Live for today or save for tomorrow? It’s the perennial dilemma facing us. We think it’s nigh-on impossible to get out of rented accommodation and into housing without swapping the smashed avocados for Smash potato…but it doesn’t have to be either/or. When it comes to housing, we’ve got your back. It’s time to make some choices (and changes)…
How did we get here? Housing unpacked…
According to the bods at the Institute for Fiscal Studies, the biggest decline in home ownership has been among middle earning young Brits.
😔 those aged 25 – 34
😔 in professional jobs
😔 earning a comfortable salary by most reasonable definitions and
😔 lacking a key financial accomplishment that most of their parents now take for granted – a home of their own.
In 1995-96, 65% of this group owned a home, but just 27% do in 2015-16, with the biggest drop in south-east England.
Ah, the simpler days…
It used to be more straightforward. Our parents were almost hardwired to save up for property, and this aspiration fitted in well with simpler life choices, wiggle-room in incomes and fewer ways to dispose of money.
The labour market was, broadly speaking, also pretty compatible with this domestic set-up – staying in one home for many years made sense at a time when workers had jobs for far longer.
The nearest that our parents got to a painful pinch point was a pronounced jump in interest rates and inflation in the late 1980s. But even then, many homeowners (including my parents) were massively motivated to pay off their mortgages so they could get their housing costs under control.
The renting disadvantage
If you have a mortgage, there’s always the chance of paying it off. But rent can turn the screw over time, especially if it continues to go up and so do responsibilities (like kids or elderly parents), because it puts the squeeze on everything else including personal savings and your retirement pot.
Yes, life is different now. We’re not our parents. We have new choices and dilemmas in our professional and personal lives. Changing attitudes to marriage and co-habitation, working patterns and job opportunities, mean we are ‘settling down’ later (if at all), moving jobs (and even cities/countries) more frequently and being far more active consumers than babyboomers were in their yoof.
Meanwhile not enough new homes are built (or rather, homes in the RIGHT areas for our job prospects), prices keep on rising, and earnings just can’t seem to keep up. No wonder renting seems the only option. And you can be footloose and fancy-free. But will you want that in five, 10 or 20 years time – what’s the downside?
There aren’t any magic bullets – but the situation isn’t as grim as it seems…
Okay, you’re probably never going to have your own walk-in Nike closet or a private forest with trees planted by Pierce Brosnan. But is really too much to hope for your own pad one day?
The problem is that pessimism has set in. Many young people today don’t believe they’ll ever earn the kind of money needed to even consider a mortgage. And once we fall into renting (unless we have the B’n’B of Mum and Dad to fall back on) we get used to the grinding reality of successive landlords who are effectively strangers, running our home lives and deciding (possibly on a whim) whether we can stay or go.
It is a life that many ‘boomers parents wouldn’t have wanted for us. But some young people may also look at the austere, penny-pinching, baked beans-based existence that their parents endured when they were doing up grotty s***holes and trying to pay off a mortgage, and declare that insane.
However, it doesn’t have to be one or the other. There is a compromise between the two, and it is achievable. It’s down to you.
🤔You can buy, but probably not in the nicest place.
🤔You can buy, but you may have to stay put awhile to make the sums add up.
🤔You can buy, but forget the Instagram filters and those pics of Jennifer Aniston’s pad.
🤔You can buy, but you’ll probably have to roll your sleeves up and go on a crash DIY course (something the Boomers took as read).
🤔And you CAN buy sooner rather than later – but only if you can streamline your outgoings (that doesn’t mean forgoing the avocados!).
It’s all about what’s right for you – it’s your life!
Why do you need to save?
Okay, mortgages are a form of debt. So in theory, you could go to the bank (or building society) NOW and say “gimme some money so I can go buy a house please, and I promise to pay it back. Pretty please!”
And you may have got away with that, like, a decade ago. Before the financial crash, mortgage lenders were lending the entire value of properties to borrowers without many checks on whether they would be a good position to pay them back.
Now? Mortgage lenders don’t just look at your income relative to the kind of property you’re hoping to buy (or the joint income of you and your partner/co-buyer). Thanks to something very boring but very important called the Mortgage Market Review, lenders also have to scrutinise your outgoings and what your credit rating looks like.
This isn’t all bad news. While you might still get four or five times your income, you’ve got to have a sweet credit history and your finances will get the Spanish inquisition. The new buzzword? Affordability. (At least, it is for us geeks…)
The key concept to suss out is LTV – it stands for Loan-to-Value.
