Tom asks: “I’m 22 and am looking at buying a flat within my local area for £200k. I have £20k saved and I’m on a £30k salary. Mortgage calculators show me my max loan is £130k. What are some other solutions, other than Help to buy & share ownership?”
Question 28 – Is A £20k Deposit Enough To Buy A House? – Shownotes
Today’s question comes from Tom:
I’m 22, living at home with parents looking to move out sometime next year. I am looking at buying a flat within my local area, all are at least £180k. I have £20k saved up at the moment, on a £30k salary.
It seems without Help to buy, I won’t be able to get a mortgage to cover the other 90% as banks generally lend mortgage value of about 4.5 times your salary which would make £135k+ £20k = £155k.
Checking numerous mortgage calculators the most a bank seems to be able to loan me is around £130k.
What are some other solutions, other than Help to buy & share ownership I could take?
Thanks for your question Tom.
This is quite a common question that we receive and we’ve had two similar questions before in questions 2 and 17. I think that it illustrates quite clearly how desperate everyone is to “get on the housing ladder”, mainly because this is what is drilled into people as the right thing to do.
Now, mathematically I’m very aw are that owning a home is better than renting, and it’s a good reason for people to try to buy their own home. However, my advice to you Tom, and thousands like you is: slow down!
I’m going to give you ten (yes, ten) reasons why you shouldn’t be buying today:
- Renting is less painful that getting up that housing ladder without the right foundations and falling off.
- At 22, your social and personal situation is not stable. You may end up leaving the area for work or for love. If you then sell in the next 3-5 years, due to estate agent fees, legal fees, stamp duty, etc, renting may have actually been cheaper.
- You have no experience of living away from your parents’ home. Would you put all of your money into anything else that you have no experience in.
- Outside of your £20k, what other savings do you have? I’m guessing very little. So, what happens when you have an emergency just after buying the house.
- Affordability is there for a reason. The bank WANTS to lend you as much as they can because they make more money. So, if they are saying that you can’t afford it (and I think that affordability should be capped at 2-3 x salary and should also factor in current net worth), then you probably can’t afford it.
- What about diversification? If you put 10% down, you effectively have 1000% of your net worth invested in one property. That doesn’t seem very strong from a diversification stand point. What happens if the housing market falls 40% in the next year like it did in 2008. If you bought at £200k with a 10% deposit, your house is now only worth £120k, but you still owe £180k on your mortgage!
- Think about other costs. You have £20k saved up, but on a £200k house, stamp duty will be £1,500, you’ll have legal fees to pay, mortgage arrangement fees, land registry searches. The list goes on. Then, you’ll need furniture, you’ll probably need to redecorate. This all requires savings as well.
- Get some real life experience first. At the moment, you can keep living with your parents to save up more money, or equally you could move out to live by yourself (or in a flat share). Financially, the best option is to stay with your parents, but socially and from a personal development standpoint, it may be good to get out there and rent for a while.
- You’re 22 years old. The average age of a first time buyer in the UK is currently 36 years old. Don’t be in such a rush.
- The mortgage repayments could get pretty tight. At first, they may seem affordable, but even then as a 22 year old with such a big LTV, you’ll have to cut back on a lot of what you enjoy in life. Then, what happens if your income falls, or if interest rates go up. You’ll be in a lot of trouble!
So, I hope those 10 reasons convince you to put the foot on the brake a little. As I’ve said before, getting on the housing ladder is great. But, falling from the top because you haven’t got steady financial foundations will really hurt!
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