"Let me tell you something. There's no nobility in poverty. I've been a poor man, and I've been a rich man. And I choose rich every f***ing time." ~ Jordan Belfort (The Wolf of Wall Street)
Buying your (first) home isn't a question of being rich or poor; they're relative terms after all. But they raise the point that choosing what you do with your money is within your control.
Give yourself some credit
Before you even think of passing Go, check your credit score. The higher it is, the lower the interest rate on your mortgage offer will be. If it's not great to try these three simple tips to give it a boost:
- Get a credit card & use it responsibly: pay it off in full each month if you can. If you have two, even better but spread the balance, so you're not maxed out on either one;
- Pay your bills on time: your credit file shows your bill payment history from the past 12 months. Show you've managed them well - if you can't pay the bills by credit card (and then pay that off in full each month), make sure you set up direct debits so you can sit back and forget it;
- Get on the electoral roll: the easiest (and free-est) step you can take. Click hereto see how easy.
Most people will have glazed over just at the "B" word. While it's a pretty dull topic, it's a vital skill for successfully navigating adulthood.
A lot of (great) personal finance gurus suggest a ratio of 50, 30 & 20 per cent for living costs, spending, and saving/investing (in that order). A big chunk of that 50 per cent is going to be a monthly mortgage payment.
If you're renting now, you are paying a simple one-off figure to the landlord. But a mortgage isn't as simple - there are always other costs associated (stamp duty, buildings insurance and maintenance costs, for example).
And you're probably going to want to own a more beautiful home than where you're renting right now. As a rule, your total monthly outgoings will be between 40 & 50% higher than just the mortgage payment. So if you're paying £1,000/mo, then the actual costs are going to be closer to £1,400-1,500.
If you haven't got a budget yet and don't know if you are roughly in line with the percentages above, take a look at this budget calculator. I still use it and revise it once or twice a year.
You then need to work out how much you can afford to borrow by taking a look at your income and your outgoings. This Affordability Calculator takes about five minutes to complete. It's an essential exercise if you're serious about buying your first home - get it done while you have time on your hands.
Bigger is better
You heard it people - bigger definitely is better. At least when it comes to deposits. The bigger it is, the cheaper your monthly mortgage repayments will be. Yes, there are 5 per cent down mortgages out there, but you'll pay a higher interest rate. If you can, try and put down at least 10 per cent but the closer you can get to 25 per cent the more mortgages you'll get to choose from.
Try and aim for a big enough deposit so that your total monthly payment is not more than 30 per cent of gross salary. I said earlier 50 per cent of your salary should be for living costs. In essence, this means you've still got 20 per cent left over for other bills, like utilities, your car (and its insurance) and so on.
Bit of tough love here - if you can't hit the targets (or near as dammit) above, then wait till you have saved a bigger deposit. Don't let your dream home become a nightmare.
2 Tricks to saving more, quicker
Your chances of winning the National Lottery are around one in 45 million. You need to find a more predictable way to get that deposit together. Here are some suggestions to get you started:
- Manage your budget
Knowing how much money you have coming in and out should always be your first step. Even the smallest savings accumulate, especially if you're saving over a few years.
- Pay yourself first
This is an old trick, but few people know or use it. Set up an automatic transfer to move five, but ideally, 10 per cent of your gross income each month to a savings account you can't easily touch.
Set up a direct debit and have it leave the same day your income hits your account. You will manage on the remaining 90 per cent, trust me.
Once you know your budget and you're automatically paying yourself first, review all your outgoings. Using a comparison website helps you check for better deals on everything from gas and electric to broadband and insurance.
The above won't catapult you to having a deposit by themselves, here are a few more suggestions:
Downsize and/or take in a lodger
Speed up the journey to owning your own place and move a little further out - you'll pay less rent, just don't lose the saving all to your commute!
Or take in a lodger. Just check with your landlord first that you're not in breach of your tenancy agreement.
The Bank of Mum & Dad
Legal & General showed lending from family members increased to £6.3bn in 2019, making the Bank of Mum & Dad, the eleventh largest mortgage lender in the UK.
You are not alone in struggling to get on the ladder - there is no shame in turning to your family if they can help!
There are quite a few government schemes that can help you buy a home with variations depending on where in the UK you are. Just explaining these schemes is a book in itself, so here's a list for you to sift through:
Spoiler alert: I'm about to hand out more tough love:
Stop kidding yourself - things will cost more than you tell yourself;
Set up a direct debit to help save or you'll spend it, you are the obstacle; and
You will have to compromise, be real about what counts as 'must-have' and what are 'likes' This goes for your Netflix, gym membership etc. as much as with what home you can afford to buy.
Every journey starts somewhere. Identify the first few steps and commit to taking the first one this month!
Stay well, and I look forward to hearing how you're doing.