Getting Your Foot On The Property Ladder – A Guide To Mortgages For First-Time Buyers
Chapter Three
Story Highlights:
This chapter tells you which aspects to consider before deciding whether to buy a home:
- Whether you should buy a home – your personal circumstances, think about your career
- Buying a house vs. renting
- Advantages of owning a home – security, personal freedom, property as an investment
- Disadvantages of owning a house – costs of buying and home maintenance, keeping up your mortgage repayments, whether a house is always an investment
- Whether buying a house is cheaper than renting
- The hidden costs to home ownership
- Whether there’s a housing crisis in the UK
Should I buy a house?
Before you decide whether to buy a house, there are a number of factors you should take into account. These have to do with your personal circumstances, your personality, your career and of course your aspirations for the future and that’s before we start thinking about the financial aspect of taking out a mortgage.
Let’s look at this in more detail so you don’t end up taking a decision which you’ll later regret. This regret could be deciding that you aren’t ready to take the plunge and later wondering why your contemporaries are more settled and more financially secure than you are. Or it could be the complete opposite; feeling tied down to your mortgage and regretting that you missed out on a carefree period of your life.
Your decision doesn’t have to be binding as it’s always something that you can come back to and reconsider when you’re in a different phase of your life.
Your personal circumstances
Whether you choose to purchase a house depends mainly on your personal circumstances, your personality and which stage of life you’ve reached in terms of relationships. Only you know if you’re ready to take the plunge and make this long-term financial commitment. It shouldn’t be something that you rush into because all of your friends are doing it or because you’re being pressurised by someone else such as parents or your partner.
On the other hand, if you’re in a long-term relationship with someone, you might feel ready to settle down and see buying a house together as the logical next step in showing your commitment to each other.
Most perspective house-buyers will have to put money aside regularly in order to save for the deposit and the associated expenses of purchasing property.
For most people who plan to buy a house this requires a great deal of personal sacrifice. You might be lucky enough to get help from family or you might be entitled to financial help from one of the government’s Help to Buy schemes. However, most perspective house-buyers will still have to put money aside regularly to save for the deposit and all the associated expenses of purchasing property. Often this money means that you can’t do all the things that you’d like to – this could be treating yourself to new clothes or splashing out on the holiday of your dreams – because you’re on a strict budget. Do you think you would resent this? Is enjoying your freedom more important to you? If so, then you aren’t yet ready to buy a house.
Think about your career
Your career is an important factor to consider before you take out a mortgage. It goes without saying that you’d have to be able to afford the mortgage repayments but what is meant here is your professional career development. Many professions require a degree of mobility and this might mean you have to move to a different part of the country for a promotion or important work experience. Of course houses can be sold, even a property in the country, but it’s much more difficult and more time-consuming than simply giving your landlord notice and moving out of rented accommodation.
Another factor to bear in mind is whether you have any unfulfilled ambitions or dreams. If you’d always planned to take time out of your career to do VSO or sail around the world, then maybe buying a home should be put temporarily on the back-burner.
Safe as houses
It’s no coincidence that we use the phrase ‘safe as houses’ to denote security. The main advantage of being a property-owner is that you’re much more secure. It’s perfectly possible that you may stay in the same rented accommodation for years and years but it isn’t the same as owning your own place. Circumstances change and your landlord – however good your relationship is with him – might decide that he needs the property or he wants to sell it and then regrettably you’ll be asked to leave.
This feeling of security also encourages home-owners to put down roots and take part in their community much more. Of course this can also happen among tenants but not so much since the people who rent are often moving through, which doesn’t give them the friendly relations of long-standing neighbours.
Summary:
There are a number of factors you should take into account before you decide whether to take out a mortgage.
Whether to buy a house depends on your personal circumstances, your personality, your profession and what phase of life you’ve reached.
Owning a house is much more secure than being a tenant.
Personal freedom
As well as being much more secure, you have greater freedom and independence when you have your own house. You haven’t signed a contract like you do as a tenant which outlines what you are and aren’t allowed to do. You also have greater freedom to decorate and change your home to suit your taste. The added bonus of this from a cold-blooded business point of view is that whatever changes you do make to the property are also an investment since they’ll increase the property’s value if/when you decide to sell.
Property as an investment
Considering annual increases in property values in the UK, houses are seen as an investment. In addition there has recently been a trend to purchase derelict property for sale as an investment. You may struggle to make your mortgage repayments at the beginning but you know that every penny you put into paying off the capital you borrowed brings your dream of owning the house outright one step closer. In the long-term you could use the equity from the home to buy a bigger house as your circumstances change or you could use it to fund your retirement.
Once you compare this to renting, the benefit is obvious. Every rent cheque goes into your landlord’s pocket rather than being used to build up a potential nest-egg.
Disadvantages of owning a house – The costs of buying and maintenance
There’s no doubt that buying a property is much more expensive then renting and the initial purchase has a lot of hidden extras which you may not be aware of until you go through the process. Saving up the money for the deposit may take years and you may feel resentful that you can’t afford to do everything that you used to be able to do such as going out.
When you live in rented accommodation and there’s something wrong with the house such as plumbing or the roof, it isn’t your problem and you just have to contact the landlord to sort it out. Unfortunately, when you’re a property-owner, you have to pay for all repairs and maintenance unless you have a landlord home insurance. If you’re lucky enough to be good at DIY or at least have a family member or friend who is, then you can make savings on labour costs. But if you don’t, you should keep some money aside for any maintenance work which needs to be done to the house.
Questions:
How much are the extra expenses for buying a house?
In a report published by ONS in February 2017, they calculated that the purchase of an average £140,000 house would need £23,300 upfront for the deposit and all the hidden extras such as Stamp Duty, legal fees, etc.
