Should I buy a nicer house in a worse area for less than I budgeted?

Question

I am a single male in my mid twenties, based in the UK and looking to buy my first home. I see this home as a 'stepping stone' home and intend to live in it for 5-15 years until I get a partner and plan on having children and then upgrading to a better house.

I have a budget of around £180k for a house based on my deposit and what the bank would lend me as a mortgage. I feel now is a good time to buy due to a volatile housing market as well as low interest rates on mortgages.

I have seen some houses in a great area for around the £180k mark and I believe due to the area these would rise in value. I have also seen a slightly better specification house in a worse area for around £130k - which is significantly under my budget. This would mean I could buy the house and still have a lot of additional deposit left over as well as the monthly repayments being lower. With the surplus money I would consider 'overpaying the mortgage' in order to reduced the mortgage term and therefore build up more equity in the house. I am aware overpaying the mortgage sometimes comes with penalties and / or restrictions.

So my question is - is it worth going for the much cheaper house in order to build up more equity or should I go for the more expensive house in the hope that I would still build up equity and the house value would also increase more than the cheaper house? Or am I overlooking some major details?

Answer 1

Welcome to Money.SE. You know, questions like this can help point out good/bad for a given choice, but there isn't likely to be a 'right' answer. I can offer a well reasoned answer, only to find another respected member offers the exact opposite.

Given the way you frame the question, I'd prefer the 'worse' house in the 'better' area. As you suggest, its prospected for holding its value and appreciating are far higher than one in a less desirable area, unless the neighborhoods change as well.

Regarding the 'overpaying' - given the low interest rate environment across the world, and the fact the long term inflation isn't dead, most low rate mortgages now have an effective rate close to zero. I'd think twice about paying faster on what may be the lowest rate you may see in your lifetime. Unless, of course, you are so risk averse, or don't trust that you will save the difference, that this advice isn't useful to you.

Answer 2

Leading up to the last big housing dip, many people borrowed near their limit planning on increased home values to provide them with equity, many of them were stuck in a bad spot when home values dropped.

I don't know UK bank policy, but in the US a standard mortgage can be issued that makes your total monthly debt payment up to 45% of your gross income. In my view, for many people borrowing the maximum they qualify for makes them over-leveraged. It can be fine if they have ample savings, if home prices increase, or their wages hold up/increase. A good way to avoid financial stress is living well below your means. Buying the cheapest house you can be comfortable living in and having more liquid assets is a good way to set yourself up to weather tough times.

It's impossible to know which strategy is best financially, it could be that the more expensive home doubles in value over the next 5 years while the cheaper one barely increases. Maybe both houses drop in value by 25% over that time which would leave you in a much bigger hole if you got the more expensive house. It could also be that the savings from buying the cheaper house would have gone up 20x if invested in the stock market over those same 5 years. There's always something better you could have done with your money in hindsight, so the best you can do is make a decision that you're comfortable with even if things don't go in your favor.

Answer 3

The correct answer to this is nobody knows.

The reasons for this are simple:

1. You are assuming that the "worse area" will never become a "better area". There are some places in the UK which historically have been seen as poor areas and then received investment and become "re-generated" such that house prices have risen significantly, when that was otherwise an unexpected event. You can find examples of this in the North East and North West of England, amongst other areas.

2. You are assuming that house prices will continue to rise. In the medium/long term, historically, this has been a general trend in the UK. You've referenced a time period of "5 - 15 years". It's not possible to say how the housing market will fare during this time.

But most importantly:

3. A house is only worth what a buyer is prepared to pay for it.

You don't know what you could sell a house in either area for 5 - 15 years in the future. It doesn't matter what you feel your house is worth. If nobody is prepared to pay that amount any questions on whether it was a good or bad decision financially are a moot point.

