Buying a home

How to Escape The Rent Cycle and Finally Buy a Home

Posted on 17th July 2019

Research has highlighted that on average, those who rent will spend a whopping £1 million more than an average homebuyer over sixty years, plus the further uncertainty of whether their landlord will sell the property that they rent. 

For the majority, homeownership appears to be a choice that is far out of our grasp. House prices are still beyond our reach, and the ability to scrape together a deposit means that most British renters appear stuck in the current cycling of always having to rent.

It is not all doom and gloom; there are ways to budget so that you can finally buy a home one day.

1. The first step onto the ladder

The average age of a first-time buyer has risen to 33 – and it is undoubtedly correct that there are distinct advantages to renting a home when you are first setting out on your own away from the family next.

One advantage of renting is that it does not tie you down to one place and allows greater flexibility should you find a new job and must relocate. Furthermore, during your early years of working and living, many of us do not want to worry about the maintenance associated with property and wish to prioritise socialising. 

However, as our work, social and family lives stabilised as we get older, households naturally begin to associate with owning their first property, to put down roots. 

Recent research by TopCashback demonstrated that 95 per cent of Millennials would like to purchase a property at some stage in their lives, although only 40 per cent were convinced they would be able to.

Renters are frustrated with the amounts they must pay out to a landlord with no collateral to show for it. Average rental prices rose over 3 per cent to around £934 in the preceding twelve months up to May 2019

Simultaneously, interest rates fell on mortgages, and it is nearly always cheaper to buy than to rent, due to the long-term cost benefit of paying off your mortgage as opposed to paying rent to a landlord. With interest rates remaining low, monthly mortgage payments are invariably cheaper than rental rates for a similar property. 

For first-time buyers, the first step on the property ladder seems a colossal stretch away.

To leave the cycle of renting and finally buy a new home, households need two things: a deposit of at least five per cent of the property value you’d like to purchase and the capability to demonstrate to a mortgage lender that you are creditworthy enough to borrow a mortgage loan.

Whilst considering that renters are seeing thirty per cent of their salaries go on rent (up to forty per cent in London) meaning there is not much leeway for households to save for a deposit. 

2. Saving a worthwhile deposit

Building up a deposit then is notoriously tricky.

However, it is crucial to gather together as much as you can humanly save, as those with higher deposits will have access to better interest rates when applying for a mortgage.

It is possible to obtain a mortgage with only a five per cent deposit, but prospective buyers will get a far better deal should they have a ten per cent deposit of the property price. 

The most straightforward and obvious way to build up a deposit for a mortgage is to save more and spend less. Much easier said than done, yet there are some following tips that savers can do to build a mortgage deposit as quickly as possible.

Getting savings help from the government

The UK government recognises that it must help those wishing to buy a home. The government offers savers two specialist products intending to assist savers to save to buy a home.

Help to Buy: ISA 

A Help to Buy ISA is only available until 30th November 2019. It will help savers to save £200 a month with an extra £1,000 in the first month.

The government then adds twenty-five percent each month, up to a maximum of £3,000 per person, or £6,000 per couple. This government bonus is added to the money that you are saving towards your first home,

Note – the property you wish to buy must be under £250,000 (or £450,000 in London).

Lifetime ISA

A Lifetime ISA is only available for people aged between 19 and 39 years old and allows them to save up to £4,000 a year. The UK government will place a maximum of £1,000 a year into the ISA until you are aged 50. The aim of the Lifetime ISA is that is can be used for a deposit for your home (for homes under £450,000) or withdrawn when you are 60 (to be used in retirement).

Stick to your budget plan and be relentless

Buying takeaway coffee and taking packed lunches for work is a well-worn cliche, yet it is one for a reason. Small steps like this do add up when taken into consideration.

Admittedly, changing your lifestyle is tough and can be quite depressing. Instead of getting yourself down, there are many budget apps that you can use like Plum, and You Need A Budget to calculate how much each month you can save towards your mortgage deposit.

By allocating funds towards each expense and saving, you will see notice how quickly your savings can grow

Grit your teeth and suffer the short-term frustrations

This is controversial yes, yet why not move back in with your parents, or take a smaller rental flat or within a shared house?

This is a drastic move that will save more cash to put towards your pot. Living with less space and with your parents will also give you an incentive to save harder so that you can leave the situation as soon as possible. 

Remember all the other expenses

When saving for a deposit, don’t forget the incremental costs that you will need to account for, including legal fees and stamp duty, decorating and furnishing your new home.

Luckily there is no stamp duty on the first £300,000 of a property worth under £500,000 if you are a first-time buyer. Someone buying their second home would have to pay stamp duty of £1,680 on the same purchase – so don’t forget to factor in these costs as you will need to include this in your savings plan. 

3. Actually affording a mortgage

Whilst renting costs more than paying monthly mortgage repayments. Borrowers must still demonstrate that they can afford to keep their repayments on time before they lend you a mortgage. 

Get your credit record right

Mortgage lenders scrutinise every bank statement and your credit report available on you when applying for a mortgage. 

Thus, monitor your credit history using free credit checkers before applying for a homeowner loan like Experian and TransUnion – and remember to check that you are on the electoral roll too. 

Unorthodox alternatives to getting a mortgage

Schemes and specialist products exist to help first-time buyers get on the first rung of the property ladder. However, they are not suitable for everyone. If your parents can support you, then the option of a Joint Mortgage Sole Proprietor product; where mortgage applicants who do not fit the right affordability criteria receive help with a joint applicant. 

Another possibility is a Help to Buy equity loan; where the government lends you, borrowers, up to twenty per cent of the cost of a newly built home, so the borrower only requires a five per cent cash deposit and a seventy-five per cent mortgage loan.

Plus, borrowers will not be charged loan fees on the twenty per cent loan for the first five years of owning that home. 

Alternatively, applicants could consider a Shared Ownership scheme or buy with a friend. If these methods are suitable, ensure that everyone is clear about who is responsible for paying and who owes what. 

Shop around

Mortgage lenders have different lending criteria, so even if one lender will not offer you a mortgage, another may do so. This is where a specialist independent mortgage broker can help you assess the lenders who are more likely to consider lending to you. 

Final thoughts

Now you can practice some of the above advice and put them into use to begin saving for your first mortgage deposit.

Remember though, the more disciplined you can be in saving for your mortgage deposit – the quicker you will be in getting your hands on the keys to your own home. And that means avoiding any impulse purchases!

What tips can you share for buying your first home? Let me know by leaving a quick comment below.

Author: Katre Kaarenperk-vanatoa

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