000 per month, this was completely unrealistic (although this could be the next step-up in a few years time).
So, we had a look on rightmove and found that modest accommodation that suited our needs and means would cost about £250,000 to £300,000.
In addition, we would also have to pay an estimated:
- Mortgage arrangement fee: £1,000
- Stamp duty: £12,500 – £15,000*
- Conveyencing: £1,300
- Surveying fees: £400
- Removals: £400
*Stamp duty is set at 0% until April 1 2021, so if we move before then, we make a MASSIVE saving.
So, excluding stamp duty, we will be looking at an additional £4,000 or so (with stamp duty, it could be up to £19,000).
We have equity of about £25,000 in our current home, so our mortgage would be between £225,000 and £275,000 (providing we sell at the right price). Adding the additional costs excluding stamp duty (above) to the mortgage would mean we would need a mortgage of between £229,000 and £279,000.
At a 3% interest rate, this would result in monthly payments of between £1,086 and £1,323 over a 25-year term.
The more money I put down as a deposit (and therefore do not have to put on the mortgage), the lower the monthly repayments will be.
Looking at the numbers, for every additional £5,000 I pay up-front, I can reduce the monthly payment by about £25. That does seem like a lot for a little, but over time, this will add up, reduce monthly payments and reduce the total interest paid over the term.
So, I had a look at how much I could possibly afford for extra deposit on top of the £25,000 from my current home’s equity.
If I rinse my instant-access savings (excluding the cash I will owe the taxman), I can raise about £7,500. My partner and I also have about £2,500 in our joint account, so there’s an extra £10,000. Given the paltry interest rates at the moment, I will get far more value from using this money to reduce my mortgage than keeping it in my savings account (although it will not be as easily accessibly if it is wrapped up in my home’s equity).
Foregoing my investments, I could raise another £5,000 over the next few months, resulting in a total of £40,000 for a deposit.
This reduces my borrowing to between £214,000 and £264,000, which reduces monthly payments to between £1,015 and £1,252. Still a lot more than we are paying at the moment but currently affordable. I think that after moving, I would want to build up my savings again so that I could afford my mortgage if my income is disrupted, which would possibly mean reducing deposits to my investment portfolio. I will have to look at the impact that this would have on my investment plan.
With regards to stamp duty, I feel that we would be missing out on a massive opportunity if we did not move before April, so the plan is to get things in motion as soon as Christmas is over.
I’ll keep you updated…