Let’s think of it like a piece of cake (hmm). The value of a house you want to buy makes up 100 per cent of the cake. Your bank may be able to loan you anywhere between 65 and 95 per cent of the cake (if you’re dead lucky!) But you’ll have to find the rest. So if your bank is prepared to provide you with a 65 per cent LTV deal, you’ll have to cough up the rest – i.e. 35 per cent.
So if you earn the UK’s average salary – £25k, with a £1k bonus each year – you can probably expect to get a mortgage loan worth £82,900 – £115,000.
That won’t be enough to buy most worthwhile homes in the UK today. So it’s time to #getsaving if you want that house.
FACT CHECK: The number of first-time buyers in Britain has hit a 12-year high, despite the national average deposit soaring to more than £33,000. While the number of people taking their first step onto the property ladder has climbed consistently for the past five years, the figure hit a fresh high in the first half of this year at 175,500. This is the third consecutive year that first-time buyer numbers have topped 150,000 in Britain, more than double the record low of 72,700 in the first half of 2009 following the financial crisis. However, the figure is some way off the 190,900 record of 2006.
Before you read on, it’s crucial to figure out if you are actually ready to buy. Take the Young Money checklist…(COMING SOON)
How much should I save for a deposit?
In an ideal world, you would aim to save as much as possible – but many of us are not living in an ideal world!
Yes, you CAN get a 95 per cent LTV mortgage, as these generous loans have made a big comeback in recent times (like crop tops and Craig David). That means you only have to raise a 5 per cent mortgage. If you’re living in a hovel or desperate to get away from Mum and Dad’s place, you may decide that once you hit the magic 5 per cent mark, it’s time to check out.
In many respects, this makes sense in a time when mortgage rates are actually still quite low – despite the base rate going up recently – and rates on magic money trees like the Help to Buy Isa and Lifetime Isa aren’t terribly fetch.
But the more you borrow, the more risk you’re expecting your lender to take. That means they WILL be more of a Nosy Parker when it comes to your finances, but also you’ll have a higher mortgage rate, higher repayments and/or a longer repayment time than if you had saved up more now.
So aim for 10 per cent or more, while not beating yourself up if this is a bridge too far. If in doubt, consult our broad checklist. FYI these are rough guidelines, not holy gospel. If in doubt, speak to a mortgage broker – more info on that coming soon.
Loan to value becomes a vital ratio as time goes on. If you have a 95 per cent LTV mortgage, you will start off owning 5 per cent of the ‘equity’. But if prices in your area suffer a dip of 5 per cent, you will own no equity, and if they fell 6 per cent you would be in ‘negative equity’.
If all goes well, you will chip away at the loan as the years go by and own more equity, which will help you invest in your second home, perhaps even with a lower LTV mortgage. But remember, although property prices are likely to rise over time, they may not go up in a straight line. So the more equity you can hold at any time, the better.
Set your savings target
This is a bit easier to nail down. Simply find the area you’re aiming to buy and suss out the average price for a FTB home (a quick search of a property search engine will give you a good idea). Next, figure out the absolute minimum deposit required for that home (5 per cent) to come up with a ballpark savings target.
Then think about how long you want to save for. If it’s five years, multiply that by 12 to get the number of months you’ll save for: in this case, 60. So finally, divide your ballpark savings figure by the number of months you’re planning.
There are LOTS of scary figures floating around when it comes to the average deposit, and the truth is that there’s NO definitive figure. According to Sellhousefast.uk, a typical first-time buyer would have needed to save £25,867 to buy their first property in 2017. This sounds about right to us, albeit as a crude average that will fluctuate by the year (and by the region).
In our example above, however, we can divide £25,867 (if that is the average for your area – do check!) by 60 to get a grand savings target of…
£431.1166667! (haha, okay, we’ll round it down to £430 quid). Sounds like too much? Just extend your time horizon – save for six years (or 72 months) and the amount drops to around £360. Save for a decade and it drops to £215.55.
And bear in mind that while you can get a free 25 per cent boost from the government (up to a set value) thanks to certain magic money trees…
ARE YOU READY TO BUY? Take the Young Money checklist…(coming soon)
FIND THE RIGHT PLACE FOR YOU – hunt down your perf. property (coming soon)
GET THERE QUICKER – here’s how to blast your budgeting and strengthen your saving (coming soon)
PASS GO, PICK UP £33K! Magic money trees for first-time buyers (coming soon)