Money: A User’s Guide
Money: A User’s Guide
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This eBook first published in Great Britain by 4th Estate in 2018
Copyright © Laura Whateley 2018
Laura Whateley asserts the moral right to be identified as the author of this work
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The information in this book is for general guidance only and is not legal advice. If you need more details on your rights or legal advice about what action to take, please see an advisor or solicitor. Please note that neither HarperCollins nor the Author offer investment advice. All financial investments carry risk. You should therefore seek independent financial advice before making any investment.
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Source ISBN: 9780008308315
Ebook Edition © August 2018 ISBN: 9780008308322
To Mum and Dad
This is a little guide that I could have really done with ten years ago, when I was twenty-three, and fresh off a First Great Western into London, one of the world’s most expensive cities, ready to start my first full-time job as the global economy crashed. Here I address the things I wish I had known about money earlier (the younger you start saving the more time your money has to grow) but was too embarrassed to ask. I assumed everybody else already had it nailed. Turns out that most did not, and still don’t, whatever their seeming competency at being an adult.
My aim is to make sense to those of you who write yourselves off as bad with money, the way I once did and often still do, as you stare down the barrel of your overdraft. It does not have to always be this way. Anyway, what does being bad with money even mean? Failing to check your bank balance regularly and not putting enough in a pension? Or putting so much in your pension that you haven’t had a holiday since 2005? Who is to judge?
Here is a secret: everyone is ‘bad’ with their money sometimes, some people are just better at styling it out and not letting on, some are rich enough that they can keep it well hidden. We are psychologically programmed to make poor financial decisions. There’s a whole Nobel-prize-winning area of academia, known as behavioural economics, to describe how. And because no one likes talking about money, and no two people agree on what it is for, whether it is better to spend it or to save it (clue, there is no right answer), the myth that others know what they are doing is rarely exposed.
So read on if you have ever wanted to know, what actually is an ISA? What tax do I pay and why? How much should I be saving towards retirement? Should I be investing any money, and if so, how? Should I pay off my student loan? How do mortgages work? What are the best budgeting apps? How do I split money with my other half fairly, and can I ever afford to buy a home, bring up a child, or be the kind of person at ease in small-plate restaurants? What stupid mistakes am I making with my money, and how can I stop it making me feel so crap about myself?
Get through this in an afternoon, and you should know a lot more than you did this morning. I can guarantee that if you follow at least a couple of tips in this book you will have already reimbursed the cover price.
But first, a bit about me, us feckless ‘millennials’, and where we are at.
Please note that I use the term ‘millennial’ reluctantly. It is a word that has come to make me itchy, a crude catch-all for the 14 million or so very different people born between the early 1980s and the year 2000, some of whom are now parents of teenagers, your boss, your lawyer, your surgeon, or your favourite novelist.
In September 2008 I went for an interview for a role as editorial assistant on the Money section at The Times, the optimistic move of a young graduate not yet grown into the full self-doubt phase. The night before, I’d been up late Wikipeding ‘what is a mortgage?’
The timing of this interview, the beginning of my career so far, was significant, though I didn’t see how at the time. Two weeks earlier the world’s fourth-largest investment bank, Lehman Brothers, had collapsed. The headline on the front page of The Times on the day of my interview was alarming: ‘the eye of the storm’, with a photograph of black clouds gathering over the White House. The introduction read:
The financial system lurched closer to a catastrophic breakdown last night after the US Congress dramatically rejected a bailout plan designed to restore confidence to paralysed banks. Wall Street suffered one of its worst days in history.
In 24 hours five banks across the West, including Britain’s Bradford & Bingley, had to be rescued to avoid insolvency … the Dow Jones industrial average of shares dived almost 800 points, losing 7 per cent of its value. It was the worst one-day points fall and the worst percentage fall since Black Monday in 1987.
I had little understanding of what all this meant (‘Dow Jones industrial average’, eh?). Nor many of the increasingly panicked headlines that followed over the next few weeks: ‘World takes fright’ … ‘The scramble to sell: £2.7 trillion wiped off the global value of shares’ … ‘Banks nationalized’ … ‘Slump pushes jobless towards 2 million’.
I would learn, as I explained hopefully to my new editors. They, unbelievably, took me on. A money journalist is one of those things, like Tupperware and condoms, that you need more of in a recession.
Exactly a decade later, still writing for The Times about consumer affairs, now helping readers with their financial woes and blunders as the consumer champion known as ‘Troubleshooter’, I see how much those few weeks changed the world, not least for those of us who received our first pay cheques in the period since the financial crisis took hold.
Lots has improved, as I’ll explain through this book. Banks are desperate to win back our trust, and technology has created countless new opportunities to make it easier to manage money well. But there has been a lasting difficult legacy, especially for those, such as my sister, who are a few years younger than me. Most under-thirties, however diligent, will never be able to buy a decent-sized home in a great part of an exciting British city on their salary alone, especially not while their incomes are reduced by student loans for decades and they are simultaneously trying to save enough into a pension to afford their heating bills when they reach ninety.
Jobs are insecure, wages static. Many, whatever their age, now work longer hours in smaller teams of staff, doing more for relatively less money than their seniors ever did at the same age. The spectre lingers of another recession and a further round of redundancies.
This is coupled with navigating the money-related dilemmas that come as part and parcel of growing up, whatever generation you were born into: how to become financially independent from your parents, how to work out money with your friends without being consumed by status anxiety, how to provide both for yourself and for your family, how to earn more and spend less without missing out on the things that make you happy and life worth living.
I also believe our ability to feel good about money is diminished by the fact that the financial services world loves to obfuscate. A lot of companies make their profit by exploiting our ignorance of how their products really work, maybe cynically, or maybe just because they too overestimate how financially competent their clients really are.
There is a move towards greater transparency, but there is a long way to go. Meanwhile the paralysing choice of financial products out there grows into a dizzying, offputting blur of numbers, percentages and jargon. There are, as I detail in my chapter on household bills, now about half a million subtly different mobile and broadband deals available to ‘choose’ from. Going to the pub is better by far than boring yourself to tears trawling moneysupermarket.com, and everyone who advertises on the site knows it.
The following chapters are a compilation of advice and tips I have picked up about personal finance since the credit crunch and since my student days, inspired by making my own myriad money mistakes while observing and writing about the traps that Times readers have fallen into.
IMPORTANT DISCLAIMER: I am very much not a financial adviser. The only post-school exams I passed involved words (apart from a first-year university statistics and maths resit that continues to give me stress dreams). I’m just a journalist. None of this book constitutes official, legally watertight, financial advice. What it offers are observations and suggestions formed by speaking to real qualified experts, researchers and proper financial advisers about how to avoid common errors.
Even so, I hope this information will help equip you with enough money basics to feel more confident about your own situation and whether or not you can improve it. I hope it will offer a glimpse into how to make better, more informed, more ethical choices, and how to avoid being mugged off by your bank and your mobile-phone network, which will save you far more money than cutting back on a few brunches ever can.
Good luck! If I can do it, so can you. Seriously.
Who this book is for, and how to read it
To state the obvious, the best advice on how to manage your money varies depending on how much of it you have and what stage of life you are at. This presents a dilemma when writing a shortish book. I had to make some decisions about who to address, what to include and what to leave out. I have chosen to focus on advice that I think is most practical for people under the age of forty, who have probably borrowed money to study, and who are earning enough to pay tax and rent a home privately, possibly working out whether or not they can afford to buy their first place.
Most of the advice applies to the whole of the UK, but in some cases laws and processes – such as how to buy a house – differ slightly in Scotland, Northern Ireland and Wales. If you don’t live in England and are in doubt, please check.
There are also things I mention that change year by year – tax allowances, for example, a company’s financial products, or government policy – which may mean that some of what I say here falls out of date. I have written with figures, laws and product recommendations true of autumn 2018.
