Can I afford to buy a house?

Miscellaneous and Personal Stuff I Must Share
1

So I’m a dad now, to a 4-month old girl. My wife and I are just-about-managing in a single-bedroom flat, a box of a home in Camden in London. We need to move.

We took it in our heads that buying was what we need to do, as mortgages are on the face of it cheaper than renting and if we move out of London we’ll get plenty of real estate and a garden.

We’ve found a town we like which is on the commuter chain to London, and found a home we love, which appears to have absolutely nothing wrong with it (i.e. well-maintained by the current owner, and we have the same tastes in decor. So we are excited that if we bought the house, there’d be nothing major we’d need to do to it initially.

Trouble is the general finances. Here’s our breakdown:

House value: £235,000
Deposit: 23,500 (or less)

Meaning mortgage will be about £800 a month or so.

Combined monthly income after tax: £3,000
Bills: approximately another £400 for council tax, water, electricity, heating, house insurance.
Food: if we are careful, maybe £150 or so a month?
Travel: we both work in London, so £600 between us.
Additional: I have a big personal loan of my own I am paying off, which is £200 a month for the next 4 years.
On the other hand, we get £80 a month in child benefit.

Childcare: this is the big, scary thing. It ain’t cheap. I’m looking round and I’ll be blown if we can find childcare which is less than £800 a month for every weekday of the whole month. Childcare vouchers should chip this down by about £170 or so.

Before childcare it looks like we’d have about £900 left. My wife is nervous (rightly) about blowing our entire savings on the deposit and having nothing left for emergencies, especially as we may be breaking even on expenses at least for the short term, until we get better paying jobs (in this economy?)

So how about it - are we foolhardy, should we stay renting (if so, where? Rents seem even worse!)

I’m nervous that having a baby (which has been my lifelong dream), has financially trapped us.

2

I do have a house but not a family, and I live in the USA not Britain, so others may offer more cogent advice, but I’ll lead off.

House ownership does give you equity and property, which is a good thing to have, and a sense of place, but there are a few more questions I think you need to ask yourself.

  1. What shape is the house in? Will things (appliances, roof, etc.) be needing replacement in a few years? I had to get a new water heater in December, that cost about $1,700 USD, so make sure you identify (and budget) for anything like that–hopefully the house is in great shape for the next 5-10 years, but it pays to check.

  2. What are your budget plans for the future? Are you going to make more money as time goes on in your careers, or could you lose income (i.e., if the wife has another pregnancy, one of you loses their job)? If so, what are the fallbacks?

In general, I think house buying is good idea, but do all the homework first.

3

Conventional (US) wisdom says you should have the equivalent of 3-6 months salary in savings. More, of course, is better. Regardless, in my view you are ahead in the long run if you buy, as you are building equity.

A few questions, however, the answers to which may help better define your position:

  1. what are you paying for rent right now?
  2. Would you not still need to pay child care even if you continue to rent?
  3. How secure you feel you are in your current jobs?

I recently got dumped out of a professional position with a company I’ve worked for for thirty years and am paying on a mortgage. Fortunately there was a separation allowance and between that and non-retirement savings, I’m good for about a year totally unemployed until I’d have to start cutting into retirement savings. The monthly mortgage amount is a couple hundred bucks less than the rent would be for an equivalent place. The tradeoff is that I’m on the hook for the cost if any major systems in my home (such as HVAC) fail, and, this being the US, I end up paying a lot more for health care premiums than when I was employed. I still feel like I’m ahead with the mortgage, however.

4

Thanks folks. Answers:

Steel Rat:

  • The house appears to be in absolute top nick; fresh paint, good quality floors, no squeaks, 1-year-old boiler, oven looks decent, bathroom looks clean and shiny. Windows look in good condition.
  • We are factoring in a potential slip in income as I hope to go on four days a week to look after our baby. It doesn’t seem to impact much in terms of how much we make though, from what I can see. Both of us hope to job-hunt for better work - we’re in the public sector but I am thinking of going private.

Edit: just realised, I’ve factored in this potential paycut in the £3,000 combined income. If I stayed full-time, it would be about £300 more, I think.

El Kabong:

  • Rent alone is currently £1,011.
  • yes, we would be having to pay childcare; in that sense, the big spike is the £600 for travel. Currently we live sufficiently close to work we can walk, or if lazy take a £1.50 bus to work.
  • We’re both quite secure as we work in the public sector, and I can’t see us being made redundant. I am pondering leaving to find a better paying job in the private sector though, whether still in London or more local to the new home.

Side note: one of the great things here right now is that the wife gets 6 months paternity leave on full pay. I’m going to take 3 months on half-pay at the start of March, which will suck, but we won’t be worrying about my travel or childcare in that period, mind.

Edit - additional side note: we do want another child at some point (likely adopting), and we want to save up to do a loft conversion (it’s an old Victorian house), so likely £10,000 or more. It’s a nice-to-have, though.

5

Consider property taxes if you have that and anything else which you would have to pay by owning a house. Some areas in the U.S. have “home association” fees.

