How much mortgage to get?
Discussion
I've been saving for a long time for my FTB purchase, and the purchase itself happened whole years after I would've wanted basically because of covid (redundancy, and then too much competition).
I've got some rubbish UK bank shares which I don't particularly want to sell (at a loss). Some time ago I was reckoning on a 25% deposit including the bank shares. Because of the delays, my savings increased to the point that I can raise just about 30% deposit without selling the shares. I went out on mortgages etc with a 30% deposit because it was the maximum I could manage and seemed like the thing to do.
Thing is that 70% LTV doesn't seem to do anything for me that 75% doesn't do. The mortgage rates which are coming up are identical.
I have a decision then;
I am not a person who will readily spend savings so there isn't really a 'protect me from myself' consideration.
I don't think the 5% difference is anywhere near enough that the extra costs of an offset start to make sense.
Really this is purely a financial decision. My gut feeling is to whack the 30% in because I have no immediate plans for the money and it'll just end up costing me a load in mortgage interest.
Or would I be mad to wang 30% in when I can secure the same rate with 25%?
The cost of borrowing the extra will probably outstrip any potential returns the savings might make.
If I do a 25% deposit I can take stock and then put some or all of the money into the mortgage in the form of overpayments?
I'm a bit concerned that once I'm paying a mortgage I won't be able to build up those kinds of savings again- not for many years- and I'll end up wishing that I'd kept some money back for the kinds of purchases I might want to make in 3-5 years (kitchen, bathroom, car etc).
I gather that I can effectively borrow more money against the house at remortgage time which would allay that concern if I am understanding correctly? Might be the way to go as mortgage rates and repayments will fall at that point.
Any other considerations I should think about? Ideas I haven't thought of? What would you do? How much would you keep back?
I've got some rubbish UK bank shares which I don't particularly want to sell (at a loss). Some time ago I was reckoning on a 25% deposit including the bank shares. Because of the delays, my savings increased to the point that I can raise just about 30% deposit without selling the shares. I went out on mortgages etc with a 30% deposit because it was the maximum I could manage and seemed like the thing to do.
Thing is that 70% LTV doesn't seem to do anything for me that 75% doesn't do. The mortgage rates which are coming up are identical.
I have a decision then;
- 30% deposit & zero liquidity. The bank shares are my emergency funds.
- 25% deposit & keep some cash back.
- Something in between
I am not a person who will readily spend savings so there isn't really a 'protect me from myself' consideration.
I don't think the 5% difference is anywhere near enough that the extra costs of an offset start to make sense.
Really this is purely a financial decision. My gut feeling is to whack the 30% in because I have no immediate plans for the money and it'll just end up costing me a load in mortgage interest.
Or would I be mad to wang 30% in when I can secure the same rate with 25%?
The cost of borrowing the extra will probably outstrip any potential returns the savings might make.
If I do a 25% deposit I can take stock and then put some or all of the money into the mortgage in the form of overpayments?
I'm a bit concerned that once I'm paying a mortgage I won't be able to build up those kinds of savings again- not for many years- and I'll end up wishing that I'd kept some money back for the kinds of purchases I might want to make in 3-5 years (kitchen, bathroom, car etc).
I gather that I can effectively borrow more money against the house at remortgage time which would allay that concern if I am understanding correctly? Might be the way to go as mortgage rates and repayments will fall at that point.
Any other considerations I should think about? Ideas I haven't thought of? What would you do? How much would you keep back?
What are you buying? A house or a flat?
If it’s a flat I’d keep a little something back in case it needs a new boiler or what have you in the first year, but you’re not responsible for maintenance of the building (outside of paying the fees!) so you shouldn’t need a huge fighting fund.
If you’re buying a house, I’d keep a little more money to one side in case something shows up after you move in. My roof leaked, for example, and I had to spend a few thousand on fixing that (but happily not replace the whole roof!). So - potential for larger bills with a house.
If it’s a flat I’d keep a little something back in case it needs a new boiler or what have you in the first year, but you’re not responsible for maintenance of the building (outside of paying the fees!) so you shouldn’t need a huge fighting fund.