I write appreciating with respect that there are millions of people in the UK who have to manage on minimum wages, and rely on benefits and food banks. There are millions of Brits who could not fathom having enough cash to invest in the stock market, or contemplate buying their own home in an area of their choosing. I have also carried out research for this book by chatting to some baby boomers and some pensioners who, just like those under forty, said they could really do with tips on how to save more and spend less. So while this book may appeal most to a younger, wealthier-than-average demographic, I hope people of all ages and financial means may find something that helps them in here, whether it is to understand how to get a better deal on your energy, get help to cope with unmanageable debt, decide whether or not you should make a will, or pick the most suitable bank account.
The book has three parts. You can read it in order, or pick out any chapter – they each stand alone – to get some advice on a particular topic that is relevant or concerning to you, such as how to understand your pension.
In PART ONE I go through the areas of personal finance that I think are most relevant to the under-forties, starting with housing and borrowing, through to how to budget, where to put aside savings for your short- and long-term future, and how to understand and reduce both your household bills and the amount of tax you are paying.
In PART TWO I look at how money makes us feel about ourselves and our relationships, offer some advice gathered from counsellors about how to deal with our emotions around money, as well as some practical tips on how to split it while cohabiting. I detail how to manage money if you feel that it is making you unhappy, or exacerbating an existing mental-health condition.
If you read most of the chapters in sequence you should have enough of a grasp of your finances by the end of Part Two to decide whether you want to do something better with them, not just to make yourself richer, but with consideration for wider society.
PART THREE looks at the growing, and important, shift towards arranging our personal finances ethically, from checking the source of the energy you use, to where to invest your pension, in a way that is mindful of its impact on the environment and other people. Being good with your money is not just about making more of it.
Where better to start than with the generation-defining money issue for anyone under forty: where the hell can we afford to live? If arctic rolls and the threat of nuclear war shaped those that came of age in the Seventies, so the Noughties kids have had the Spice Girls, MSN Messenger and a housing crisis.
In November 2017 the estate agent Strutt & Parker (which sells what I would consider to be largely unaffordable properties: a £525,000 cottage in a hamlet outside Totnes, Devon; a £25 million house in Notting Hill, London) issued a report that blew up on Twitter about how first-time buyer couples should be able to save the average £33,000 needed for a UK house deposit, or the insane £64,000 needed for a London house deposit, within just five years by cutting down on six ‘luxuries’.
Some of the numbers: give up one night out a week and save £6,000 annually (that assumes you spend £115 a week on one night out) and £2,640 a year on takeaways (£50 a week!). Make rather than buy sandwiches for another £2,576 (£49.50 a week, but you should still eat lunch over the next five years, and bread is not normally free) and eliminate £832 a year on lottery tickets (£16 a week. Anyone?).
Even after finding that, having given up excessive expenditure that you are unlikely to be making, you are still short if buying in London, here comes the kicker:
‘Those lucky enough to have family that can help will receive an [additional] average of £29,400 towards their goal.’
Whichever way you want to spin it, however much money you think us under-thirty-fives are wasting on Deliveroo, the statistics are tough to argue away. Average house prices have far outstripped average earnings across the UK, which makes it way more expensive than it used to be to buy a house in every part of the country.
In the South East, where, still, many of the most prestigious and lucrative graduate jobs are to be found, it is particularly bad, with London house prices 15.7 times higher than average incomes for people between the ages of twenty-five and thirty-four, according to a report from February 2018 by the think tank the Institute for Fiscal Studies (IFS). Across Great Britain as a whole nearly 40 per cent of twenty-five to thirty-five year olds face a house price to income ratio of at least 10.
A separate report by the Office of National Statistics (ONS) found that in 2017 the price of a home in London was 13 times the wages of full-time workers aged twenty-two to twenty-nine, in 1999 it was 3.9 times the then average salaries. Even in the North East they are 5.5 times, up from 2.46 in 1999.
Bear in mind, as outlined in chapter 2, my guide to whether or not you can afford to buy. You are unlikely to be able to borrow more than four or five times your salary in a mortgage.
Whenever such statistics appear in the press there follows the same reductive, crabby response: ‘Whilst house ownership has collapsed the stag/hen do market in Marbella or Prague has soared,’ one man wrote on thetimes.co.uk. But there was another comment on the coverage of the IFS report that sums it up for me, from someone who says she bought a modest semi in the South East in the 1970s.
It cost £11,500 and I saved a £2,000 deposit (lived with parents), and got a £10,000 mortgage (three times my salary).
I earned around the national average wage, and the house was around four times the national average wage. I drove an Austin 1100 which cost £100 and expired a year later. A bit of a struggle, but not too bad.
Similar houses in the same estate are now selling for 15 times the average wage. The cheapest flat in my area is seven to eight times the average wage. That’s the problem. For sure iPhones, £3 lattes, and holidays don’t help, but they are not the fundamental issue.
FYI, if you went on fifty-two lavish £500 stag or hen dos (sympathies), one every weekend for a whole year, you would have spent £26,000. A typical 20 per cent house deposit in London is now more than £80,000, according to Nationwide Building Society.
With that in mind it makes sense to start any advice on housing with some tips on how to rent well. A third of those born between 1981 and 2000 will be tenants for the rest of their lives, according to the think tank the Resolution Foundation.
I will then move on in chapter 2 to help you work out whether or not you can afford to buy a home, and if you can, how to sort out your credit score, and get yourself the best mortgage possible.
The majority of perma-tenants will be so because they cannot raise a housing deposit big enough to buy close to where they work. I think it is worth stressing, though, that for some people renting is not a result of being unable to buy, but a positive lifestyle decision and a better way of spending, or saving, their salary.
The rental market is riddled with problems, shyster letting agents and landlords promoting property that is not fit for human habitation. Moving constantly between rental properties can be horrendous, as is not knowing when you are going to be booted out or when your rent is going to be raised. Such uncertainty is damaging to mental and physical health, children’s schooling, general morale, your confused cat and your wilting pot plants. All the same, for some tenants spending income on rent offers a better, more flexible, sociable way of existing than tying themselves to a hefty mortgage and a resulting nine-to-five grind for the rest of their days. Maybe you don’t want to carry the responsibility of fixing a leaking roof.
So: you are renting, out of necessity or out of choice. How do you make the best of it?
How to rent a place and lessen the chances of getting ripped off Should you rent from a letting agent, or a landlord?
When renting privately you will either do so direct from a landlord or through a letting agency. There are pros and cons of each. Going direct to a landlord helps keep fees down, and you may not have to submit to a credit check. Rents can be cheaper because landlords are not paying someone else to find and check tenants for them. I am also convinced that letting agents play a large part in encouraging landlords to raise rents. Cut out the middleman and you may charm your landlord into wanting to hang on to you without charging more. Reliable tenants are assets.
Sites such as Open Rent, No Agent and Homerenter match up tenants and landlords direct, though you may have to pay some low fees if a landlord wants to see a reference.
Going through a letting agent might help if you need repairs doing, when the agent can negotiate with your landlord on your behalf. You also have more consumer protection by signing up to rent through a letting agency. Agents must be part of a redress scheme, such as the Property Ombudsman (TPO), The Property Redress Scheme, and Ombudsman Services: Property. You can turn to these organizations for help with any disputes you may have with your landlord or agent. Check an agent’s membership before you commit.
The massive downside to letting agents is fees. For years letting agents have been making an absolute packet out of charging rip-off fees for it’s hardly clear what – ‘admin’, ‘renewal’, ‘referencing’. The housing charity Shelter says the average letting-agent fees are £200, but has seen cases where tenants are charged £700 before they have paid any deposit. The good news is that the government is to outlaw fees for granting or renewing a tenancy in England and Wales, so by 2019 they should no longer exist (they are already banned in Scotland). Agents will only be able to charge for the rent, a refundable holding deposit and security deposit, and any ‘default fees’, which are penalties in the event that a tenant breaches a clause in their tenancy agreement.
There is concern, however, that agents might exploit this loophole to charge really unreasonable default fees for silly breaches. Shelter has seen people fined for leaving a jar of peanut butter in the cupboard, or failing to remove dust from skirting boards (£3 per skirting board), or totally over-the-top fees for replacing something missing from the inventory, like £100 for a new loo seat when you can buy one for £12.50 in the shops. If you are in this situation, challenge it.
