We understand that the property market for young people is abysmal According to Statista, the average price of a house in the UK as of July 2019 was £232,000, up almost 100% from the average price of £157,000 in 2009.
Considering that the median annual disposable income for the average household in the UK is just over £1,000, that means it would take the average Brit nearly 20 years to save up for the 10% down payment for a house, assuming they do not spend that disposable income on anything else.
These numbers look horrifying (and they are horrifying) but there is a silver lining.
The UK government offers several incentives for first-time homeownership that can make the costs of buying a house much more manageable for the average Brit.
You can qualify for a low-interest loan or purchase a home through a shared ownership program.
In this article, we discuss what things you need to consider when buying a house, including down payments, mortgages, and other related costs. We will also talk a bit about how you can manage your budget to meet your housing expenses.
First Time Home Buyers Checklist
The two major cost factors to consider when buying a house is the initial deposit and mortgage payments.
The first cost you will need to cover is the initial deposit.
In general, the larger your initial deposit, the lower your monthly mortgage payments will be and the better mortgage rates you will get.
- Most mortgage lenders in the UK require you to have an initial deposit of at least 5% of the market value of the home.
- We recommend trying to save at least 10% of the cost of the house and putting that towards the deposit.
- The larger the deposit, the better. A 25% deposit will usually get you access to the best mortgage deals.
The high cost of housing means that you need to start saving as early as possible.
Research from housing charity Shelter suggests that a young family needs to save for 12 years to accrue a 20% deposit. This number jumps to 26 years in central London.
Fun fact: did you know the word “mortgage” stems from the Latin mort which means “death?”—as in “you have this debt until you die”?
Fortunately, the reality of mortgage debt is not as bad as the etymology of the word might imply.
Essentially, a mortgage is a legal document that gives the lender the right to take the property if you do not make your loan payments.
The word “mortgage” is also sometimes used to refer to the housing loan itself. When you take out a mortgage, you are required to pay back your loan in the specified time period plus any interest.
FYI, the average monthly mortgage payment in the UK as of 2018 was £699.
A mortgage payment has a few components. The principal is the loan amount you still have to pay back. So if you take out a £200,000 loan and pay off £30,000, then your principal balance would be £170,000.
The interest rate determines how much your principal increases each payment period. The average interest rate for a 10-year home mortgage in the UK was 2.65% as of 2019. According to Statista, the interest rate for all kinds of mortgages in the UK have shown a general decline over the past three years.
Lenders may also collect property taxes as part of your mortgage payment and place them into an escrow account until the tax bill is due. Lenders also factor in homeowner’s insurance into monthly mortgage payments as well as mortgage insurance.
In order to get a mortgage, you will have to show proof of your income, and evidence of your financial behaviour in the form of bank statements and payslips. Since the 2008 financial crisis, mortgage lenders have put more rigorous checks in place to make sure they are lending to qualified buyers.
There are several different types of mortgage that each have their own interest rates and payment periods:
Different Types Of Mortgages
The different types of mortgages you can take out include
- Fixed-rate mortgage
- Tracker mortgage
- Guarantor mortgage
- Standard variable-rate mortgage
Now, let’s go over each of them briefly.
A fixed-rate mortgage is a mortgage agreement where the interest rate stays the same over the period of the loan. This means that you will pay the same amount every month, regardless of whether your lender’s rate changes. Fixed-rate mortgages are good because they are stable and predictable, but you might end up paying more than you would for another kind of mortgage plan.
A tracker mortgage has interest rates that follow rates set by the Bank of England for that period. Since this rate can change, your monthly payments can change too. If rates rise, then your mortgage payments rise and if they fall, your mortgage payment falls too. Tracker mortgages can be good because if the rate falls, you end up paying less.
Guarantor mortgages are mortgages that allow third parties (usually parents or family) to contribute. If another person agrees to take some of the risks of the loan, lenders are more likely to give better rates. The problem is not everyone has family or friends who can help them out, meaning a guarantor mortgage is not an option for everyone.
Standard-Variable Rate Mortgage
A standard-variable rate mortgage has an interest rate that is set by the lender. Since lenders can essentially change rates whenever they want, it is recommended to move to another mortgage plan as soon as possible. While the interest on variable-rate mortgages in the UK is usually indexed according to the Bank of England’s rate, lenders can change this rate if they wish.
Some ways to increase the chance of getting a good mortgage include putting down a large deposit, having good credit, maintaining employment, and getting on the electoral role. Lenders also take into account savings and any outstanding loans. You will also be required to continually provide financial documents to your lenders so they can determine you are still able to make payments.
3. Other Costs
There are other miscellaneous costs you will also need to consider. For example, many mortgage lenders have a charge for entering a mortgage agreement, and you may have to cover the cost of assessing the current value of the property. Lastly, you will most likely have to pay for housing inspection to make sure the building is up to code.
4. Federal First-Time Buyer Schemes
Fortunately, the UK government offers several schemes to make buying a house for the first time easier.
Help to Buy ISA
If you are buying a house for the first time, you might be eligible for a Help to Buy individual savings account (ISA)The UK government will top off your savings by up to 25% (up to £3,000) and you do not have to pay tax or pay it back. So for example, if you have an ISA and £1,600 in your savings account, the government will pay you £400 for a total of £2,000.
In order to be eligible for a Help to Buy ISA, the purchased property must be more than £250,000, it must be the only house you own, and you must be where you intend to live for the next 3 years.
Read More: What Is An ISA, And Is It Right For You?
Shared Ownership Scheme
You can also get a shared ownership scheme through a housing organization. A shared ownership scheme lets you own a portion of the property (say 25%) and you pay rent on the rest of that value. In order to be eligible for a shared ownership deal, you must make less than £80,000 a year, and any of the following three conditions must apply
- You are a first-time buyer
- You owned a house in the past but can’t afford one now
- You are an existing shared owner
We won’t lie, the housing market in the UK leaves a lot to be desired. But that does not mean homeownership is completely out of the grasp of young people.
Federal home buying schemes offer a way for first-time buyers to afford housing and there are several things you can do to improve your mortgage rate.