We saved a deposit to buy our first property, but with mortgage rates higher than we expected, we now think the monthly payments could be a financial challenge for the first few years.
The way we see it we have two options: either downgrade the two-bed property we initially wanted to a one-bed property, with the intention of moving to a larger property in a few years, or a two-bed property buy bedrooms and hire a renter for the first few years to help pay the mortgage.
What would this mean for our mortgage application? Should we tell the lender that we plan to rent out a room, and should that income be included in our affordability calculation? And what would the situation be with regard to taxes? Via email.
How many bedrooms do you need? With higher mortgage costs, some aspiring homeowners are making compromises and opting for a cheaper, smaller home to get on the ladder
Ed Magnus from This is Money answers: There are no doubt first-time buyers across the country facing a similar dilemma regarding mortgage rates.
There are already signs that buyers are making compromises and purchasing smaller homes than they otherwise would have, according to real estate agent Hamptons.
Earlier this summer, the company reported that one- and two-bedroom homes sold faster than three-bedroom homes for the first time since 2010.
The research also found that one- and two-bedroom homes had the smallest year-on-year decline between asking price and sales price.
Larger homes, on the other hand, are under greater pressure on affordability.
According to Moneyfacts, the average two-year fixed-rate mortgage rate is now 6.66 percent, up from 2.38 percent two years ago.
New Era: After more than a decade of relatively low and stable mortgage rates, borrowers are facing a harsh new reality that adds hundreds of dollars to their monthly costs
This means that the average person taking out a £200,000 mortgage and paying it off over 25 years will have to pay £1,370 per month, compared to £885.
You pointed out that a tenant can help you cover excess mortgage costs.
The Rent a Room Scheme allows homeowners to earn up to £7,500 tax-free every year by renting out a room in their property, as long as it is their main residence and they continue to live there.
The tax exemption is automatic if you earn less than €7,500. This means that you do not have to complete a tax return if you earn less.
Anyone who earns more than £7,500 from a tenant in a given tax year must file a tax return and declare that he or she is eligible for the payment.
The tax-free allowance is reduced to £3,750 if someone else receives income from renting out accommodation in the same property, such as a co-owner.
It is also important that a homeowner cannot make use of the scheme if the rented room is not part of the main home or is unfurnished.
Nicholas Mendesmortgage technical manager at broker John Charcol and Jeremy BladNorth London estate agent and former chairman of Rics, give their views below.
A house with one or two bedrooms?
Jeremy Leaf replies: Many potential buyers face this dilemma; the best advice is to go in with your eyes open and do as much research as you can.
We notice that many potential buyers are building in their own stress tests, in case interest rates rise further.
They ensure that they can pay their mortgage not only now, but also if it becomes more expensive. Don’t overextend yourself – if choosing the twin bed means it will be a struggle, maybe think twice.
Many people advise against a one-bed flat instead of two, as they think it will be harder to sell the smaller property when the time comes.
Future-proof: Those who choose to purchase a one-bedroom property as their first home may find they outgrow it quite quickly
But think about your own area and see what else is on the market – if there is a surplus of single beds on the market now, chances are that will still be there when you come to sell.
However, in our region this is the situation in two-bed properties rather than one-bedroom properties; there are many of the former for sale and only a handful of the latter.
A double bed gives you more flexibility and space, so think about your lifestyle and any changes that may happen in the coming years.
For example, if you were to have children, you might find it easier to live in a larger property than a smaller one, where you might have to sell and move sooner rather than later because you don’t fit in.
What are the consequences for the mortgage?
Nicholas Mendes replies: There’s no doubt that mortgage rates have made buying a home for the first time more complicated.
Rates have a direct impact on monthly payments, meaning you’ll need to reassess which properties are affordable within your budget.
It is reassuring to read that you have not taken the usual approach of extending the mortgage term as this means you will have to pay more in the long run, but can also lead to unknown consequences later by extending the term beyond the expected retirement age.
Buying a home is a long-term investment and you want to make sure it meets your needs now, as well as for the future.
While we expect mortgage rates to fall over the next twelve months, they are not expected to drop below 4 percent or return to below 2 percent, which homeowners have fortunately experienced in the past.
Mortgage Dilemma: The majority of lenders will accept applications with up to two tenants living in the property
You want to make sure you take this into account when assessing your budget, now and for the future.
Taking on a tenant is an option, while the majority of lenders will accept applications with up to two tenants living in the property, they will not accept a tenant’s income towards affordability.
To use renters’ income for affordability, the pool of lenders is significantly reduced to a handful of mortgage banks, and with certain caveats.
For example, Dudley Building Society will limit the maximum income it will consider to the level set by the Government under its ‘rent a room’ scheme – currently £7.5,000 per year.
The property must also be assessed as being able to meet the needs of the borrower(s) and their tenant. Only income from one tenant is allowed, the maximum loan value must be 80 percent and it cannot be interest. also only mortgage.
Finally, Dudley BS states that the tenant’s rent should not exceed 25 percent of the monthly mortgage payment.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow a commercial relationship to compromise our editorial independence.