Laura asks: “Do I stand any chance of being approved for a mortgage and should I be buying a house?”
Question 2 – Should I Be Buying A House – Shownotes
The title of this week’s episode is “Should I be buying a house”. The actual question comes from Laura, who asks:
My partner and I have seen a house that we love – we have been renting for 10 years! The house is £210,000. My partner earns £48000 a year and has a clean credit history. I earn £25000 a year and have a disappointing past, including several pay day loans and several late payments, although none in the past 2 years. I currently have an overdraft of £1000 and I am paying off a £3000 credit card. We have a 10% deposit which is partly his savings and partly a gifted deposit from my parents.
My question is, do I stand any chance of being approved for a mortgage?
Right, whilst Laura’s question is whether she stands a chance of being approved for a mortgage, I think that the real answer lies in whether she is ready to buy a house at all.
You see, Laura is looking to get on the housing ladder with her partner, a positive endeavor. Generally, due to the maths involved based on a century of data, house ownership is preferable financially to renting.
People in the UK are always absolutely desperate to “get on the housing ladder” and the vast majority believe that “throwing away money on rent” is a financial mistake. It may well be. However, it’s a much less serious financial mistake than buying a house before you are ready.
And, from Laura’s question, this is something she sounds like she is doing.
There are generally two things to consider when determining if you are ready to buy:
- Are you ready for the personal commitment?
- Are you ready for the financial commitment?
The first question is key, and one that many people take too lightly. Buying a personal residential property (ie where you are going to live) is only beneficial compared to renting if you are planning to live there longer than 5-8 years. Otherwise, all the expenses that come with buying and selling (estate agents fees, solicitors fees, stamp duty, surveyors costs, etc etc) will be greater than the benefit you’ll see by owning the property and servicing a mortgage rather than paying rent.
The second question is whether you are financially ready. Now, you need to think a lot harder than “can I get past the bank tests”.
Laura says in her question that she and her partner have a 10% deposit saved, which comes from her partners’ savings and a gift from parents. 10% on the property she is looking for is £21,000.
However, if she takes a step back and looks at her overall finances, it may become clear that her and her partner’s financial position isn’t strong enough. Yes, they have that £21,000. However, given that some came as a gift, they clearly haven’t been able to save all of it themselves. On top of that, the £1000 overdraft and £3000 credit card need paying off (especially if they are incurring fees or interest).
And, what about costs of buying? The £21k deposit is there (kind of), but what about the £1,700 in stamp duty, or the £1-2k in legal fees and searches. What about the £500 for the homebuyers report?
Then, say you have all that saved and you move into the house. Now, what happens when your boiler packs up? Or a roof tile flies off? There are a lot of costs to home ownership that you don’t have when renting.
Finally, what happens if interest rates rise? You may lock yourself in for two years at 2%, but unexpectantly inflation and interest rates increase in the UK, and your standard variable rate is now 8%. Can you still afford your mortgage payment?
To help you think about all these questions, and more, this guide of 12 house buying considerations is a great starting point.
Slow down. I always try to make people picture the following when they are desperate to buy before they are either personally or financially ready. Yes, getting on the housing ladder is a good thing. But, unless you have good foundations for your ladder, you’ll fall from the top and wish you never got on at all.
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