If you’re buying a house, I’d keep a little more money to one side in case something shows up after you move in. My roof leaked, for example, and I had to spend a few thousand on fixing that (but happily not replace the whole roof!). So - potential for larger bills with a house.
how much does the 5% represent in reduced/ (increased) payments?
use that as your basis. if its material then I'd reduce borrowing, if not I'd keep the rainy day fund, or a mix of both - 2.5% off mortgage, 2.5% in savings.
Other curve ball is what is your safety net? do you have parents/ relatives who can bail you out in the short term if something goes wrong? If you do, maximise down payment. I know a lot of people who have done this as in the end it just doesn't matter because all risks of cash flow are mitigated/ eliminated.
use that as your basis. if its material then I'd reduce borrowing, if not I'd keep the rainy day fund, or a mix of both - 2.5% off mortgage, 2.5% in savings.
Other curve ball is what is your safety net? do you have parents/ relatives who can bail you out in the short term if something goes wrong? If you do, maximise down payment. I know a lot of people who have done this as in the end it just doesn't matter because all risks of cash flow are mitigated/ eliminated.
Payments at 75% LTV are +£124 (7%) / month compared to 70% LTV.
Interest on the money I keep back would yield £89 / month assuming I put it all in an ISA paying 4.75% but I would need some access to the cash and rates are going to wane.
Offset actually looks quite good. Because of high rates currently I am embarking on a 35 year duration but my plan was to overpay with a view to reducing to ~25 years. I was going to have to maintain some kind of savings in parallel- in ISAs to avoid higher rate personal savings allowance.
A term reduction offset mortgage basically achieves all that in one product which is pretty slick. It's a bit like 'betting on the house' isn't it- the mortgage rate is always going to tend to be higher than savings rates.
To answer a couple of questions, it's a house, and yes I do have a safety net in that my parents would help out if I got in trouble for some reason.
Interest on the money I keep back would yield £89 / month assuming I put it all in an ISA paying 4.75% but I would need some access to the cash and rates are going to wane.
Offset actually looks quite good. Because of high rates currently I am embarking on a 35 year duration but my plan was to overpay with a view to reducing to ~25 years. I was going to have to maintain some kind of savings in parallel- in ISAs to avoid higher rate personal savings allowance.
A term reduction offset mortgage basically achieves all that in one product which is pretty slick. It's a bit like 'betting on the house' isn't it- the mortgage rate is always going to tend to be higher than savings rates.
To answer a couple of questions, it's a house, and yes I do have a safety net in that my parents would help out if I got in trouble for some reason.
We don't know where the markets are going to settle over the next few years so personal security has more merit today than it has for a while.
As an FTB a few things to consider:
-Emergency funds are no good if they are held as stock in something that may well be the cause of that emergency. Cash is currently yielding 5% and with no capital at risk (in simple terms). True emergency funds would be cash not single sector equities.
- whether those equities are showing a loss or gain is of absolutely zero importance. It's the punter's fallacy at play there. The only single thing that is important is what the pot value is today and whether you are better served holding that value via a different medium. People must bin that whole stuff about what the value was at initial purchase. It's all about the value now and whether the medium it's held as remains the best.
- you are now massively exposed to the U.K. housing market and the U.K. banking sector. If the economy does deteriorate what two sectors do you think will be on the front line getting bummed? Something to contemplate.
- It's a great deposit but a question to ask is if in 2, 3 or 5 years when the fix discount expires the property market has pulled back, let's say 20%, that's worn 100% by your deposit so how do you plan to be in a position to not be forced to remain with your current lender due to not having the cash to be re-margined?
- do you have any form of mortgage payment protection? The BoE policy is very specifically targeting middle to high income private sector employment which puts us in the firing line if they over cook their goals. Is it worth at least seeing what the cost of that 'hedge' is over the short period where you will be ultra cash poor or is there a parental hedge in place?