What fees you have to pay up front, and questions to ask before you part with them
When you have found a property you want to rent you will generally need to go through a credit-check process (if you are worried about your credit history see on how to improve it), which is where you are rated on how likely you are to pay your rent on time. You may also need to show bank statements and provide references, such as your old landlord or employer, or failing that, to offer a guarantor, such as a parent, who will agree to cover your rent if you cannot meet it. You then have to cough up a lot of money for a deposit.
Some agents or landlords require a holding deposit, which is a sum of rent paid to secure the property you want while the letting agent checks your references. When the new law comes into force in 2019 a holding deposit can be no more than a week’s rent. Do not pay until you are sure you want the property, because you may not be able to get this deposit back if you don’t. Usually it will be taken off your tenancy deposit. Get the holding-deposit details in writing, including what will happen to it if your landlord changes their mind and you can’t move in.
You usually also have to pay your first month’s rent in advance. You then need to add on the tenancy deposit. From 2019 tenancy deposits will be capped at a maximum of six weeks’ rent.
Always get receipts whenever you pay anything, in case there are any issues further down the line. Before you pay or sign, see if you can negotiate on any fees or the cost of the rent. These things are not fixed and agents or landlords may be trying it on.
You also need to ask a few questions: how and when you will be paying rent, and whether the rent includes any bills; how long you can rent for – the length of your tenancy – and whether you are entitled to end it early. Are there any rules on what you can and can’t do in the flat – for example, have parties, keep a dog, smoke?
Ask to see the property’s Energy Performance Certificate (EPC). Legally a property you rent must have an energy-efficiency rating of at least E, unless it is exempt, in which case there is a register for exempt properties on gov.uk. If the property is an F or G your landlord is breaking the law and can be fined.
If you are moving into a shared house with several flatmates your home should be licensed with the local council as a house in multiple occupation (HMO) to make sure it is safe and not at risk of overcrowding. This is worth checking.
Also, it may sound obvious, but do actually view the property you want to rent in situ, rather than just online, before parting with any cash. There are lots of online rental scams out there, particularly targeting students, where you pay upfront fees to secure properties that either do not actually exist or have already been rented out, sometimes multiple times.
Need to know: what are tenancies?
Most private renters will sign an assured shorthold tenancy. Have a good read of the tenancy agreement before you sign it, which lays out what responsibilities your landlord has and how to end or renew your tenancy. Make sure you are given a written tenancy agreement, one in five millennial renters told consumer group Which? that they did not get one when moving. Most shorthold tenancies last six or twelve months, and you have to pay the agreed rent for this whole period. After this fixed period you can agree a new contract, or allow the tenancy to continue. If you want to leave at the end of the fixed term you probably need to give written notice in advance; your agreement should tell you how much notice you need to give. A landlord can end your tenancy without reason – outside of the fixed period – but needs to give you at least two months’ written notice, and provided that your leaving date falls at least six months after your original tenancy began.
If you are living with other people you may sign a joint tenancy agreement. This means that you are all responsible for rent, and for sticking to the terms of your agreement. If your flatmate moves out and refuses to pay rent, you will be lumbered with it instead, so pick your roomies carefully.
How your deposit is protected
Landlords have to keep your deposit safe by putting it into a deposit-protection scheme within thirty days of you paying it, or will ask a letting agent to protect your deposit for them. The deposit has to be in a government scheme, and your landlord needs to tell you which one. There are three: Deposit Protection Service (DPS), Tenancy Deposit Scheme (TDS) and My Deposits. They are also allowed to use an insurance scheme to protect it, instead.
You may be given a ‘repayment ID’ from the scheme. Keep it safe: you need it to get your deposit back at the end of your tenancy.
How do I get my deposit back?
Landlords can only deduct money from your deposit for damage, cleaning costs if you have left the place in a worse state than when you moved in, and any missing items. Their right to do this needs to be detailed in your tenancy agreement. They cannot deduct money for normal wear and tear – for example, scuffs on the walls or faded carpets. Damage needs to be things like a massive iron burn in the middle of the floor.
Check your agreement to see whether you are supposed to have the property professionally cleaned before you move out.
You will agree an inventory when you first move in: a document detailing what is in the property and its condition. Take lots of photos, inside and out, to make a record of any existing issues. You might also want to take photos of the property to show what it is like as you move out, and do a check-out inventory, getting your landlord to sign it, as your back-up if there is any dispute.
You have to contact your landlord or letting agent to request your deposit back. Best do it by email or in writing, so that you have evidence of the date. You should get it back within ten days. If they refuse, or take longer, or if you don’t agree with any deductions they make, you can contact the deposit-protection scheme where your money is kept and go through their free dispute-resolution process. If your landlord has made any deductions they should write to you to explain how much and why.
Shelter has a useful template letter on its site to help you challenge any deductions that you think are unfair. As a last resort you could go to the small claims court if you still cannot get back your deposit.
How you can avoid paying an upfront deposit
If you can’t afford to pay a large deposit up front there are some new products available to help you get around it. Companies like the Zero Deposit Scheme (ZDS) and Reposit offer what is basically an insurance policy for the landlord instead. With both you pay the equivalent of one week’s rent (rather than the normal six required for most security deposits); with ZDS you also pay a £26 annual admin fee for each additional year you are in the same property, and it guarantees to cover your landlord for the same sum as a traditional security deposit.
You will end up paying more with these schemes, however, because most tenants do get their full security deposit back at the end of a tenancy, whereas the money you are paying to the schemes is non-refundable. You are also still liable to pay your landlord directly for any damage that might otherwise have come out of the security deposit. Such schemes are only to be used if you are desperate to move into a rental but really not able to scrape together the cash up front.
Increasingly there are housing developers creating build-to-rent schemes that do not require a security deposit. Two of my friends live in one of the first, by Get Living London, in the old athletes’ village in the Olympic Park, London. They also have a longer-term tenancy, of a guaranteed minimum three years. Look out for similar developments.
Who is responsible for repairs in my rental?
Your landlord is legally responsible for keeping your property in decent shape and carrying out timely repairs to its structure – things like pipes and wiring, and heating and hot water – as well as clearing anything that will damage your health, such as mice or mould. You need to do a few basics yourself – change lightbulbs or replace smoke-alarm batteries.
If you are without heating or hot water your landlord should sort it out very quickly. Under section 11 of the Landlord and Tenant Act 1985 a landlord has to supply adequate space, heating and water. The minimum heating standard is at least 18°C in sleeping rooms, and 21°C in living rooms, when the temperature outside is as cold as minus 1°C, and it should be available at all times, according to The Tenants’ Voice, which has template letters you can send to your landlord to get them to recognize their responsibilities if they refuse to do so. Always send requests for repairs on email so that you have a record.
Failing that, you can contact the environmental health department at your local council, which can force your landlord to sort the issue, or even authorize repairs and send your landlord a bill.
Who pays household bills in my rental?
Who looks after the energy or broadband can vary, so check with your landlord when you sign your tenancy. If it is the tenant’s responsibility then don’t make the common mistake of assuming that you have to be on the energy tariff that is already in place. You can switch your provider to whoever you want, and in fact you should do this, because it could save you several hundred pounds.
When you move in, ask previous tenants or the landlord who is the current supplier. If no one knows, you can call a meter number helpline to find out who supplies gas on 0870 608 1524, and one of several numbers, depending on where you live, for electricity; the energy-uk.org.uk website has details. Take a meter reading at your new property as soon as you arrive. Tell the existing supplier that you’ve moved in and give the meter reading, so that you are not held liable for previous tenants’ bills. You are responsible for any energy used when you take over the property, not just when you actually move in.
You will probably be put on the supplier’s most expensive standard variable rate (more about this in the bills chapter 9), so you want to move off that as soon as possible. If you find a company that is cheaper just sign up and they will take care of contacting the old one and moving your supply. Do not forget to let them know, and take meter readings, when you move out.
