It's a big question, and one that a lot of millennials are currently asking themselves. So we decided to speak to Vicky Spratt, housing rights expert and campaigner known for her "Make Renting Fair" campaign which succeeded in getting letting fees for tenants banned.
If you’re renting your home, the odds are that you’re sick of reading both about Brexit uncertainty and how you will never, ever buy a home of your own.
Renting is on the rise - the number of households who rent has increased by 52% in the last decade and the the number of families renting privately has now reached 1,570,141. This number has more than doubled since 2007-08, and now represents a quarter of all families. It’s disheartening, and it makes you think everything you do is futile.
And yet, all is not lost. While there can be no doubt that for younger generations today the obstacles in the great race to get on the property ladder are greater than they were for our parents, it can still be done. In fact, last year just over half of the homes sold were purchased by first-time buyers.
It goes without saying that the plight of Generation Rent is serious and ought to be treated as such by politicians and policymakers, but knowledge is power and the more you know about your situation, the more you can do about it.
However, before you can consider buying a home in any way, shape or form, you need to do some financial groundwork.
How do you know if you’re ready for a mortgage?
Laura Whateley, author of Money: A User’s Guide says that the reason it’s so difficult to buy a house these days is that house prices have gone up far faster than wages. So, the first thing you need to do is look at what you can actually afford based on your earnings.
You could do this through an independent mortgage advisor or by using a variety of online tools including ClearScore’s tool which will tell you how much you could afford to borrow, and help you compare mortgage deals.
“You can only borrow a certain amount in a mortgage which is based on your salary,” Laura explains. “It varies between 2 and 5 times of your salary depending on factors like your credit score and your spending patterns.”
By Laura’s calculations, this means that “if you are on a £30k salary you could only borrow a maximum of about £150k give or take. After that, you need to work out how much you can expect to have saved, realistically, for a deposit.”
Location, location, location
Of course, how easy it will be to buy really depends on where in the United Kingdom you want to live.
As we all know, London is the eye of Britain’s housing crisis storm, but statistics show that a first-time buyer could buy a home outright in the northeast of England or Northern Ireland with the same amount of cash they would need for a deposit in the capital. Whereas, in 2018, the average price paid by those taking their first step onto the ladder was a whopping £426,857.
Richard O’Reilly, a mortgage expert at online broker Habito says “the key for anyone looking to buy is that ideally, you will need to have a percentage of the value of your home saved as a deposit. So you need to start thinking about what that amount looks like and start mapping out your finances in line with your savings target as soon as possible.”
David Hollingworth, Associate Director of Communications at L&C mortgages says “the key for anyone looking to get on the property ladder is to understand how much they will be able to borrow as that will determine how big a deposit they will need.”
“Saving for an adequate deposit is often a challenge for first-time buyers, so the sooner they start to build a savings pot the better,” he adds. “Mortgage deals are available for those with as little as 5% to put down, but the rates improve for those that can pull together a bigger percentage of the purchase price.”
Should you consider a government scheme?
That said, you should get to know schemes like the Help to Buy equity loan (which, FYI, is currently scheduled to end in 2023) and shared ownership because they are giving people who can’t buy with a traditional deposit a leg up in more expensive areas.
Help to Buy enables first-time buyers to buy a home with just a 5% deposit, while the Government recently announced that they want to make it easier than ever for people to access shared ownership with as little as 1%.
Both schemes have (perhaps rightly) received criticism, but if you’re renting and you can’t afford to buy the traditional way - with a 20% deposit on the full value of your desired property - they may be your only option. Nonetheless, the bigger deposit you have, the smaller your loan to value ratio (LVT) will be and the better the deal you'll get.
If this is a concern, Laura notes that “buying with someone else also makes owning a home a more realistic prospect because you can pool your salaries and therefore double how much you can borrow.” However, she adds, “unless you’re both on an above-average salary, it's still very difficult in the most expensive parts of the country.”
Think about the other costs
Indeed, David points out that “there are other costs when buying that need to be budgeted for”. These include survey costs and legal fees. However, the good news is that first-time buyers are currently enjoying stamp duty relief.
“One of the bigger costs of buying has historically been stamp duty land tax. However, many first-time buyers will avoid paying any stamp duty at all now, thanks to first-time buyer relief. In England and Northern Ireland, first-time buyers buying at a value of up to £500,000 will pay nothing on the first £300,000 and 5% on anything above that, saving as much as £5,000” David explains.
As with all policies, this could change, so it’s worth keeping in mind if you think you will be in a position to buy in the near future.
Ultimately, though, Laura adds, there are some basic nuts and bolts to keep in mind. “Back in the day when our parents bought their first homes, all that mattered was how much you earned,” she says.
“Today, banks also judge your salary alongside your spending. They want to see proof that you'll be able to meet the cost of your loan given other financial commitments you might have like other debts, childcare or a car.
So, before you ask to borrow money it’s worth cutting back your spending and debts a bit, as many banks will ask to see the past three months of bank statements.”
All of this means that wherever you decide to buy and who with, your credit file is of the utmost importance. So, you need to start getting it in order now.
“If you have a very bad credit history as a result of, for example, missing loads of bills or defaulting on other loans, you could be rejected outright,” Laura says.
“The same could apply because you have what’s known as a thin file, because you’ve actually never borrowed any money before - regardless of whether you’ve got enough for a deposit.”
It’s easy to check the health of your credit rating for free on ClearScore.
Check your financial health well ahead of time
If you’re worried about your credit rating, Laura advises the following:
- Make sure you're on the electoral roll at the same address you use for your bills
- Avoid taking out payday loans
- Pay back all credit cards or bills on time and in full
- Even paying off your mobile phone bill on time each and every month can help
In a nutshell, make sure you're up to date and on top of any direct debits because they could impact you if you miss them.
Whatever you decide and whatever you can afford, David has one final piece of information for you to chew on. “Mortgage rates are extremely low at the moment which really helps with the affordability of monthly mortgage payments. That could mean that the cost of a mortgage is lower than paying rent, although there will be other costs of owning, such as maintenance.”
But, he adds, nonetheless, “buying gives you security because it removes the potential for a landlord to end your tenancy.”
We know that Brexit uncertainty has actually caused prices in London and the South East to fall for the first time in years, so, if you can save for a deposit and get your earnings - whether on your own or with someone else - high enough to buy, it’s certainly not a bad time to look at buying a home of your own and getting out of the renting rat race.