What to do with £150,000?

Sep 19

If you earn £30,000 a year and have a good credit rating, then you could borrow between three and five times that amount from responsible mortgage lenders. However, how clued up are you when it comes to saving for a mortgage? Do you know how much you need to save in order to put down a deposit? I’m going to throw a more frightening question at you – do you know how much you will have actually paid back at the end of your mortgage?

A review of mortgage lenders reveals that they are currently offering between 60 and 90 percent loans to the value of the property. Lower loans to value mortgages attract lower interest repayable rates, usually between 1.5-3.5%; maximum loans to value come with interest rates between 3.5-5%. The market still offers tracker mortgages in addition to fixed rate mortgages, however, a number of lenders also offer discounted mortgage interest rates too.

So, there’s still a lot of choice concerning types of mortgage available, but bear in mind the more money you can save and put forward to a deposit, the less you will be borrowing and at a lower rate of interest.

Let’s see that in action:

Take a property that is worth £230,000: If you’re renting in West Hampstead, it is possible to get a studio or even one bed flat around that area for that price.

You already have 35% or £80,000 saved. You want to borrow, £150,000, which is 65% of the property value.

At 2% over 25 years you would be paying around £630 a month. Or £189,000 pounds in total: £150,000 borrowed, £39,000 in interest. At the end of that period you would hope that your property had risen in value to £269,000 – the original value plus the rate in interest.

However, let’s say the property was worth £165,000 and you were still borrowing £150,000, because you had £15,000 saved.  In this case however, £150,000 represents 90% rather than 65% of the property value.

At 5% over 25 years you would be paying around £880 a month or £264,000 in total, £150,000 on the original loan plus £114,000 in interest. Therefore, as well as paying back a higher monthly amount, you would be paying a lot more in interest and hope that, at the end, your original £165,000 property had risen in value by £114,000 to £279,000, compared to £269,000 on an original property worth £230,000 – a lot less risk.

In other words £80,000 allows you to borrow £150,000 and pay it back plus £39,000 over 25 years whereas £15,000 allows you to borrow £150,000 and pay it back plus £114,000 over 25 years. Having £80,000 saved up will also save you £10,000 over 25 years:

Deposit: £80,000 + borrow: £150,000 + interest: £39,000 =  £269,000

compared to

Deposit: £15,000 + borrow: £150,000 + interest: £114,000 = £279,000.

You need to consider then, how much choice saving a further £65,000 could give you – what property to buy, as well as reducing monthly payments and minimising risk.

Being able to save up for a third of value of your house results in lowering your monthly mortgage by a quarter – the difference between paying £880 and £630 a month as well as significantly reducing the amount you pay back in interest – an extra £39,000 over 25 years on a lower interest rate compared to nearly three times that amount – £114,000 – on a higher rate of interest.

So, if you are able to get a mortgage for £150,000, you need to think about how you can best make it work for you. Even this little example: Saving £700 for 2 years would give you the 10% for the £165,000 property above.

However, saving for a further three years would give you £35,000. Assuming the price hadn’t risen, a 65% loan to value £130,000 mortgage at 2% would cost £560 a month or £168,000 in total. Therefore, waiting and saving a further three years, from £15 to £35 thousand means that not only would you borrow less, you would pay back £38,000 rather than £114,000 in interest. Saving a further £20,000 over three years, then, would save you paying out £76,000 over the lifetime of the mortgage repayment. Saving £20,000 over three years would also mean the original £165,000 property price would only need to increase by £38,000 to £203,000. If you are wishing to take out at £150,000 with savings of £15,000 for a property worth £165,000, it would make financial sense, then, for you to save and wait another three years.

Attribute to: Duncan Cumming

Having established his career in digital sales and marketing, Duncan formed his own Digital Marketing agency UK, Cayenne Red. Along with the running of his business, Duncan spends time writing informative and helpful articles about his areas of interest including finance.