Feel like you’re on your way to buying your first home? Perhaps you’ve (finally) got something resembling a deposit in your savings, have been eyeing up mortgages and have a decent handle on the type of place and area you might be able to manage? Then it’s time to assess your finances.
Not in a ‘glance over your Internet banking history for 10 minutes’ way. We’re talking getting down and dirty with everything - from your outgoings to your debts. This will mean that you don’t spend your first year as a homeowner barely scraping by (or sacrifice your long-term financial health at the altar of the bricks and mortar gods.)
“Be realistic about what you can afford. Only you really know the truth about what you spend, why you spend and whether you can do without those things,” says award-winning financial expert and editor of money site savvywoman.co.uk, Sarah Pennells. “Most first time buyers have to scrimp and save a bit, but you need to be sensible about affordability.”
Ready to embark on your financial MOT? Here we go:
Calculate your monthly expenditure
Go through the last six months of bank statements and highlight everything that you have spent that’s technically a non-essential, from Thursday night’s taco venture to your payday clothes spoils, and add this on to your monthly costs (i.e. what your monthly mortgage payment is likely to be, plus things like food shopping, bills and travel).
Knowledge is power, here: a 2018 survey of first-time buyers with a 30% deposit showed that those with an average take home monthly salary of £2,309 spent £669 of that on mortgage payments. This equates to just under 29% of available funds - though this fluctuated regionally, with London and South-East seeing that figure rise to between 40-44% of disposable income spent on a mortgage. Either way, understanding how much of your pay leaves your account each month will help you to avoid nasty surprises later down the road.
Make these key checks
Do you have an overdraft? If so, do you regularly use it?
Do you have outstanding credit, if so, how much?
Do you have any outstanding career development or student loans? When might you pay them back?
Have you defaulted on any lending? If so, is that rectified and explained on a credit report?
Will your mortgage let you save for those emergencies and rainy days and allow you to put some money into a pension pot? (If not, you could be in a mortgage trap of having a house but not being able to financially future-proof your life.)
Think about your pension
Retirement might seem like a long way off, but if you start putting into that fund as early as possible, life will be less stressful as time marches on.
“A good rule of thumb is to take half your age when you start paying into a pension, and pay that percentage of your salary into it,” advises Pennells.
“So, if you’re 24 when you start your pension, pay 12%. if you’re 30, it’s 15%. If you’re a full-time employee, the percentage includes the money your employer pays in.”
Don’t forget savings
While you’re likely set to clean out your funds with your first home purchase, it’s of course great to have a cushion leftover, just in case. ISAs are a great shout, as they enable you to save without paying tax on the interest that you accrue. You can stash up to £20,000 over the course of the tax year, in a standard cash ISA, a Lifetime ISA, an innovative finance ISA or a stocks and shares ISA.
“Check the type of ISA you have. You can either keep paying in, leave it but not pay in (if you can’t afford to) and only cash it in if you really need the money now,” says Pennells.
“If it’s a lifetime ISA you can’t cash it in before you’re 60, unless you’re using it towards buying your first home.
“An ordinary cash or stocks and shares ISA gives you more flexibility. If that’s what you have it’s better to leave money in it to grow, if you can afford to.”
Time to think mortgages?
If you’re all teed up to buy a place in every way apart from the big chunk of cash for the deposit, then a Post Office Family Link™ mortgage, provided by Bank of Ireland UK, could be the final piece of the puzzle. This works by letting you raise the funds needed for a deposit against a close family member’s mortgage-free home (usually a parent or step parent), while you take out a mortgage for the rest of the property’s value. The great news is, the deposit is interest-free and is paid back over five years, while the mortgage repayments - subject to interest - are made over a term that suits you, up to 35 years. This makes the family member(s) in question your assistor(s), and they must seek legal advice before going ahead.
Alternatively, if you’ve sorted a deposit but are limited in the amount you can borrow because of your salary, then a Post Office First Start mortgage, provided by Bank of Ireland UK, could work for you. Again, a close relative can step in. They can act as your sponsor, bringing their salary into the mix. Say the house you’re looking at costs £250,000, and you have £15,000 saved, meaning that you need to borrow £235,000. If you’re on £27,000, this could be tricky. But if your sponsor is on £50,000, then this could be used to allow you to borrow the cash you need. This makes them jointly responsible for your repayments. They must get independent legal advice before completion if they choose not to be registered as a joint owner. Legal and financial advice is highly recommended even if they choose to be a joint owner.
Once you’ve followed the above and got your finances in order, you’re ready to go.
Good luck, team.