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I have recently taken on a fixed-term contract for three years, which is giving me a salary significantly higher than I am used to. After the three years, however, it is very likely that my salary will drop to its normal amount.

My new salary currently gives me just enough to get a mortgage to buy a property in my city, together with quite a large amount of savings I have. But after the three years, I probably will no longer be able to afford the mortgage repayments.

So my plan at the moment is to take out a mortgage on my current salary, buy a property, live there for three years, and then sell it once my salary decreases. I've figured that this will be cheaper than renting for this entire period.

What I am interested to know is what kinds of mortgages I should be looking for to suit this plan. One option might be to go for a mortgage with a low fixed-rate for three years. But then when I sell the property, I imagine there will be a charge for an early repayment. Any general advice on this? Is this even a good plan at all?

My specific details are:

  • I live and work in the UK.
  • My cash savings (for the deposit) is £150k.
  • The property value is around £450k.
  • The mortgage will therefore be around £300k.
  • My new salary is £65k / year.
  • My salary in 3 years will probably be around £45k / year.
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    Early repayment charges exist in some but not all mortgages. If that's your concern, shop around. I'd be more concerned about whether three years is too short a time for this to really be cheaper than renting a house... and remember that selling a house can take many months during which you're still paying mortgage. – keshlam Jan 10 '16 at 3:11
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    Any reason you are not looking at property that you can afford after 3 years as well. Rather than live lavish for 3 years, you may moderate it and will not have to go through this. – Dheer Jan 10 '16 at 4:40
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    Remember stamp duty, too. Last time I looked at it it was more than a year's rent, so it takes quite a while for you to "break even" on buying rather than renting (not to mention the maintenance costs and risks that would usually be borne by the landlord are yours now). – Ben Millwood Jan 10 '16 at 9:54
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    @BenMillwood Stamp duty + various other buying costs on a £450k property would probably come to about £15k at the moment – Andrew Jan 10 '16 at 13:41
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    Have you even spoken to a lender yet? A bank may not be so willing to give you a mortgage based on a new higher temporary salary. You are proposing to get a mortgage that's nearly 5X your new income. That's a red flag to me. – JTP - Apologise to Monica Jan 11 '16 at 13:24
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Sorry, from the details you have provided, this is an awful plan. In general, it's good practice for a mortgage along with property tax and insurance to cost less than 30% of your monthly income. A 300K mortgage will cost just under 18,000 or so. Once you add tax and insurance, you are well over 30%.

Keep in mind, banks will often be happy to sell you the rope to hang yourself. The large deposit you are offering looks good to a bank as it lowers their risk, but also gives them more reason to foreclose in 3 years when this blows up on you.

If you planned to stay, and kept the higher salary, this deal would still be ill advised, although I'd recommend a bit different course of action - I'd suggest finding a house that was a good candidate for a room mate or two. If rents are so bad where you want to buy, then you should have no problem getting others interested in this. The right house with this extra income can turn an otherwise bad deal into something manageable.

For your situation, even the above excellent advice may not be enough. The cost to buy/sell along with market risk, may still make this a bad deal.

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So essentially from a math point of view;
The Rent you save should equal the Property tax, Mortgage Interest etc you pay. You mention that you are already figured this and you infact have overall saving.

So the only question remaining is the risk in this strategy;

The fact that you can't afford it after 3 years indicates you may be buying something that you can't afford.

Selling real estate is time, effort and money.

3 years is a short span and the property price can go down from 450k.

From the time you list the property for sale, to the time it gets sold you are still paying mortgage and property tax.

There would also be agent/lawyer cost for sale.

If you have a bigger house, one tends to spend more on furniture and other stuff.

  • The reason I'm not going to buy something cheaper which I can afford after my salary drops, is that I live in London and need to be Central for work -- so getting a one-bed on a £45k salary is not likely. Therefore, I would have to rent for three years, and I thought it would just be cheaper to buy for this period. – Karnivaurus Jan 10 '16 at 13:35
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    @Karnivaurus, it's funny how you haven't mentioned the rent you would be paying compared to the mortgage repayments? Nor have you included any closing costs when buying and selling a house and any maintenance cost. It seems like you have already made your decision to buy a house on reasons other than which is the best financial outcome, and just want someone else to agree with you that you are making the right choice. But every one seems to agree that you're making the wrong choice, especially when you don't provide all the information. Plus this site is not a free advisory service. – user9722 Jan 10 '16 at 22:25
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You could buy the property and rent it out if it becomes unaffordable. However keep in mind that a rise in interest rates may hit you as well in the future. This is attractive especially if property prices turn out to not be so good after three years. You could essentially wait until you're making good money on the price and earn rental yield in the meanwhile.

However also note that selling a home that is not your primary home in the UK will hit you with capital gains tax when you sell.

So it depends on how much risk you're willing to take. It's not a bad move long term, but it could lock your money away for a decent period of time while you wait for a beneficial time to sell, making you unable to buy a property elsewhere and also preventing you temporarily from living in the one you already own.

One final thing I should say is if you follow this strategy be conservative and sell/rent out your property several months before your three year contract expires.

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