I will start off the tips in this chapter by saying that there is no magic solution to how difficult it is to afford a home where you want one. Apologies: you need more money. The options are limited: get a better-paid job, or a job somewhere with cheaper housing; beg and borrow from rich enough parents, friends, partners, perhaps with a boost from a family mortgage or a government scheme – read on for more; or start saving harder for longer (I hope that this book will help a bit with that).
Understanding the process of buying a home can, however, contribute towards working out whether you want or can stretch yourself to get on the ladder, and it can save you a lot of money on the stressful journey if or when the time eventually comes. The experts suggest you get started thinking about how to make yourself a model homebuyer at least six months before you start engaging estate agents and banks. Don’t panic if you do not have six months, it is possible to put yourself in a better position within weeks.
Of those I know who have bought their first homes, many because the bank of Mum and Dad has chipped in, all have told a similar story: ‘I had no idea what I was doing, so I felt like I was being totally shafted.’
The nature of the buying and selling process, which is a game of holding your nerve and outguessing who is trying to outmanoeuvre who, plus dealing with estate agents (a profession on equal pegging with journalists for the most able to put a creative spin on the truth), means that some shafting is hard to avoid. Steel yourself. But getting your head round the following should at least keep it to a minimum.
I will start by explaining the basics of how you can borrow money to buy a house, and then move on to the finer details of what mortgage to choose, plus all the other costs of the process, if by that point you reckon you can indeed raise the funds required.
First – what actually is a mortgage?
How to borrow enough to buy a property
Whether or not you can afford to buy the house you want boils down to two things: can you raise a big enough deposit, and can you borrow enough, given your earnings, outgoings and spending habits, to get a big enough mortgage to top up that deposit? We are going on the assumption here that you are not buying a house with a suitcase of cash: if you are under forty and do not need a mortgage you do not need this book.
When working out the size of the deposit you can save, don’t forget that there are lots of other expenses involved in buying a house that you need to budget for – for example, stamp duty, which can be tens of thousands of pounds on expensive properties, and solicitors’ fees. Skip to later in the chapter for an estimation of how much these will cost you.
How your deposit influences the mortgage you can get
The bigger your deposit, that is the lump sum of cash you are bringing to the party, the smaller the amount you have to borrow from a bank, the more of your property you actually ‘own’ from the start, and, naturally, the cheaper your monthly mortgage repayments.
Your monthly mortgage repayments will depend on the type of mortgage product you go for (read on for a detailed explanation of this), but will mostly likely consist of some capital repayment, that is an amount you pay to chip away at the fundamental sum that you are borrowing, and interest, which is, to put it most simply, the fee or the penalty you pay to borrow the money from the bank. Interest is charged as a percentage of the size of your mortgage, so if you borrowed £100,000 and your interest rate was 2 per cent, you would owe £2,000 interest a year, paid in monthly chunks.
The size of your mortgage is the size of the proportion of your property that the bank still technically ‘owns’. If you can’t pay your mortgage back your property will be repossessed, which means that the bank sells it to recover the value in cash of this proportion. If it is repossessed at a time when property prices are depressed and your home sells for less than you bought it at, you could end up owing the bank more money than you started with.
The aim is to pay down your mortgage over time and start to own more of your property. If house prices rise your house is worth more, so the amount of loan you have outstanding on it has shrunk relative to its value, though you will not feel the cash benefits of this unless you sell, or remortgage.
If house prices tumble, as happened after the financial crash, you could end up in ‘negative equity’, that is where you owe the bank more in a mortgage than your house is actually worth, and you will not be able to move, becoming what is known as a ‘mortgage prisoner’. Falling into negative equity is less likely than it was, because since the credit crunch banks are much more cautious about how much money they will lend to you.
What is LTV?
The amount you can borrow in a mortgage is measured in a ‘loan-to-value’ rate, or LTV, as you will see on mortgage adverts. This is just the percentage mix of deposit and loan. If you had £20,000 cash and wanted to buy a £200,000 house, you would have a 10 per cent deposit, and need to borrow the remaining £180,000 to get your hands on it. That is you need to borrow 90 per cent of the property’s value, or 90 per cent LTV. If you had £180,000 cash and needed to borrow only £20,000 you would have a 90 per cent deposit, and would apply for a 10 per cent LTV mortgage.
Before the Crash it was common to see 100 per cent LTV mortgages. Northern Rock used to have 125 per cent LTV mortgages, which it scrapped in 2008. These existed because there was such general confidence that house prices were on a permanent climb. Banks are no longer so sanguine, though higher LTV loans have been creeping back onto the market aimed at first-time buyers.
There is a common rule in money matters that the higher the risk the higher the reward (see chapter on the stock market for more on this). If banks are taking a greater risk on you, stumping up £180,000 to lend to you rather than just £20,000, they want more of a reward, so you’ll pay more on top of the sum you want to borrow, generally in the form of interest.
The greater your deposit, the cheaper your mortgage will be
This leads us on to another cruelty for first-time buyers struggling with the cost of housing: all the cheapest mortgage deals with the lowest interest rates are available to the borrowers that banks want the most: those who can save the biggest deposits. All the record-breaking low-interest-rate deals plastered over billboards are generally only given to those borrowing with an LTV of 65 per cent or less, or put the other way, who can contribute a deposit of at least 35 per cent of the cost of the property they want to buy.
Most first-time buyers, especially those buying a flat in an expensive city, will be looking at borrowing with a 5 per cent deposit, or 95 per cent LTV mortgage, or 10 per cent deposit and 90 per cent LTV mortgage.
• TOP TIP
If you can push yourself to find a 10 per cent deposit, you should. There is a particularly large interest-rate jump between mortgages offered to those with a 5 per cent deposit and those available to those with 10 per cent deposit. This can work out as, for example, £1000 more a year on a mortgage of just £100,000 brokers tell me.
How your bank is judging you
The deposit is most of the battle, but once you have scraped it together you will need to persuade a bank to lend you the rest, and that is a harder and more mysterious process than it used to be. For our parents it was as simple as telling a bank how much they earned. You could borrow a multiple of this. Now, while earnings count, they are not conclusive. Outgoings count just as much. Remember that banks are worried about taking a risk on you, especially when you are a first-timer, so will make all sorts of judgements on your spending pattern to check how safe a bet they can make that you will continue to pay off your mortgage each month.
They do this through looking at your credit score (more on how this works shortly) and your spending patterns, based on analysing bank statements, any debt you are in, and any regular expensive commitments that look fixed, such as a child, dog, Camel Lights habit etc. Your prospective lender will probably want to see at least the last three months of bank statements, as well as payslips, so collect these well in advance and make sure that within this period you do not exceed your overdraft limit or have any bounced payments.
Ray Boulger, of mortgage brokers John Charcol, says you should also bear in mind that a lender will be able to see who you are paying money to, ‘so don’t spend on things you think a lender might disapprove of’ – bouts of online gambling, for example. Also he says give careful thought to signing up to Open Banking; this will allow a lender to see a longer spending history. (See budgeting chapter for more on open banking.)
You will also have to fill out an application form, detailing your outgoings. If this, or your bank statements, disclose lifestyle choices that make you look like a mega-spender, above-average numbers of holidays or meals out, say, that may reduce the amount you can borrow. The same goes if you have lots of financial debt commitments – such as car finance, personal loans or credit-card debt that you don’t repay in full each month. As long as the debt is not judged excessive, though, it is the amount you are paying in monthly payments, and so reducing what is left to spend, that influences the amount you can borrow, not the outstanding debt. Debt with less than six months to run is usually ignored.
Student loans count only in so far as repaying them means you have less disposable income left in your bank account, which feeds into how much you can afford to borrow. The fact that you have student-loan ‘debt’ does not count against you.
Banks will also look to see how your income or affordability levels may change in future. This is why a former colleague of mine went to the bank to apply for a mortgage with a very baggy top on, and took good care to pay for any Mothercare purchases with cash. If they had known she was going to have a baby, she guessed they would have judged her on balance a greater risk, likely to see both a dip in her earnings and a rise in her outgoings, even though she was pretty confident she could afford a big mortgage just fine.
