Avo CAN do! 🥑

Enjoy avocado brunch today – or save for a home tomorrow?

For many millennials today, it feels like either/or.

It can seem impossible to get on the housing ladder unless we swap smashed avocado for Smash potato.

But if home ownership is right for you, it’s a question of making the right choices.

  • According to the Institute for Fiscal Studies, the biggest decline in home ownership has been among middle-earning young Brits. We’re talking:
  • those aged 25 - 34
  • in professional jobs
  • earning a comfortable salary by most definitions
  • lacking a key financial accomplishment that most of their parents now take for granted – a home of their own.

It all used to be much more straightforward. The baby-boomer generation was, for the most part, hardwired to save up for property, and this aspiration fitted in well with simpler life choices, wiggle-room in incomes and fewer consumer opportunities.

And 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 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. 

Things have changed. We have new choices – and dilemmas – in our lives. Changing attitudes to marriage and co-habitation, working patterns and job opportunities, mean we are ‘settling down’ later – if at all. We’re also switching up our careers more, with the average person having 12 different jobs over their lifetime. 

Falling travel costs and technology makes it easier to work and live abroad. Plus, we have more consumer goods and services competing for our hard-earned cash. Yes, our parents had to sacrifice certain pleasures to save for property – but they were simpler, smaller ones. The trade-offs we face are much bigger, because our consumer landscape today is much more sophisticated.

We also have to give up far more relative to our parents because the costs of property ownership – in some areas – have mushroomed. Not enough new homes are being built – or rather, homes in the RIGHT areas for our job prospects – while social housing in England is at its lowest level for a decade.  While the price of an average home in England and Wales has actually remained steady, property values in London and the South East – key areas for many young workers – have soared. More crucially, young earnings haven’t kept up, with millennials earning £8000 less in their twenties compared to generation X. And house prices are not the only cost facing first-time buyers, as we will learn shortly. 

No wonder that many renters decide to stay put. And this option does give you more flexibility than buying a home. But what will you want in five, 10 or 20 years time – what’s the downside?

If you have a mortgage, there’s always the chance of paying it off. Those chances massively increase if you manage your budget well, take advantage of low interest rates by overpaying and find a super-sweet mortgage deal.

But rent can turn the screw over time, especially if it continues to go up. And unfortunately, experts from the Royal Institute of Chartered Surveyors have predicted that rent will climb 15 per cent over the next five years as suitable stock is reduced and demand from tenants keeps coming. Nothing is guaranteed – certain regions have actually seen drops in rent (see below) over the past decade, so it rises across the board are not a dead cert.

But if even if rents remain static or even drop, this is hard to predict and far less under your control compared to managing a mortgage. And without wishing to scare the bejesus out of you, you may want to consider costly responsibilities coming down the track – like bringing up a family or looking after elderly relatives. In those circumstances, you may be very glad that you took the chance to fix or reduce your housing costs earlier on. Another big tick in home ownership’s favour is the stability it brings. Okay, so maybe only a minority of landlords turf out well-behaved tenants at the drop of a hat. But rising costs at the end of contracts, unreasonable limitations on behaviour and delays in getting things fixed are all-too common. And if you can reduce your housing costs over time, you’ll find it far easier to commit to personal savings and your retirement pot. 

Okay. So you’re a realist. You totally get that it’s unlikely that you’ll ever be able to afford a home with 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, tinned-foods existence that their parents endured when they were doing up grotty dumps and trying to pay off a mortgage, and declare that utterly insane.

Home ownership really isn’t for everyone, and it’s a decision that should be based on your circumstances, location, career prospects and future goals. Even if renting is more expensive that home ownership in most cases, paying that premium is undeniably better than buying a property in the wrong area, at the wrong time, at the wrong price. With house prices actually falling in real terms for half of all wards in England, this is a lesson some first-time buyers have learned the bitterly hard way.

But there is a huge difference between someone who has made a rational, well-considered reason to rent – and someone who has just given up hope. 

You CAN buy...

So in order to buy a property, you’ll probably need to take out a mortgage – effectively a home loan. Of course you know that already – if you can afford to buy a home with cash, you probably don’t need to read this!

Given the potential sums involved, wouldn’t it be lovely if we could just go to a bank (or building society) 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 actually got away with that over a decade ago. Before the financial crash, mortgage lenders were lending the entire value of properties to borrowers with very few checks.

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 too.

What does this mean? 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.

The key concept to suss out is LTV – it stands for Loan-to-Value.

Let’s think of it like a piece of cake (yum). 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. 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.

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 below. 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.

This is pretty easy to nail down. (Yay!) 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.  Based on the average property price for a first-time buyer, with a 10 per cent deposit, you would need to save £21,966. 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 £21,966 (if that is the average for your area – do check!) by 60 to get a grand savings target of…

£ 0 !
Maybe add a few pennies on top 😉

Sounds like too much? Just extend your time horizon – save for six years (or 72 months) and the amount drops to around £305. 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…FIND OUT MORE ABOUT THOSE VERY SOON!

CONGRATS!

You’ve hopefully got a better idea of how to save up for a home and if ownership is right for you.

Please be assured no avocados were hurt in the making of this guide.

You can find out more about government-backed Isas for first-time buyers here and take back the power with our guide to the rental revolution!