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How Much Deposit Can You Afford?

How Much Deposit Can You Afford?

When it comes to housing deposits, bigger is better. That said, it’s also important not to overstretch yourself. Here are some points to consider when figuring out how much deposit you can really afford.

What are your overall moving costs?

As a buyer, here are some of the main costs you should consider when moving home:

  • Travel to view homes
  • Surveying fees
  • Conveyancing fees
  • Mortgage-administration fees
  • Home-moving fees

You’ll also need to think about necessary updates, maintenance and running costs in your new home. Keep in mind that any existing services you use may change their price to reflect your house move. You may also find that some of your existing possessions aren’t suitable for your new home.

In addition to all of the above, it’s advisable to allow yourself a bit of financial “breathing space”. This can give you a bit of room to manoeuvre when life happens. It can also ease your transition into your new home. For example, if you’ve spent a day painting, you may not fancy cooking so you might get a takeaway instead. This can increase your food spend.

What is your financial outlook for the future?

If you want a mortgage, you’re going to need to convince your lender that you can afford it. Separately to that, you, personally, need to think about your financial outlook for the future. In basic terms, there are three questions you need to answer.

Firstly, how much income can you reasonably expect to earn over the next five years or so? Secondly, how do you anticipate that income coming in? For example, will you have a consistent monthly salary or do you expect your income to go up and down? Thirdly, what factors will influence your finances? For example, are there any major life events coming up?

The answers to these questions will help you decide what level of savings you need. This in turn will guide you as to how much money you can afford to put towards buying a new home. Remember, however, that the cost of buying a new home goes beyond the deposit. Per the previous comments, resist any temptation to overstretch yourself.

How much money can you afford to put away now?

If you plan to save for your deposit via instant-access savings accounts, then, by definition, you’ll be able to access your money if you need it. If, however, you plan to use some other route, for example, bonds or the stock market, then you may have to lock your money away for a time. What’s more, if you go down the investment route, you put your capital at risk.

Even if you’re using instant-access savings accounts, you may find it easier to make plans if you have a realistic idea of how much of your savings you can keep over the long-term. Obviously, even the best-laid plans can be derailed by what life has in store. That said, you can mitigate this risk by making sure that you have appropriate insurance cover.

In the real world, saving up for a deposit (or anything else) is partly a matter of income and partly a matter of focus. Your income will determine how much of a surplus you have after paying your essential expenses. Your level of focus will determine how much of your disposable income goes toward your deposit.

Keep in mind that building a deposit is an exercise in financial management. It’s not a race. There are no prizes for getting to the “finish line” before anyone else. You just have to decide for yourself how much you want to save for a house versus how much you want to use your money in other ways.

Please contact us for any more information.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage

For savings and investments, we act as introducers only

Haggle your way to a more affordable home

Haggle your way to a more affordable home

If you don’t like the term “haggling”, think of it as “negotiation”. That’s essentially what it is. In simple terms, the seller (or their agent), is trying to achieve the highest possible price for their home. You are trying to achieve the lowest possible price for the property. This is not about “win/lose”. It’s about reaching an agreement. Here are some tips to help.

Prepare thoroughly

Guide prices are a guide to what a seller (or their agent) wants for the property. You should therefore regard them as sources of information rather than as instructions. What you really need to know is the state of the local market and the seller’s situation. You can find out a lot about the first point with some thorough digging around the internet.

The key point to understand is that you need recent, local data. Recent data tells you what the market is doing now, not what it did in the past. Local data tells you how the market is performing in the locations which interest you. To take an extreme example, there’s no real point in looking up data from London if you want to buy property in Aberdeen.

In fact, if you’re looking at buying in a city, then you want data at local-authority level if not postcode level. Be aware that there can be significant differences in property prices in different areas of a city. You need to be sure that you’re comparing like with like.

Get preapproved for a mortgage

If you need a mortgage, then get preapproved for one. This marks you out as a serious buyer and reassures sellers. Think about whether or not there are any other steps you could take to make a seller’s life easier. For example, can you be flexible with your move date?

Understand the seller

It’s always safer to deal with a seller who has a clear reason to move. This reduces the chances of them pulling out of the sale, leaving you high and dry (and possibly out of pocket). The more motivated a seller is to move, the more chance there is that they will be willing to accept a lower price in return for a quick and convenient sale.

There are, however, a couple of caveats here. Firstly, a seller may have a baseline price below which they cannot, or just will not, go. For example, they may need (or just want) enough to clear their mortgage. Secondly, the more competition there is for a property, the more likely it is that someone else will offer both a higher price and a quick and convenient sale.