SIDENOTE It is illegal for a bank to discriminate against an applicant because she is pregnant, so, like a job interviewer, you cannot be asked: ‘Are you pregnant or do you plan to get pregnant?’ But most will have questions on their application forms like: ‘Do you anticipate any changes to your financial circumstances in the next three months which might make it difficult for you to make your mortgage payments?’
You need to be honest. Lying on the application form is fraud, though you do not have to disclose your pregnancy. It should, however, make you think hard about whether you can actually afford the mortgage you want if your income or circumstances change once you have got it. A bank can only know so much about your ability to repay in the future; it is up to you to gauge how much you want to stretch yourself, knowing what life or job changes lie ahead.
Earnings matter, if only to work out whether you stand a chance of buying
Before you start browsing Zoopla it is a good idea to work out roughly how much you are realistically going to be able to borrow based on your earnings. This is only part of the picture as explained above, but a good place to begin. There are lots of mortgage calculators online that work on this basis. The rough rule of thumb at the moment, though it varies between banks, is that you can borrow about four to four and a half times your pre-tax salary. Some lenders will stretch to five times your salary, as long as it is affordable (if you are self-employed this might not apply – more below). Clydesdale bank this year launched a ‘professional mortgage’ with a maximum loan 5.5 times salaries if you are a newly qualified professional such as a doctor, vet, solicitor or architect. This is called an ‘income multiple’. That means if you earn £35,000 a year before tax you are unlikely to be able to borrow more than about £158,000 if you are buying alone. Now you can see why there’s a housing-affordability problem.
It is worth noting that the income multiple is the same for couples as for single applicants, so you are in a much stronger position if you buy with another person. Banks also treat ‘non-guaranteed’ income differently – items like commission payments and bonuses. This means you might get quirks where one bank actually offers you a bigger mortgage on a four-times-income multiple than another bank which is prepared to lend on a four-and-a-half-times-income multiple but does not allow for bonuses.
The maximum income multiple also varies with what LTV you can afford. Someone with a 25 per cent deposit is more likely to be able to borrow five times their income, whereas if you have just 5 per cent deposit, the maximum is unlikely to be more than four times. This maximum may also vary according to how much you earn, on the basis that you can allocate a higher proportion of your income to the mortgage repayments if you are richer. As Mr Boulger puts it: ‘Someone earning £80,000 won’t spend four times as much on toilet rolls as someone earning £20,000.’
How to get a mortgage if you are self-employed
You used to be able to apply for ‘self-cert’ mortgages, nicknamed ‘liar loans’, which allowed you, as a self-employed worker, to state your income without any actual proof of it. These were banned in 2014. If you are self-employed or a freelancer you apply for mortgages in the same ways as everyone else, but it is now a lot harder to get one, though do not give up before you have tried.
Ideally you need at least two years of accounts, and three years will go down even better. Many banks want these signed off by an accountant. You also need to show the income you have reported in your self-assessment tax return to HMRC; you can download the SA302 form and tax-year overview from HMRC’s website.
Some lenders – for example, Halifax (if you have a great credit score), Newcastle Building Society, Kensington and Precise Mortgages – will consider those who have been self-employed for only a year. Smaller building societies tend to be a better bet: they are less likely to pull ‘Computer says no’. You may also find it easier if you were with the same business as a full-time employee before you started going freelance.
If your earnings have been rising, banks will usually take your average income for the past two or so years. If it has fallen, they will probably use the latest and lowest figure of earnings. The best thing to do is apply to a lender you know will be most happy to offer you a deal given your specific circumstances. A broker can help matchmake. If you are self-employed, take extra care with spending in the run-up to a mortgage application. You want to act especially frugally for at least six months beforehand.
What is ‘stress testing’ and why the future matters as much as the present
Post-credit-crunch lending rules now also require banks to make sure that a mortgage is affordable not only right now but also in the future. The result is ‘stress testing’. You may be able to comfortably meet mortgage repayments on your existing salary with current low interest rates, but what if interest rates rise? You will only be able to borrow as much as you can happily afford with an interest rate of 3 per cent higher than it is today, usually compared with a bank’s standard variable rate (more on what that is in a minute) at the point at which you apply. That means most first-time buyers are stress-tested on the basis of a mortgage that might fall payable with interest of 7 to 7.5 per cent.
This protects you from overstretching yourself, but also means you are limited with how great a risk you can take on borrowing, even if you feel confident that your earnings are going to increase significantly in the future.
What is your credit score and why does it matter?
When it assesses whether or not you can afford a mortgage, a bank will score your creditworthiness based on information it can gather from your credit history or credit file as well as your bank statements. Your credit history is a record of your interactions with other financial companies: banks, energy providers and so on, kept by credit-reference agencies. Your prospective lender is looking for evidence of past borrowing behaviour to assess whether or not you will be a well-behaved borrower going forward.
You are also judged on things like how long you have been with the same employer, how long you have lived at your address, and how long you have had your bank account.
Most banks, building societies and financial companies have their own arcane bespoke credit-scoring system, based on what factors they deem important as a yardstick of reliability. No one is quite sure how they all work, how they are compiled, and how banks use them. Underwriters at banks, that is the team that assess risk, will not reveal how they compile and assess credit scores because they are ‘commercially sensitive’, so you can be rejected for having, in their view, a bad score, without knowing why, or being able to argue that their criteria are wrong.
You do not have one single credit score – this is a myth – but UK banks use three credit-reference agencies in the UK for information: Experian, Equifax and Callcredit. They compile their own credit scores based on their own assessment of your credit history, and you can check them to get some idea of whether or not you look like a worthy borrower. They are useful, but just guidelines.
Despite their opaque nature, credit scores are annoyingly important, and used for everything from overdrafts and credit cards to mobile-phone deals and, crucially, mortgages. I have received letters in my role as consumer champion at The Times from people on the verge of losing a house they want, or unable to secure an affordable mortgage, because of minor bill infractions or disputes, like forgetting to clear a small sum owed to an energy company on an account for a shared flat after everyone moves out, or missing a mobile-phone payment. These have resulted in letters from debt collectors, which damaged the reader’s credit history.
One man thought his gas account had been put on hold over a bill he did not think he owed while it was investigated; instead it had been passed to debt collectors, and a ‘late-payment’ notice added to his credit report. As a result he was turned down for a cheaper mortgage, and estimated that it would cost him over £10,000 more.
One first-time buyer couple applied for three new bank accounts – a current account each, and a joint account with the same bank that had agreed to lend them a mortgage – because they were told it would simplify things. Instead their credit score was damaged by the fact that they applied for too many financial products at once, even though the bank was getting more of their business. Totally bizarre, but really expensive, they could no longer apply for a 95 per cent LTV mortgage; they had to find another £12,000 for a deposit for a 90 per cent one. Luckily their grandparents bailed them out, but others less fortunate would have lost the house.
How to improve your credit history
If you were going to lend someone several hundred thousand pounds you would want to know a bit about how likely they were to pay you back, based on how well they had paid other people back in the past. You might be equally reluctant to lend to them if you had no evidence of their reliability because they had never borrowed from anyone before. What people do not realize is that although debt is portrayed as something you should generally avoid, having no credit history is as bad as having a faulty one. Banks need something to go on. This can be a problem for young first-time buyers whose only experience of financial products is their bank account and children’s saver they signed up to when they were twelve, or for people moving here from abroad who leave their credit histories behind in another country.
What it is useful to do, ideally at least six months before you apply for a mortgage, is create a wholesome credit portrait of yourself and, if you have no credit history, start borrowing small amounts to build one up. Start by checking your credit record through one or all of the three main credit-reference agencies mentioned above: Equifax, Experian and Callcredit. You can do this free, though be warned that you only get it free by signing up for a free trial period, after which you start to get charged automatically. Many people are caught out by this, so unsubscribe as soon as you have your score. Noddle lets you check your Callcredit score and is ‘free for life’.
I recommend that you check the credit-reference agencies at least six months before you start to apply for a mortgage, so that you have time to sort it out if it’s poor, but it’s worth doing even if you intend to apply for a mortgage next week.