An extreme example would be if literally not a single buyer wanted to buy your house, technically it is "worth" £0. You will receive that amount, i.e. nothing, if nobody will buy it. That's a very unlikely scenario, but highlights the point that the worth/value can differ for a buyer and seller. In terms of gaining money through a sale, it depends on what the buyer considers it is worth - not what you as a seller think it's worth.

Since nobody can tell you the answers to these points, either option could be seen as good or bad. It really is that simple.

Answer 4

I think there are two factors to balance out here:

• Buy the most house you can afford
• Be realistic about what "afford" means

In general, it is a good idea to buy as much house as you can afford - effectively taking a step-and-a-half on the housing ladder rather than just a step.

However, in working out what you can afford, don't just take the bank's word for it on what they will lend you - even with all the post-2008 affordability checks etc., to my mind you can still borrow way more than would be sensible. You have to bear in mind that interest rates are at a historic low and have been for a long time - use some mortgage calculators to test what the monthly payment would be if rates rise to 7%, for example. Even if you get a 5 or 10 year fixed rate deal, when that deal ends you will need to shop around and find an affordable option, and on that kind of timescale it's perfectly possible for rates to be 7% or even higher. When we did our own affordability checks we used 5%, 10% and even 15% to make sure we could afford the highest option even for a few months if we had to.

Answer 5

From the purely monetary viewpoint in which you are asking the question, I agree with Vicky that you should consider what "can afford" really means - calculate what you will be comfortable paying at the moment, what you can pay if Covid lasts another 2 years and the housing market tumbles into chaos or if a vaccine is available tomorrow & the mortgage starts skyrocketing. Also consider what happens if you meet your partner tomorrow and end up moving out within one to two years.

Then add the personal factor - do you want to live in the nicer area or would the "worse" area actually be better for you (close to work, places you want to go, transport hubs etc). Do you like the more expensive houses or would you want to go with the cheaper one and be able to afford nicer furnishings within it?

Answer 6

The real estate market will have its ups and downs and there's no guarantee property prices will go up but buying a good house in a bad area (that's showing no signs of improvement) is always a losing bet. Buying a "lesser" house in a good area will, at least, give you a fighting chance.

Choose the best area you can afford, even if the house requires some repair. You're young and if you have the time and talent, you can upgrade the house yourself (paint, reno of kitchens and bathrooms) and increase its value. Old fashioned as it might seem, sweat equity is the best way to start in the real estate game.

In any event, you're young and have plenty of time to recover if you make a mistake.

40+ years of successes (and failures) in real estate investing have taught me a few things...

Answer 7

I am not sure buying is a good idea at all in your situation. You say you want to buy it as a 'stepping stone', that you intend to keep it for 5-15 years. This suggest to me:

1. You expect the house price to go up in the next 5-15 years, i.e. you see buying a house as a better investment than a diversified market portfolio
2. You probably see renting as 'throwing money away'

Both of these are very questionable assumptions. If you were renting instead, how much would it cost you compared to the price of a house? When you count all the expenses and opportunity costs, chances are renting and putting the rest of the funds into a diversified market portfolio is financially a better bet. Add to that the fact that you are very young and may very well want/need to move in the next few years (say, for a better job).

If you simply want to enjoy owning a house, that is fine. But I would see buying a house as consumption, not as a way to build wealth to afford a better house in 5-15 years.

Answer 8

Octavian mentioned it already but - whyever - got downvoted. I only want to emphasize that the location matters most. I would even say it is clear obvious. Consider you own 10 squaremeters at the NY Times Square or 10 squaremeters somewhere in the outback. Even when you build only a dog house in NY and the most impressive mansion in the outback, the location in NY will be much more precious. In addition to that, as gentrification is an ongoing topic, I wouldn't buy premises where people leave over time. But when you buy space where the people move to, and even if it is "only" in the suburbs, its value will increase. Because you own something that is requested.

Answer 9

A famous saying around real-estate agents and real-estate developers about what decides the worth of a property is

Three of the most important things to consider:

• Location
• Location
• Location