How many years have seen a drop in house prices in the UK?
Between 1980-2013 house prices in the UK registered a drop 7 times. (ONS statistics)
Is it more common to rent or to buy?
This depends on your age. In their research ONS found that younger people are more likely to rent. Interestingly enough, 2004 was the year when renting became more common than owning for 25-29-year-olds whilst 2011 was the year that the same thing happened for 30-34-year-olds.
How much do you need to earn to buy a property?
ONS found that you’d need to earn an average of £26,444 to borrow enough to buy an entry-level property. However, they point out that this can vary widely according to which area of England or Wales you live.
Keeping up your mortgage repayments
If your financial circumstances change or interest rates increase, then your mortgage can seem more like a burden than offering freedom. If you’re in rented accommodation, it’s much easier to deal with a loss of income since you can give your landlord notice, walk away and rent something smaller or temporarily move in with family/friends.
However, falling behind on mortgage repayments can have much more serious repercussions. Not only the personal disappointment of leaving behind a place in which you’ve invested a lot of yourself but also the long-term consequences of how it’ll affect your credit rating and any plans you may have for the future.
Is a house always an investment?
Another drawback you need to bear in mind is that a house isn’t always a good investment. We’re all so used to seeing reports of successive rises in house prices that some people forget that house properties can also fall in price. The property market can be so volatile and you don’t know what might trigger a drop in prices. If that does happen, you could find yourself losing money on your property. If you’ve bought the house as a long-term investment, then it probably wouldn’t concern you so much.
The property market can be so volatile and you don’t know what might trigger a drop in prices.
However, if you’re planning to sell (for example, to move because a change in your job), then you might find yourself in the unfortunate position of having ‘negative equity’. This means that because of falling house prices, you owe the mortgage provider more money than the house is now worth. In such situations, home-owners find themselves stuck with a house that they can’t sell.
Summary:
Owning your own home gives you greater freedom to make changes to the property and these enhance its monetary value so home ownership can be an investment.
Buying property entails a lot of extra expenses while you – and not your landlord – are responsible for maintenance and repair-work.
Falling behind on mortgage repayments and facing repossession can be an emotional upset and affect your access to credit in the future.
Home ownership isn’t always a good investment since it’s possible that house prices might fall.
Is buying a house cheaper than renting?
It’s very difficult to give a direct answer to this question. Certainly, in the property boom of the 1980s and the lower price of houses as a proportion of Britons’ average salary, having a mortgage used to be cheaper than renting. It really depends how you compare the prices. Research carried out in 2016 showed that if you exclude the capital repayments in the first year, then mortgages were 25% cheaper but if these repayments were included, then mortgages were 20% more expensive.
Another factor to bear in mind is where you live. Let’s take the example of London. Many people can’t afford to live in London so they choose to buy property outside the capital because it’s much cheaper. Even with their commuting costs, they’re on a London salary so they find themselves much better-off.
The relative prices of rents in your area also have to be taken into account. With very little access to social housing, some people have no choice but to rent from private landlords. However, the less accommodation there is to rent, the higher the rents tend to be. This increase in rents can make getting a mortgage seem more and more attractive. Recent research showed that in 60% of the UK’s biggest towns and cities buying is cheaper than renting. For example, in Glasgow it was 28% cheaper to buy while in Birmingham it was 24% less.
Hidden costs to home ownership
You may feel that the daily expenses you have whether you’re renting or have a mortgage are exactly the same. However, this isn’t strictly true. There are a number of extras you’d have to pay as a home-owner which you wouldn’t pay as a tenant.
While renting, you might have taken out a home contents insurance policy in case of theft or damage. When you buy a house, your mortgage lender will also expect you to take out a buildings insurance policy to protect their investment from damage caused by fire, flood, etc.
Another expense you will have is paying your council tax every year (usually in 10 instalments). Although you may have paid this as a tenant, often landlords add an extra sum to your monthly rent to cover their expenses for council tax so you wouldn’t have budgeted for it as a separate bill.
Compared to all the other costs, however, the single largest expenses you’ll have as a home-owner will be maintenance, re-decoration and possibly furnishing your home. This is an ongoing process and you’ll probably have to pay some money every year to cover these outgoings. You might be tempted to neglect these small problems but if they aren’t dealt with as soon as they arise, they can end up costing you much more money in the long-term.
Is there a housing crisis in the UK?
Certainly, a number of factors have made housing a serious issue in the UK. These include the lack of social housing stock (which puts a strain on private rented accommodation), an ageing population and immigration. A further change in society over the past 40 years has been the fact that people are more likely to purchase a home before they marry which has led to a dramatic rise in single occupancy home purchases. All these factors together has led to increased demand which have fuelled further increases in property prices.
You might be influenced by accounts in the media when experts predict the housing crisis getting worse or you might be reassured by the recent government-run schemes to relieve the pressure on existing property by encouraging new-builds. Then, you’ll also read that house prices are due to increase further or others who predict that it’s time for them to plunge. Judging by previous crises, none of these so-called ‘experts’ have a clue about what’s going to happen.
Whether there is a housing crisis or not shouldn’t play a role in your decision to buy a house. Instead, you should think about your own individual circumstances, weigh up the advantages and disadvantages and decide based on what is best for you.
Summary:
Whether it’s cheaper to buy or rent depends on how you calculate the figure, where you live and the availability of rented accommodation in your area.
There are a number of extra costs you’ll have as a home owner such as buildings insurance, Council Tax, maintenance and furnishings/decoration, which you don’t have when renting.
Whether there’s a housing crisis or whether property prices are due to fall/increase shouldn’t make a difference to your decision to buy a home but instead, you should do what’s best for you.
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