• MAKE SURE YOU ARE ON THE ELECTORAL ROLL
This is essential. If you are not you won’t get a mortgage. Banks use the electoral roll to check you are who you say you are. Make sure your name is spelled right, all your address history is correct and up to date, and that you are registered to vote at the same, most recent, address.
• GET A CREDIT CARD AND USE IT IN A CHILLED-OUT MANNER
If you have a poor score because you have not had credit in the past, take out a credit card and use it for day-to-day shopping for a few months. Set up a direct debit to clear if off in full every month. Don’t just pay the minimum payment, but don’t max it out either: the perfect amount of spending is about 10 to 30 per cent of your credit-card limit. It demonstrates that you can borrow sensibly without losing the plot with all this lovely free money. A monthly credit-card balance below 30 per cent can gain you 90 points on your credit score, according to Experian, which scores from 0 to 999. A score of around 780 is fair, one of above 961 or higher is excellent. A card balance above 90 per cent will cost you 50 points.
• ADD RENT TO YOUR CREDIT HISTORY
You can now ask for rental payments to be added to your Experian credit score to demonstrate that you are a reliable rent-payer. Not all banks take this into account yet, but there are hopes that this will slowly start to change, so it is worth doing.
The Rental Exchange scheme records your rental payments and sends the results to Experian. You need to actively sign up to do this by paying your rent through a company called Credit Ladder, which then passes on your money to your landlord or letting agent, so run this past your landlord to check that they are happy with it first. Equifax and Callcredit don’t yet consider rental payments.
• DON’T APPLY FOR OTHER STUFF
Don’t be over-keen. Applying for too many accounts and loans in a short space of time does not go down well. If you can, avoid applying for anything (mobile phone, credit card, bank account) within six months or so of applying for your mortgage.
• BREAK UP WITH YOUR EX
Break any links to ex-partners and former flatmates with whom you have shared joint accounts or joint bills. If you are still wrongly linked on your report, contact all three agencies to ask them for a ‘disassociation’. Contrary to popular belief, just living with someone else who failed to pay their bills on time will not damage your credit file, but if you were financially tied to them then their poor credit history will reflect negatively on yours (conversely their excellent credit history reflects well on you). Bear this in mind before you open any kind of joint financial product.
• PAY ALL YOUR BILLS ON TIME
Make sure you do not default on any household bills. Credit reports include information from, for example, your gas, electricity, insurance and water supplier. Any defaults, even if you failed to pay just £5, stay on and damage your report for six years.
Missing your last payment on an account will cost you about 130 points according to Experian; receiving a default, when an account is passed to debt collectors, or getting a court judgement, will cost you more than 250 points. These things fade over time, though: after three years you will lose fewer points for them. If there are any mistakes on your report, or any defaults that you think are unfair or misrepresent you, then you can ask the credit-reference agency to investigate them and add a note of up to 200 words (known as a notice of correction) on your file to put them right. Lay out why you feel they are unfair, or why your circumstances have changed. For example, you might write that you missed a bill because you had lost your job, but you are now fully employed and back to paying bills on time.
• REDUCE YOUR DEBTS (BUT DON’T WORRY ABOUT STUDENT LOANS)
Pay down any debt you have as much as possible before applying for a mortgage: lenders will look at your ‘balance trend’ as part of credit scoring. This does not include student loans. Arguably you would be better off boosting your deposit than using savings to pay down any student loan. See the next chapter for more on why.
• BE CAREFUL ON FACEBOOK
There have been stories that banks take what you post on social media into account. This is hard to prove, but Andrew Montlake, of the mortgage broker Coreco, told me that he would suggest those looking to apply for a mortgage should be careful about what they share. ‘Gambling stories, wild nights out and lavish spending boasts should probably be avoided.’ Also avoid sending or receiving cash to your bank with ‘banterous’ references. Banks have rejected people based on ‘drug money’ appearing on their statements, even if it is obviously a joke.
• DO NOT GET A PAYDAY LOAN
For some banks payday loans are also an absolute credit-score killer. Some banks will not lend to you at all if you have taken out a payday loan, others are less fussed. But best not to go anywhere near Wonga at least a year before you apply for a mortgage if you can help it. Ideally never go anywhere near Wonga.
• GET A COPY OF YOUR OLD REPORT IF YOU HAVE MOVED TO THE UK FROM ABROAD
If you have moved from abroad, bring a copy of your credit record from the main agency in your home country to the UK, then contact Experian, Equifax and Callcredit and ask them to put a note on your file that you are willing to provide a copy of your credit history. Monese offers bank accounts to people who have no proof of address, maybe because they have no credit record in the UK and therefore their name is not on a utility bill.
You have got a deposit and can afford a mortgage! So what is the process of buying a house?
You spot a house you like advertised with an estate agent. You work out whether you can afford it and stamp duty based on whether you can get a mortgage. You can at this stage get a ‘mortgage in principle’, which is a non-binding agreement stating how much, based on your income, outgoings and credit score, a bank will lend you. If all looks good, you put in an offer for the property, which is hopefully accepted by the seller. You then appoint a property lawyer to start what is called the conveyancing process. You find the mortgage you want – it doesn’t have to be with the same bank that gave you a mortgage in principle – and apply for it for real.
Once the sellers have accepted your offer there is still no guarantee that they will definitely sell to you, just a ‘gentleman’s agreement’. There is a chance that you could get gazumped. That’s where another seller swoops in with a higher offer, and a greedy seller dumps you for the new bidders. Gazundering is where you, the buyer, lower your offer just before exchange of contracts. There is nothing other than your conscience, and the risk of pissing off the seller, who may pull out, to stop you doing this, but all the same, better not to – bad karma.
Cross your fingers you do not get gazumped, and insist that the person you are buying from takes down the online or estate-agent advert for their home (the estate agent probably will not do this unless you force them to). In Scotland an offer being accepted is legally binding, sometimes subject to a mortgage being approved, so you are unlikely to be gazumped, or pull out once you have put your offer in.
Your bank will carry out affordability and credit-score checks and then, with a mortgage-valuation survey, on the property you want to buy. This survey is not the same as a building survey, which checks whether the house is in good condition. You need to set this up yourself.
Meanwhile your solicitor will be carrying out checks too, on things like whether your property is on a floodplain. You have to pay for these. Press your solicitor for these to be completed quickly.
When you have received your mortgage offer and your solicitor is ready you can exchange contracts, a process carried out between your own and the seller’s solicitor. At this stage you normally need to pay 10 per cent – sometimes, if you negotiate, 5 per cent – of the price of the property you are buying to your solicitor, who passes it on to the seller’s solicitor. Make sure you have this money ready to be transferred out of your bank account; some banks will require a few days’ notice.
Be super-careful about the accuracy of your solicitor’s bank details. There is a common fraud where solicitors’ email accounts are hacked by a fraudster who sends out an email to a buyer stating that the solicitor’s bank details have changed, or adding in false sort codes and account numbers. If in any doubt, call your solicitor to check again where you send the money. Once you’ve clicked send it’s gone, and you cannot get it back if you send it to the wrong place. I’ve seen this happen several times, and it is heartbreaking.
You also need, at this stage, to arrange buildings insurance, legally required as part of receiving a mortgage.
You agree a day of completion, on which you arrange to send over the rest of your home deposit, plus any fees owed to your solicitor, as well as stamp duty. Your solicitor will receive cash from your mortgage company and arrange to send this to the seller’s solicitor on completion day, at which point you receive the keys for your new home. Woohoo!
The many other costs of buying a house
When working out whether you can afford to buy you need to budget for all the many other unexpected costs that crop up along the way: stamp duty, legal costs, local authority searches, survey costs, mortgage arrangement fees, mortgage broker fees, buildings insurance, removal vans, and, only if you are selling too, estate-agency fees.
Need-to-knows: Stamp duty
This is the biggest cost of moving, a tax you pay on any property you buy in the UK. The tax is based on the price of the property you are buying, and is staggered in thresholds. For example, you pay 2 per cent of a property’s value on properties priced between £125,001 and £250,000; 5 per cent on properties worth between £250,001 and £925,000; 10 per cent on properties worth £925,001 to £1.5 million.