Then in the U.S. rural areas away from the big cities have lower housing costs sometimes. You may be able to find a rural area with an inexpensive house and then factoring in the train to work costs might be lower than living in the city? Driving might be less or more?

Also how much of your time to get to work and back?

The best is if you can get jobs in a rural area and make the same amount of money!

6

I am also located in the US, and not familiar with UK properties or mortgages. But, I work in real estate, and the rule of thumb has traditionally been that you shouldn’t spend more than 28-30% of your gross monthly income on PITI (principal, interest, taxes (property taxes) and insurance (property insurance), and not more than 36% on all loan payments, including car and student loans and the like. Note that these ratios use gross monthly income, before income and social security taxes are deducted.

You gave us your after-tax income at $3,000 per month (I know it is in pounds, not dollars, but I don’t know where to find the pound symbol). I would guess that would equate to about $4,000 per month gross. At 28%, that means you can “afford” $1,120 to $1,200 for the mortgage payment, including escrow of insurance and taxes. That looks about where you would be… lower, in fact, since your $1,200 estimate includes utilities. Adding in your other monthly loan payment of $200 raises the ratio to 35%.

So, you appear to be at the upper end of affordability, especially since you need to account for commuting and child care. If you have $600 in commuting and another $600 in child care, things will be pretty tight. But you seem to be looking at about the same amount in rent, but you wouldn’t have the commuting expense.

I don’t see an obvious right or wrong answer. It sounds like you want to own and have a garden. I don’t think that’s undo-able, but will take a close watch on spending.

7

Why do you think that mortgages are cheaper than renting? Have you compared similar places? A mortgage in a distant suburb might well be cheaper than renting a smaller flat downtown, but that’s not a real comparison.

My advice is to sit down and do the math. Compare what you’d actually be spending on mortgage interest (and maintenance!) versus rent. (Would you need mortgage insurance, too?)

Then, try really hard to separate the decision about whether to buy or rent, from whether you like this particular house (unless this is a very special limited-time offer for some reason). There are other houses.

Also, is any kind of compressed schedule or telecommuting part of the time a possibility for either of you? That could help save on commuting costs (and possibly help make child-care transportation more doable for you).

Finally, congratulations, and enjoy the little one!

8

I think you should find a place closer to your work. 600 is high, and it sounds far. A shorter commute and more cash on hand sounds like a happier existence to me. I realize you’ve fallen in love with a place already, but I think you should keep looking, for something that you love but is better located.

Good Luck!

9

600 pounds may sound like a lot but OP & wife both work in London, one of the most expensive cities on the planet. The daily congestion charge to drive your car into the city during business hours alone is £11.50. Single rides on the tube cost £5; a monthly pass starts at £125 and goes up to £300.

To the OP: How much have you saved for the down payment (not including emergency fund)? I don’t know that much about UK mortgages but AIUI fixed rate mortgages are expensive/rare and adjustable rate mortgages (ARM) are somewhat of a gamble (esp if a hard Brexit leads to higher interest rates, which seems likely). Your £800/month payment could easily go to £1200 without much warning.

10

  1. If one of you makes 2/3 to 3/4 of the income an obvious alternative to look at is for the other to quit working. Then you no longer have the childcare costs, the costs of that partner working (transportation, business clothing, noon lunches), that partner’s income taxes. That partner can spend more time preparing meals–so you don’t grab high priced takeout meals because you are both too exhausted to cook.

  2. Another alternative is to move out of the Southeast (London metropolitan area, etc) to for example the North of England. Housing prices are going to be a lot cheaper and you won’t have the long and high transportation costs.

11

Well, not totally clear-cut, but with all that, it still sounds like buying would be the better option. If it were me, I’d search the market a bit more before pulling the trigger, unless you really feel the property in question is the best you’re ever likely to find.

12

No. You should follow what is called the 36% rule. Google it for better explanations.

Add up all of your firm monthly commitments, mortgage, loans, car payment, other payments, debts to the Mafia, all the expenses that you MUST pay every month. Then divide by your gross (before taxes) income, if it exceeds 36% you are not living wisely.

If you are young and have a firm predictable income that is not at risk, you may boost that number up to a much at 45% short term. A few years. Beyond that you are headed to a rough life. If your future income is not secure, don’t push the 36%.

It is not like the remaining 55% or so is discretionary income. Food, clothing, more clothing for a growing child, schooling for child, entertainment so you don’t end up hating each other, these things and more are just as needed long term as the monthly rent. They are more important for the long term success of your family unit.

It is easy to be impatient when you are young. It would certainly be wonderful if all your expectations could be met. I would advise you to wait a little longer. Not forever, not abandon your plans, just be in a position that you are not putting it all on the line at a time when you do not need to risk what you have.

Of course I have always been fiscally conservative. Do as you feel is right and live with the results.

13

I don’'t know anybody who had “extra money” right after buying a house.

It is always “skin of teeth” financially.

If you want to be 100% absolutely certain you’ll come out ahead, no matter what:

  1. Be filthy rich
  2. Put enough down so that the monthly payments could be covered if you rented it out.

Option #2 is much like option #1: have more money than 98% of all first-time buyers.