- the term of loans has become hugely relevant now money has returned to having some form of value. At 5% what each £100k to borrow will cost you is massively more now for 35 years v 25 years.
Personally, I would be looking to hold back cash and to hold it as cash as a FTB in this evolving market. Sitting there long U.K. resi and long U.K. banks with no cash would be too much of a casino bet for me.
Longer term, from the outset I'd be focussing on building that cash pile as it's that pile that makes life relaxed. With the right cash pile you don't care about the short term value of your home, you don't care what games the lenders are up to etc. Alongside getting that cash pile back to where you don't give a FF about what seriously stresses most people out is focussing on the term of the loan and avoiding the trap that many will be falling into that is convincing themselves that paying interest for 40 years is better than 29 years because the monthly looks smaller.
It might also be worth noting that in the normal run of things, nothing builds a cash pile quicker or gets a loan term shorter than renting a room out to a mate or colleague. That's the big graduate, FTB wealth and security accelerator.
Good luck.
As an FTB a few things to consider:
-Emergency funds are no good if they are held as stock in something that may well be the cause of that emergency. Cash is currently yielding 5% and with no capital at risk (in simple terms). True emergency funds would be cash not single sector equities.
- whether those equities are showing a loss or gain is of absolutely zero importance. It's the punter's fallacy at play there. The only single thing that is important is what the pot value is today and whether you are better served holding that value via a different medium. People must bin that whole stuff about what the value was at initial purchase. It's all about the value now and whether the medium it's held as remains the best.
- you are now massively exposed to the U.K. housing market and the U.K. banking sector. If the economy does deteriorate what two sectors do you think will be on the front line getting bummed? Something to contemplate.
- It's a great deposit but a question to ask is if in 2, 3 or 5 years when the fix discount expires the property market has pulled back, let's say 20%, that's worn 100% by your deposit so how do you plan to be in a position to not be forced to remain with your current lender due to not having the cash to be re-margined?
- do you have any form of mortgage payment protection? The BoE policy is very specifically targeting middle to high income private sector employment which puts us in the firing line if they over cook their goals. Is it worth at least seeing what the cost of that 'hedge' is over the short period where you will be ultra cash poor or is there a parental hedge in place?
- the term of loans has become hugely relevant now money has returned to having some form of value. At 5% what each £100k to borrow will cost you is massively more now for 35 years v 25 years.
Personally, I would be looking to hold back cash and to hold it as cash as a FTB in this evolving market. Sitting there long U.K. resi and long U.K. banks with no cash would be too much of a casino bet for me.
Longer term, from the outset I'd be focussing on building that cash pile as it's that pile that makes life relaxed. With the right cash pile you don't care about the short term value of your home, you don't care what games the lenders are up to etc. Alongside getting that cash pile back to where you don't give a FF about what seriously stresses most people out is focussing on the term of the loan and avoiding the trap that many will be falling into that is convincing themselves that paying interest for 40 years is better than 29 years because the monthly looks smaller.
It might also be worth noting that in the normal run of things, nothing builds a cash pile quicker or gets a loan term shorter than renting a room out to a mate or colleague. That's the big graduate, FTB wealth and security accelerator.
Good luck.
As a FTB, I’d certainly suggest keeping some cash aside immediately. Not only for all the moving fees that need paying that are easy to miss, or as people have mentioned ready cash for repairs etc but you could well need things like furniture, appliances etc. I assume you’ll have some from time in rented, but even a few items can be costly.
When we moved from a flat into a house we really underestimated the things we had to buy - lampshades, a few chairs even simple things like extension leads, bulbs etc and then things for the newly acquired garden like a mower all add up over the first 6 months. Gumtree etc was well used.
As an aside, I found a receipt for some furniture we bought from IKEA in 2011. The exact same order would now be just over double the cost. It’s no surprise, but furnishing houses really isn’t cheap any more.
When we moved from a flat into a house we really underestimated the things we had to buy - lampshades, a few chairs even simple things like extension leads, bulbs etc and then things for the newly acquired garden like a mower all add up over the first 6 months. Gumtree etc was well used.