First-time buyers are exempt from paying stamp duty on any home worth below £300,000. If the property you want to buy is worth more than £300,000 but less than £500,000 you pay 5 per cent of any proportion between the two.
If you are buying with another person you both have to be first-time buyers, otherwise it does not count. There is an exception if only one person’s name is on the deeds, and that person is a first-time buyer, but only if you are not married. You are not a first-time buyer if you have already owned a property in another country, or if you have inherited a property. You also only get the exemption if you are buying a home to live in. It does not apply to buy to let, even if you have never bought a property before.
You need a property solicitor or conveyancer to help you buy a house. Expect to pay fees in the region of £1,000 to £1,500. Having a solicitor who cracks on with the work and will answer your calls promptly will save you a lot of aggro, so a personal recommendation is probably the best way to find one. Failing that, The Law Society website’s ‘find a solicitor’ section lists conveyancers. You do not need to use a local solicitor. You could find a more affordable, reliable one from back home, even if you are buying in London, for example.
You will also need to pay your solicitor certain fees for Land Registry, which charges for changing the ownership of a home into your name, and local authority searches. Budget an additional £300 or so.
Finding a solicitor before you put in a house offer makes you look organized and committed and can help save precious time when an offer has been accepted and you want to exchange as soon as possible.
When you get a mortgage your bank will want to check that the property you want to buy actually exists, as well as that it is worth the price you are going to pay for it: the bank does not want to lose money if it has to repossess. It will therefore carry out a mortgage-valuation survey, which you will probably have to pay for: a few hundred pounds. Do not make the frequently made mistake of relying on this as some kind of comprehensive survey of whether or not the house you are buying may fall down.
You need another building survey, by a qualified surveyor, or the less extensive homebuyer’s survey to check for damp or rot or Japanese knotweed or a ceiling that is about to collapse. You are not obliged to have one, but you may regret it if you do not and there are extensive problems in your new home.
Some are considered not worth the paper they are written on, however, so put some research into what kind of survey to go for, and whether it is worth it for the type of property you are buying. Expect to pay from £300 to well over £1,000, according to the HomeOwners Alliance. The Royal Institution of Chartered Surveyors site (RICS.org) is a good starting point.
First-time buyers will particularly benefit from using an independent mortgage broker or mortgage adviser who can help you wade through the different mortgage products that are out there. Brokers can also hurry along a lender and keep things progressing smoothly, filling out all application forms for you. Some brokers charge fees of from £300 to several thousand, others get commission from banks they match up to borrowers, either instead of or as well as a fee.
Broker London & Country does not charge a fee and promises that, though it gets commission, you do not get any worse a mortgage deal than you would if you went to the bank directly.
Do not be bullied into using an estate agent’s preferred adviser. You are under absolutely no obligation to meet their ‘in-house broker’, and it is illegal for estate agents to suggest that the price of the house you want to buy will go up unless you do. A word-of-mouth recommendation is often best, or you can search the website unbiased.co.uk for regulated advisers.
Brokers will try to recommend add-on products while arranging your mortgage – life insurance for example. You will find a better deal by searching elsewhere, so don’t feel pressured by any hard sell (see for more on this).
Choosing a mortgage What’s actually in a mortgage?
A mortgage is likely to be your biggest financial outlay for the next twenty to thirty years. Choose wisely and you save thousands of pounds. There are a lot of mortgages to choose from, however, so it’s not easy. A broker will help you navigate the market, but first understand what you are signing up for yourself.
How much a mortgage will cost you up front, when you first get accepted for one, and from month to month for the next few years, depends on what that mortgage ‘product’ is made up of and the length of its term. Most are a mix of capital repayment, interest, and arrangement fees. These fees are significant, sometimes several thousand pounds.
The ‘term’ is how long a period you are given to pay back your mortgage. Many are twenty-five years, though the first forty-year mortgages have started to appear. You can lower the amount you pay month on month by opting for a longer term, but longer terms accrue more interest over time. It is a balancing act.
Similarly a mortgage with the cheapest interest rate is not always the cheapest deal over the longer term. You need to work out whether lower arrangement fees mean that you may be better off with a slightly higher interest rate, or vice versa. Banks are clever at making an offer look more attractive with low advertised rates but ultra-high arrangement fees.
Also look out for flexibility. Can you overpay your mortgage without being charged fees if you expect a bumper pay rise in the future? Can you take any break from mortgage payments without penalty if, for example, you know there’s a period when you will see a dip in earnings?
Should you get a fixed-rate or a tracker mortgage? • BUT FIRST, WHAT IS THE BASE RATE?
The base rate is the national interest rate set by the Bank of England, and it is to the base rate that high-street banks and building societies peg their mortgage rates (as well as their savings rates, see ).
Following the Crash, the base rate was cut to a historic low of just 0.5 per cent, where it stayed until 2016, when it fell even further to 0.25 per cent. Low interest rates can help to revive the economy, they are good for businesses – borrowing is cheaper – and should make citizens spend rather than save. It is rising at the moment slightly, but is still at record lows. Young first-time buyers have never known anything other than cheap interest rates on mortgages, but it may not always be this way. In 1990, the base rate was nearly 15 per cent, in 1980 it was 17 per cent.
Variable rates, pros and cons
When choosing a mortgage one of the biggest decisions is whether to get a variable rate, a tracker-rate mortgage or a fixed-rate mortgage.
A variable rate is fairly self-explanatory. The mortgage lender sets the price of its variable rate and may at any point raise it or lower it; variable rates will rise when the base rate rises, but banks may set them as they like. All lenders will have a ‘standard variable rate’ (SVR), which is their default product that you will revert to whenever the special deal you might sign up for, say a two-year tracker, ends.
The SVR is usually more expensive than the best mortgage deals on the market, so it pays not to sit on it for any length of time, though many people do. Recent research by mortgage broker Dynamo suggested that a third of people whose mortgage deal expired in 2017 spent forty-two days on the SVR, which cost an average of £371 more than they needed to be paying, in ‘procrastination penalty’.
A tracker rate is a variable-rate mortgage, but one that is actually pegged to the base rate. So for example you might have a tracker-rate mortgage of 1.99 per cent, which would work out at an interest rate of 2.49 per cent when the base rate is at 0.5 per cent, and rise to 2.99 per cent if the base rate rose to 1 per cent.
The cost of your mortgage rises proportionally with the base rate. You can sign up to a tracker with various different lengths: a lifetime tracker runs for the full term of your mortgage, say twenty-five years, or you could have a two-, three-, five- or ten-year tracker.
Fixed rates pros and cons
Fixed rates do not alter with the base rate. You lock into a specific rate for a set period – two, three or five years normally, but increasingly ten-year fixed rates have come onto the market. Whether you go for a variable or a fixed rate comes down to how much you want to bet on base rates rising or falling. Fixed rates are best for people who want the certainty of knowing exactly how much they must pay month by month for their mortgage for the next few years, but they may be slightly more expensive. You need to make a clear-eyed decision, because you will pay high exit fees to get out of your deal, whether it is fixed or tracker: as much as 5 per cent of your mortgage in what is known as an early repayment charge (ERC).
You may also be charged an ERC for paying off a chunk of your mortgage at once, for example, if/when you win the lottery. Some deals let you overpay a certain percentage a year if you can afford to, but there is a limit.
When weighing up your options, consider that every time you move deal you will probably have to pay arrangement fees. If you are signing up for an inexpensive-seeming two-year deal, factor in that you will have to soon pay out arrangement fees when it comes to an end and you want a new rate.
On the other hand the downside of signing up for a deal that is very long, say a ten-year fix, is that you may struggle to transfer it to a new house if you intend to move. Some mortgage deals are ‘portable’, but if your circumstances have changed since you took it out, or your bank does not like the look of your new place, you may struggle.
Watch out for any small print that allows a bank to put up its tracker rates even when the base rate does not rise. Some have a ‘collar’ that stops your rate falling too low if the base rate falls below a certain minimum.