Keep a clear head

Until the sale is complete, in fact, arguably until you’ve moved in, you’re buying a property. It may be someone else’s home, but it is not yours. Keep that in mind at all times.

Obviously, you should only be looking at properties where you would be happy to live. You must, however, avoid getting emotionally attached to them. Your attitude needs to be that you want a good deal for your money and will go on looking until you get one.

If any given property is out of your budget (or just overpriced) and the seller is not prepared to reduce the price, then just move on. If you really liked the property, then keep an eye on the listing. If the seller does not get a sale, they might become more flexible on price further down the line.

By the same token, however, be careful about focussing so much on getting a bargain that you lose out on a great property you could have afforded.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage

Please contact us for any more information.

Dealing With Deposits

Dealing With Deposits

According to data from Halifax, first-time buyers now have to put up an average deposit of £57,278 to buy their own home. That’s £10,829 (23%) more than the previous year. First-time buyers in London have to pay over double this with an average deposit of £130,357. Here is a quick look at the drivers behind these figures and what can be done about them.

House price inflation

The most obvious reason for larger deposits is rising house prices. Despite COVID19 and Brexit, the UK has recently seen intense house-price inflation. While coincidence does not necessarily mean causality, it’s certainly interesting that this growth spurt started at the same time as the Stamp Duty holiday.

The Stamp Duty Holiday

The Stamp Duty holiday may have made a lot of people very happy. It is, however, unlikely that first-time buyers were amongst those rejoicing. They already benefited from a Stamp Duty discount. The Stamp Duty holiday effectively negated this. It put them back on the same footing as onward movers and made them only slightly better off than investment buyers.

In principle, the effect of the Stamp Duty holiday should already be starting to wear off. The closer it gets to the end of March deadline, the harder it will be for buyers to get from offer to completion by the deadline. In practice, there are two reasons why the impact of the Stamp Duty holiday might be felt for more than the next couple of months.

Firstly, the government may choose to extend the Stamp Duty holiday. It may choose to extend the overall deadline. Alternatively, it may choose to extend the holiday to anyone who has an offer accepted before the current deadline, thus giving them more time to complete. Even if it does neither, it might choose to alter Stamp Duty banding to bring in some revenue without creating a major shock in the housing market.

Secondly, what goes up does not necessarily come down again at all. Even if it does, it may not come down quickly. In other words, the end of the Stamp Duty holiday may see house prices stop rising or at least slow down their rise. It may not, however, lead to them actually falling.

Nervous lenders

At the end of the day, deposits are there to protect lenders against risk. This includes the risk of house price falls and the risk of lender default. Each lender has to decide for themselves how much of a deposit they require from each applicant. In simple terms, the more nervous a lender feels about a situation, the more likely they are to demand a high deposit.

Right now, average deposits are running between 19% in the North West to 27% in London. What’s more, they may also impose restrictions on the source of deposits. These actions may reassure anyone concerned about falling house prices triggering a rerun of 2008. They do, however, have a disproportionate impact on first-time buyers. They cannot benefit from an existing property increasing in value to help cover the cost of the deposit on a new one.

A way forward

Navigating a path through this situation could be tricky for all concerned. First-time buyers should certainly do everything they can to save for a deposit. This may include making use of the Lifetime ISA with its government-funded bonus system.

Industry, regulators and the government may, however, have to come together to organize further support measures for first-time buyers. Realistically, lenders’ hands are tied by the need to work within the framework of affordable and responsible lending. Regulators could loosen these rules, but there would be a risk to doing so.

This means that the bulk of the support is likely to need to come from the government. It could potentially come in the form of extra financial support, tax breaks, borrowing guarantees or some combination of all of these.

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

Is the housing market really back in business?

Is the housing market really back in business?

Non-essential businesses are now starting to reopen, albeit with safety measures in place to protect against COVID19.  This includes the UK’s estate agents who can now take prospective buyers and renters to view potential new homes.  Of course, this supposes that there is a supply of buyers and renters and a pool of new homes for them to see.  It also supposes that buyers who need a mortgage will be able to get one.

The issue of demand

Given that everyone needs somewhere to live and not everyone can live with their parents (or in accommodation provided by their work), there is always some level of demand in the housing market.  The real question is whether the demand will be for property to buy or property to rent.

When you buy a home, assume you either pay cash or use a repayment mortgage, you build up equity in an asset.  This can be a powerful argument in favour of buying.  The problem, however, is that if you need a mortgage, then you have to be confident that you can make the repayments or else you could risk losing your home.  In fact, you could risk losing your home and still owing your lender money.  You also risk having your credit record damaged and having to deal with the consequences of that.