As an aside, I found a receipt for some furniture we bought from IKEA in 2011. The exact same order would now be just over double the cost. It’s no surprise, but furnishing houses really isn’t cheap any more.
mk2driver said:
If I was in your situation I would put down 25% and then you can overpay through the year if you want
Leaves you with some liquidity which for me holds a lot of value
Same here. Assuming you can overpay penalty free. Most mortgages offer max 10% of balance can be overpayed without incurring early repayment fees.Leaves you with some liquidity which for me holds a lot of value
thepritch said:
As an aside, I found a receipt for some furniture we bought from IKEA in 2011. The exact same order would now be just over double the cost. It’s no surprise, but furnishing houses really isn’t cheap any more.
Technically, furnishing a first home still costs nothing as old folk are still dying and no one wants to pay for their old brown furniture that's already lasted 100 years. 
P1Fanatic said:
mk2driver said:
If I was in your situation I would put down 25% and then you can overpay through the year if you want
Leaves you with some liquidity which for me holds a lot of value
Same here. Assuming you can overpay penalty free. Most mortgages offer max 10% of balance can be overpayed without incurring early repayment fees.Leaves you with some liquidity which for me holds a lot of value
It also means you can effectively use your day to day spending to reduce the mortgage by using a credit card to give you liquidity to offset some more. I have a running balance on my credit card that's probably 3-5k paying off the balance each month, so that's 3-5k more in my bank account, and that's 3-5k I'm not paying mortgage interest on.
paulrockliffe said:
This is why an offset mortgage is such a solid option, you put money in the offset account and you're overpaying as much as you want. Then you need some cash and you can just take it back. No hassles, no fees.
It also means you can effectively use your day to day spending to reduce the mortgage by using a credit card to give you liquidity to offset some more. I have a running balance on my credit card that's probably 3-5k paying off the balance each month, so that's 3-5k more in my bank account, and that's 3-5k I'm not paying mortgage interest on.
Yup. Genuinely brilliant product. Except for the shopping fraternity because they'll be doing what they always do which is plan to use the product intelligently and then within hours of first contact will accidentally stumble across some absolutely essential thing they must have or do and start depleting the reserves, turning themselves into renters who will eventually have to move out of the nice rental and into a rather grim one when the banks decide to cease lending to them. Can be a real issue if the parents don't die on schedule or have spent the renter's money!! It also means you can effectively use your day to day spending to reduce the mortgage by using a credit card to give you liquidity to offset some more. I have a running balance on my credit card that's probably 3-5k paying off the balance each month, so that's 3-5k more in my bank account, and that's 3-5k I'm not paying mortgage interest on.
paulrockliffe said:
Ha ha, my first mortgage was at simple as a massive overdraft on my current account. Literally put your card in the machine and the balance was negative hundreds of thousands.
Those people ruined that for me.
Yup! Focussed the mind somewhat but I suspect that for others it may have inspired a 'fThose people ruined that for me.
k it, I'm fked' train of thought so one may as well shop, done and simply be fabulous to assuage the burden. What I do recall was being on a rather nice holiday as the old Scottish banks went pop and while some were soiling themselves over their Coutts situation I was desperately trying to learn whether my completely offset First Direct set up would net off if HSBC folded.
It was also mildly amusing when the host came to tell everyone that RBS had gone as you could instantly see who banked with Coutts. Not as amusing as the bloke who worked at one of the host's companies and had won the holiday in a competition, who subsequently stood up and welcomed everyone to his world and offered to sell lessons on how to get by with no cash. He became a good friend but I don't think anyone else liked him.
If you're me are you really selling Barclays, Lloyds, Legal & General shares now?
They're all dividend paying and surely have some upside
If I do a 25% deposit I could have decent ready cash savings ~25k and keep the shares
I get that it's not at all diverse but I have held these shares for 8 years and have only recently stopped reinvesting the dividends.
I reckon look for an opportunity to sell them during the first mortgage term.
