We’ve saved a deposit to buy our first property, but with mortgage rates higher than we expected, we now think the monthly payments might be a little tough for the first few years.
The way we see it, we have two options: either move from the two-bedroom property we initially wanted to a one-bedroom property, with a view to moving to a larger property in a few years, or buy a two-bedroom home. and Take in a tenant for the first few years to help pay the mortgage.
What would this mean for our mortgage application? Would we have to tell the lender that we plan to rent a room and would that income be counted toward our affordability calculation? And what would be the situation regarding taxes? Via email.
How many rooms do you need? With higher mortgage costs, some aspiring homeowners are making compromises and opting for a smaller, cheaper home to get up the ladder.
Ed Magnus from This is Money responds: There will undoubtedly be first-time buyers across the country facing a similar dilemma regarding mortgage rates.
According to real estate agent Hamptons, there are already signs that buyers are compromising and purchasing smaller homes than they would have otherwise.
Earlier this summer it reported that one- and two-bedroom homes were selling faster than three-bedroom homes for the first time since 2010.
It also found that one- and two-bedroom properties experienced the smallest year-on-year falls between asking price and asking price.
Larger homes, on the other hand, have experienced greater affordability pressures.
The average two-year fixed-rate mortgage rate is now 6.66 per cent, according to Moneyfacts, up from 2.38 per cent two years ago.
New era: After more than a decade of relatively low and stable mortgage rates, borrowers are having to face a harsh new reality that adds hundreds of pounds to their monthly costs.
This means the average person who takes out a £200,000 mortgage and pays it off over 25 years will shell out £1,370 a month compared to £885.
He has pointed out that a tenant could help him cover excess mortgage costs.
The Rent a Room scheme allows homeowners to earn up to £7,500 each year tax-free by renting out a room within their property, as long as it is their main residence and they continue to live there.
Tax exemption is automatic if you earn less than £7,500, meaning you won’t need to complete a tax return if you earn less than that.
Anyone earning more than £7,500 from a tenant in a given tax year must file a tax return and state that they qualify for the subsidy.
The tax-free allowance is reduced to £3,750 if another person receives income from renting accommodation in the same property, such as a joint owner.
It is also important to note that the owner cannot use the plan if the rented room is not part of the main house or is not furnished.
Nicolas MendesMortgage technical manager of the broker John Charcol and jeremy leafNorth London estate agent and former residential chairman of Rics, give their thoughts below.
A one or two bedroom house?
Jeremy Leaf responds: Many potential buyers face this dilemma; The best advice is to go in with your eyes open and do as much research as possible.
We are finding that many potential buyers are developing their own stress tests in case interest rates rise further.
They are ensuring that they can pay their mortgage not only now but in case it becomes more expensive. She doesn’t try too hard; If opting for the twin room means it will be difficult for you, maybe think twice.
Many people advise against a one-bedroom apartment instead of two, thinking that the smaller property will be more difficult to sell when the time comes.
Future-proofing: Those who choose to purchase a one-bedroom property as their first home may find that they have outgrown it quite quickly.
But think about your own area and take a look at what else is on the market – if there is a surplus of one-bedroom apartments on the market now, there is a good chance that when you come to sell that will still be the case.
However, in our area this is the situation with two-bedroom properties rather than one-bedroom properties; There are many of the former for sale and only a handful of the latter.
A room with two beds will give you more flexibility and space, so think about your lifestyle and any changes that may occur in the coming years.
If you had children, for example, you could more easily live in a larger property than a smaller one, where you might be forced to sell it and move sooner rather than later because it doesn’t fit.
What are the mortgage implications?
Nicolás Mendes responds: There’s no doubt that mortgage rates have made buying a home for the first time complicated.
Fees have a direct impact on monthly payments, which means having to re-evaluate which properties will be affordable within your budget.
It’s comforting to know that you haven’t taken the common approach of extending the mortgage term, as this will mean paying more in the long run, but it may also have unknown consequences later by extending the term beyond your expected retirement age.
Buying a home is a long-term investment and you’ll want to make sure it meets your needs now, but also those of the future.
While we expect mortgage rates to decline over the next 12 months, they are not expected to fall below 4 percent or return to below the 2 percent that homeowners have been fortunate enough to experience in the past.
Mortgage dilemma: Most lenders will accept applications with a maximum of two tenants residing in the property
You’ll want to make sure you keep this in mind when reviewing your budget now and in the future.
Taking on a tenant is one option, although most lenders will accept applications with a maximum of two tenants residing in the property, they will not accept the income of one tenant for affordability.
To use tenant income towards affordability, the pool of lenders is substantially reduced to a handful of building societies, with certain caveats.
For example, Dudley Building Society will cap the maximum income it will consider at the level set by the Government under its ‘rent a room’ scheme (currently £7.5k per annum).
It must also be considered that the property is capable of meeting the needs of the borrower and its tenant, only income from one tenant is allowed, the maximum loan-to-value ratio must be 80 percent and cannot be interest. not just a mortgage either.
Finally, Dudley BS states that the rent paid by the tenant should not represent more than 25 percent of the monthly mortgage payment.
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