When you rent, by contrast, you do not build up any equity in your home and there are consequences for missed payments, including, potentially damage to your credit record.  On the other hand, you are only committed to a tenancy for the length of a lock-in period and even then it may be possible to negotiate an early release with your landlord.  This can offer people much more room to manoeuvre if their circumstances change, financially or in any other way.

The issue of supply

On the home-sales side, supply depends on people being either forced or willing and able to leave their current homes.  At present, it’s a very open question how much either reason will apply in a post-COVID19 market and the answer will probably depend largely on how well the UK weathers the post-lockdown financial reckoning (and Brexit).

If it can, at least, escape recession and keep the economy ticking over, then forced sales should be minimized and hopefully people will have the confidence to move home in line with their lifestyle changes (e.g. arrival/departure of children) and preferences.  If, however, the UK enters a recession or even stagnates, then the number of forced sales may increase and potential home-sellers may choose, or be forced, to stay where they are, rather than risk a change.

The home-rentals side is slightly different as buy-to-let property is bought specifically as an investment, not a home.  This means that the level of supply is likely to be determined by how well property compares to other investments, such as the stock market.  There is, however, the potential for properties intended for short-term letting to be brought back into residential use (for example if travel restrictions make them uneconomical).  There is also the possibility that there will be an increase in the number of people letting out rooms.

The mortgage market

In principle, the mortgage market is still operating to the rules imposed by the Mortgage Market Review.  It remains to be seen, however, whether or not these rules will function in a post-COVID19 environment and, if not, what the government will do about it.  Again, much is likely to depend on how well the UK performs economically over the foreseeable future.

If the economy performs at least reasonably well, then the government may feel that it can leave the housing market, and by extension the mortgage market, to get on with its own business.  If, however, it does not, then some form of intervention may be necessary.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of Buy to let mortgages.

How much is stamp duty?

How much is stamp duty?

Stamp duty may not be the most exciting topic in the housing market, but it can make quite a difference to how much you end up paying for your home.  Here’s a brief guide to what it is, how it works, what that means in practice and what the future might bring.

Stamp duty is actually a shorthand for different taxes

In England and Northern Ireland, Stamp Duty means Stamp Duty Land Tax and there is an online calculator here.  In Wales, it means Land Transaction Tax and there is an online calculator here.  In Scotland, it means Land and Buildings Transaction Tax and while this in no official calculator, you can find the current rates listed here.

Stamp duty works along essentially the same lines in all parts of the UK, but the bands are different (plus they are subject to change), hence you always need to check the rates in force at the time of your intended purchase and in the location of your intended purchase.

You should also be aware that different rates of tax may apply depending on what kind of purchase you are making, e.g. a first home, a main home (but not your first home) or an additional home.

How and when you pay stamp duty

From a buyer’s perspective, the process itself is actually quite easy.  You just send the money to your solicitor and they send it on to HMRC when the property completes.

What stamp duty means in practice

In simple terms, you need to work out if you are due to pay stamp duty (if you are a first-time buyer you may not be) and if you are then you need to work out how you are going to pay it.

Basically, the two approaches are either to add it to your mortgage or to pay it out of your cash savings.  In either case, you would need to meet the appropriate lending criteria regarding Loan To Value ratio (LTV) and affordability.  You would also have to accept the fact that either way you are going to impact your LTV ratio and this may impact your ability to get the very best deals.

Having said that, while mortgages are sold as long-term products, there is absolutely nothing to stop you re-mortgaging at a later date when you have built up equity in your home and this fact may be enough to prevent you from needing to as it may encourage your lender to agree to negotiate an improved rate in acknowledgement of your improved situation (re the LTV ratio and possibly increased income as well).

For the sake of completeness, the example of stamp duty is a good reminder to think about all the possible transaction costs involved in buying a home and the importance of making sure that you have funds to pay them.

The future of stamp duty

Interestingly, there are proposals to switch stamp duty to a tax paid by the seller.

The argument behind this change is that people who are moving from smaller homes to larger ones would pay stamp duty on the smaller home (they are selling) rather than the larger one they are buying, while people moving into smaller homes will be paying less for the property they are buying.

This may sound good in theory, however, it’s hard to see what would deter sellers of any description from simply incorporating the cost of the stamp duty into the sales price of the property.  If they did so, then, rather ironically, the buyer (who is the person ultimately paying for the property) might end up paying more as the property could be pushed into a higher stamp duty band, so you’d effectively be paying stamp duty on the stamp duty.

Your property may be repossessed if you do not keep up repayments on your mortgage.

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