Buying with the Bank of Mum and Dad (BOMAD): top tips and family mortgages
The Bank of Mum and Dad became the UK’s ninth-biggest unofficial mortgage lender, in 2017 helping to fund 26 per cent of all UK property transactions, on a par with Yorkshire Building Society, according to research by Legal & General. Of those under thirty-five seeking to buy in 2017, 62 per cent were being partially bankrolled by parents or other family members.
This has bred a new category of family mortgages. David Hollingworth, of broker London & Country, says you should not necessarily head straight for something badged up a first-time buyer deal – a normal mortgage might be cheaper or more appropriate. Nevertheless if you are struggling with a deposit there are some innovative solutions.
Barclays Family Springboard will lend as much as 100 per cent LTV as long as your parent will lock 10 per cent of the property price (i.e. the 10 per cent deposit they might otherwise have given you) in cash into a linked savings account as additional security. This means your parent keeps their cash in their name rather than giving it to you, and will be able to access it at a later date, within three years, assuming you make all your mortgage payments on time.
Post Office’s Family Link gives you the opportunity to take out two mortgages on two properties, 90 per cent LTV on the one you want to buy and 10 per cent against your parents’ home. You the buyer pay off both loans, but the 10 per cent one is interest-free, though you have to clear it within five years. You must be a first-time buyer to take advantage of this, and your parents must have an income of at least £20,000.
Aldermore has a similar concept, a Family Guarantee mortgage, again at 100 per cent LTV, which allows parents to use spare equity in their own home as security, rather than cash, as do Family Building Society and Bath Building Society. The major drawback of these is that your parents’ home is at risk of being repossessed if you cannot pay your mortgage, which could make for some tense Sunday lunches. They are also more expensive than conventional mortgages. If your parents can afford to give you cash instead, you will get a better interest rate.
If your parents or grandparents are giving you some or all of your deposit in cash, lenders will want to know whether it is a gift or a loan, and whether the money has any strings attached, such as having to repay them monthly. This will affect the perceived affordability of your mortgage and therefore how much you can borrow. A ‘soft loan’, which is where your parents expect to be repaid, but only when you sell your property, therefore no monthly repayments are required, is not a problem. Banks will often require a letter from your parents confirming that the money is a gift, or a ‘soft loan’.
First-time buyer schemes to help you buy (with or without BOMAD)
You can take advantage of the following options whether or not you have money from your parents. If you are saving up to buy your first home use either a Lifetime ISA or Help to Buy ISA and you get some free cash from the government. See more details in savings chapter 5.
Help to Buy Equity loan
This government scheme has been extended to run until 2021. The idea is to help those with small deposits to access bigger homes and better interest rates. By its terms, you have to buy a new-build property from an approved house builder, with a 5 per cent deposit, receiving a 20 per cent loan from the government. This means you can take out a 75 per cent LTV mortgage; those buying in London receive a 40 per cent loan, so they need borrow only 60 per cent LTV.
The 20 per cent loan is interest-free for the first five years, then you have to pay interest at initially 1.75 per cent, a rate which increases in line with CPI inflation (for more on what that is, see the savings chapter 5). In exchange, the government, like the bank, owns 20 per cent of your property. You pay this off if and when you move, or you can pay it off sooner if you have managed to save the money.
Your mortgage should be a lot more affordable because you have a lower LTV despite your small 5 per cent deposit. Typically monthly payments are reduced by a third compared with what you would be paying with a 95 per cent LTV. As a result many first-time buyers using Help to Buy have been able to afford a slightly bigger property. There is a limit on how much you can pay for your home. In England this is £600,000, in Wales, £300,000. In Scotland £200,000.
One of the downsides is, as some people who took out their Help to Buy loans five years ago are now finding, that if your property does not appreciate in price much you may struggle to repay the government stake and buy another home. If you sell you may find that you have gained little. Many will sign up for Help to Buy assuming that they will use the increased value of their property to remortgage and pay off the equity loan. There are also complaints that those who come to the end of their original Help to Buy mortgage term may struggle to remortgage on to a better deal; there are fewer Help to Buy eligible remortgage products available.
You can find more details on the Help to Buy website (helptobuy.org.uk).
If you cannot afford a whole property you can actually buy part of one, from just 25 per cent of it to 75 per cent of it, through the shared-ownership scheme. You rent the rest from a housing association, as long as you earn less than £80,000, or if you are buying in London, £90,000. This is per household though, so combined income if you are a couple. You can search for eligible properties on sharetobuy.com.
Take a three-bedroom flat available in Cambridge. Its full price is £415,000 but you can buy a 30 per cent share in it for £124,500, which requires a mortgage deposit of just £6,225. Your monthly cost would be £1,407, made up of a £624 a month mortgage, rent of £666 and a service charge of £117. Sounds like just the solution, but there are a lot of catches with shared ownership, so do your research to see if it actually suits you.
First, that massive service charge. Though you own only, say, 30 per cent, you have to pay 100 per cent of the service charge, which is a monthly charge you pay the housing association for maintenance. Service charges are infamously expensive, and notorious for rising steeply. Likewise, rents on the proportion you do not own may also rise and become less affordable, though rents are less than would be charged on the open market – usually 2.75 per cent of the property value per year. You can start to buy more shares in the property, up to 100 per cent of the whole thing, in a process known as staircasing, but again, if property values rise you may not be able to afford to do this. Also you may be limited to how many times you can ‘staircase’, so you couldn’t for example buy just 1 per cent each year.
Shared-ownership mortgages come with higher interest rates than conventional mortgages. There are also certain restrictions on what you can do with your home because, really, you are still considered a tenant. You cannot sublet it, for example, which makes life a bit difficult if you have to move elsewhere for work. If you fall behind on rent there is the risk you will lose the property.
You can always sell and realize any gain you have made on the portion you own, supposing that house prices have risen, but the housing association has a right to find a buyer before you sell through the open market.
Debt is a dirty word, so much so that a long time back the financial services industry rebranded it as the much more enticing ‘credit’. But although many of us often called ‘generation debt’ are up to our eyeballs in it, not all debt is created equal, or owed equally urgently. You should not unnecessarily freak yourself out about borrowing money to the detriment of its many positive benefits (your own flat, university degree, iPhone, car, good credit score) or of getting a decent night’s sleep.
Wrapping your head round how to borrow well is also one of the most efficient ways to avoid wasting money, which is why I think it is a topic worth addressing ahead of how best to budget, or start a savings account or pension. There is no point in having money set aside if you are paying out hundreds of pounds in interest on overdraft or credit-card debts because you have not managed to clear them quickly enough.
If you were to borrow £3,000 on a credit card, with an interest rate of 19 per cent (some credit cards now charge interest rates of over 50 per cent), and only make the minimum repayments, starting at £74 a month and reducing over time, it would take you twenty-seven years and seven months to pay it off, and you would have paid an additional £4,192 in interest in the meantime, highlighted the Financial Conduct Authority, the financial services industry regulator. That £3,000 would have cost you £7,192. If you could stretch to repaying £108 a month, by not saving until the debt was cleared, for example, you would get rid of it in three years, and pay £879 in interest. The debt would have cost you £3,879.
I will come on to how best to have and use credit cards, but, having dealt with mortgages, I’ll start with the second-biggest debt you are most likely to be juggling – a student loan. Ironically, that is the debt that should cause the least insomnia. I will then outline the debts that are far more pernicious, and how best to handle them in a way that helps you save money.
If you are mired in really messy debt with a bank or similar lender there are things you can do and people available to help you out of it, so please don’t let it harm your mental health. I have covered this in chapter 11 on money and wellbeing.
Putting aside all the controversial politics of whether or not students should have to pay tuition fees, and the rising cost of living at university, you have to admit that student loans have suffered from a shocking PR job. We have all read the news reports about bright young people being forced into £50,000 of ‘debt’ that they will be lumbered with for the whole of their twenties, thirties and forties, at least. While this is technically true, the implications are often misunderstood. The connotations of the dirty D word can be dangerously offputting, especially if you have grown up in a household stalked by debt, or cannot rely on BOMAD to bail you out.
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