They're all dividend paying and surely have some upside
If I do a 25% deposit I could have decent ready cash savings ~25k and keep the shares
I get that it's not at all diverse but I have held these shares for 8 years and have only recently stopped reinvesting the dividends.
I reckon look for an opportunity to sell them during the first mortgage term.
HustleRussell said:
If you're me are you really selling Barclays, Lloyds, Legal & General shares now?
They're all dividend paying and surely have some upside
If I do a 25% deposit I could have decent ready cash savings ~25k and keep the shares
I get that it's not at all diverse but I have held these shares for 8 years and have only recently stopped reinvesting the dividends.
I reckon look for an opportunity to sell them during the first mortgage term.
Boils down to personal risk. But the value at which you bought them is of no relevance at all. Nor is the potential upside as you're doing a downside risk calculation. The only thing that matters is what the value would be if there was a major economic event that required them to be converted to cash. When evaluating the risk, only you know your personal circumstances such as the amount of cash held after the property purchase being enough to cover a re-margining of the property loan, the rate at which you can continue to grow the cash and alternative instant source of cash, ie parental bail-outs. They're all dividend paying and surely have some upside
If I do a 25% deposit I could have decent ready cash savings ~25k and keep the shares
I get that it's not at all diverse but I have held these shares for 8 years and have only recently stopped reinvesting the dividends.
I reckon look for an opportunity to sell them during the first mortgage term.
And any equity yield needs to be risk weighted against cash equivalent yields, to which the only equities that you'd normally have a higher risk weighted yield on would be the utilities, not so much the banking sector.
Re the individual stocks, Legals only has a 9% gross yield (you might be receiving a net yield whereas cash you can accrue tax free so in reality the yields may be on par but the net of 9% once risk weighted will be much lower). You need to know why Legals has been sold down all year and what would be the reason for it not being bid up on the high yield as well as why the trend would reverse in the medium term.
Lloyds has done nothing for two years and a gross yield of 6% is well below what you'd get for cash with no capital risk.
Barclays has been in a downward trend for 13 years and has a yield even lower than Lloyds and well below cash.
As a young home owner, so almost your entire wealth in property, if you were to desire sitting long an i diversified basket of FTSE constituents, now cash has a value, you'd really only be considering utilities, the pseudo bond proxies. Especially considering if the world were to go to crap and your house deposit got wiped by a property devaluation event, banking stocks would continue with their long term down trend. Conversely, even when the world is going to crap the utility bills still get paid and more importantly, collected. It's also a sector with long term taxpayer investment backing during the migration to renewables etc.
NowWatchThisDrive said:
People have been thinking forever that there has to be upside for UK banks. In my opinion they're horrible businesses - highly leveraged political footballs whose accounting and breadth of risks are too complex for a non-specialist to truly understand.
Yup. Not the right thread but the sector hasn't really been a good punt this century, other than taking on risk for a better yield then cash but even then the values have been in general decline throughout the zero interest era. It's still quite common to find pensioners holding them and being overweight in them so there must be some kind of deep seated cultural belief relating to banks, akin maybe to the one with property?You'd expect them to be performing well through this year as the rising rates should deliver better margins but I'd guess their being traded down as the risk grows re issues from rising global rates and their dividend yields are now well below cash once risk weighted.
For me, the reason to avoid at present is the amount of research that would be needed to get a good understanding re default risks as we enter a new economic era of higher rates. For example, to get a commercial investment property sold in central London at the moment, buyers are wanting nearly 7% yields which given the yields the owners have them on represents nearly a 50% capital write down if they were to sell. Were commercial property funds and holders going to start defaulting around the globe then you'd want to know which U.K. banks are most exposed. You've also got all the thousands of zombie companies across all the developed markets which were only legally solvent because their gross revenues were just sufficient to service their debts. As those companies renegotiate the debts at the new higher rates then there is a valid view that many won't be able to legally claim to be solvent and banks will be left owning the worthless remnants etc.
Things could be fine and the higher margins deliver good growth but the potential downside just at the moment is multiples higher than any potential upside.
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