Look up what that house sold for when you were 4 months old.

Now do you see why most people grab a house if they possibly can?

In the US, we still have millions of “spare” acres to develop. UK (esp. London’s area) is not going to be adding to the amount of land available.

In the US, commutes (one-way) for the mega-urban areas are routinely 50-60 miles.

If you can possibly swing it, do it!

14

In the SF area, devoting 50% of after-tax (as in the entire paycheck) to housing for all of one’s life is now standard.

If you make $50,000 (pre-tax), the rule when I was a child was: you cannot afford more that $150,000 house.
That is now being pushed to $250,000.

You will not be throwing parties, you may have friends over to watch a futbol game and drink beer.
You won’t be buying a new car for several years.

And: You mention this house looks just right! The current owner’s taste matches ours, so we need do nothing!

What about the slightly (or much) cheaper house with the ugly carpet, bizarre paint?

The thing first-timers don’t ever get right: this is NOT a rental. This is where you will be for 20 years.
In that time, you WILL replace carpet; you WILL DEFINITELY repaint every surface.

If looking at ugly carpeting will get you into a house - look at the carpet until you can afford to replace it.

If the thing is weatherproof with a roof which will last 10 years and the foundation is solid, everything else can be changed at your leisure.

15

First of all, congratulations on the birth of your daughter! I don’t own a house, so I’m possibly not qualified to comment here.

However, one of the reasons I don’t own a house in the UK is that London prices kept going up, much faster than I could save for a deposit. I don’t know whether this is likely to continue (or if I’m just spectacularly bad at money - but I’m not the only person I know in the same situation) but it’s worth thinking about whether - if you don’t buy this house - your saved-up deposit will still be enough to get you a similar house when you find another one you like if that ends up taking a while.

£300 a month commuting costs doesn’t sound that bad to me (though I did live in Brighton for a while, so my idea of acceptable travel costs might be a bit skewed) - but I wonder how much time your commute will take. That’s the thing that, in hindsight, really made things difficult when I lived in Brighton: the amount of time I spent commuting. It was just over an hour each way when things went well - but there are always train problems, so my commute often took longer than that, and I didn’t always get a seat, and a million little things that made it all really irritating. So just be sure before you take this house that you will be fine with the commute, especially if you’re currently in walking distance of work.

Looking at the numbers you’ve given, although I’m not great at maths, it looks to me like you might want to consider whether it would be worth one of you taking a career break while your daughter needs childcare, if either of you would be at all interested in doing that. Cutting your travel costs in half and removing the childcare costs looks like it wouldn’t be that far off one of your salaries, after tax, and you might also be eligible for other tax breaks if your joint income is lower too.

That might impact on your mortgage, I don’t know. But it seems to me that lots of mums (it is usually mums, though there’s no real reason it has to be) in the UK do cut their hours or stop working for a while, precisely because the cost of childcare is so high. If that doesn’t appeal, do either of you have any family nearby who could maybe step in for one day a week and bring the childcare costs down that way? (I assume not, else you’d have mentioned it - but just in case Great Aunt Mildred completely slipped your mind…)

16

What usedtobe said is wisdom and what Dallas Jones said is also wisdom, especially about the entertainment budget. As has been pointed out by almost everyone else, financial caution and divorce of emotion from the transaction are vital.

Some further thoughts,

I’ve bought two houses in my life, both fairly soon after the addition of a newborn to my life. What everyone said about being financially conservative when buying a house is great advice. In 2016 I had to replace the roof (planned for) the windows (planned for) and the water heater (not planned for). The water heater would have ruined us if we weren’t personal friends with the head of the finance company that holds our mortgage.

How handy are you? Can you say, replace a wall outlet or light switch, a shower or bath tub valve? Can you dismantle, clear, repair or replace the plumbing under the sink yourself? How are your painting and more importantly your painting preparing skills for the house? These are some things to consider when you buy a house. You will find yourself developing such skills (if you don’t have them already) just to save a few £’s (sometimes hundreds)

17

What are these roofs made out of? UK roofs are usually tiled (slate, concrete or clay most commonly) and seem to last for a long time.

18

I would find the new jobs first, in the state sector, then move there. NE Scotland is crying out for teachers, for instance.

19

“asphalt” shingles on my house. (can’t remember if they’re really asphalt, just what they’re called sometimes.) this type of roof is good anywhere from 10 to 20 years depending on how much money is invested in it. The one I replaced was 25 years old. the new roof is good for another 20 years.

if the house being considered for purchase has a tile or slate roof, those have some different issues of their own that need to be considered. Really, the roof was just an example of the category of things needing to be considered (house maintenance and repair) when planning finances for purchasing a house, it doesn’t have to be the roof at all, could be anything from windows to water heater, all (possibly) middling to large expenditures depending on how you go about it.

20

With regard to your budgeting - always a good idea - you should budget £100 a month for stuff that needs doing around the house. Probably more the first few months: you will be going to the DIY shops. And make sure you have £200 cash available for an emergency plumber or electrician.