So I was just reading a Guardian article by a journalist, a first time buyer, talking about how she spent a month experimenting with cutting back on her expenses to see how much money she could save…and whether she could realistically afford a deposit for a property. This isn’t an investment property by the way, this is a personal house.
Now, I see this issue a lot. It’s a very real issue, I’m not going to deny that at all. It’s hugely more difficult now to get on the property ladder than it was a few generations back…and that’s down to various economic reasons that I’ll probably talk about at a later stage but right now they’re not actually that relevant.
What is relevant is understanding that this is how things are now, it's the nature of the beast. It's about accepting that fact and making the conscious choice as to whether you want to adapt to the market and make the best out of the situation.
The only thing stopping you at this stage is your personal choice…which is entirely in your control.
You could just wallow in self-pity and say “ah I’ll never be a property owner, I’ll just give up”...
...or you can do something about it.
Once you’ve made the choice, the next step is just acquiring the knowledge.
Because that’s the critical thing here, it's possible to do…I’ve managed to do it and I also know plenty of young people that have managed to do it.
I completely understand that people come from different backgrounds and different starting positions but I know some young people that have come from absolutely nothing and gone on to build huge property empires.
I'm not saying that to gloat, the point I'm making is that that means it’s possible…and the people that have done it aren’t any more special than anyone else.
It also doesn’t necessarily mean that it’s easy…and for some it’ll be easier than others. That’s just how it is…you’ve gotta work with what you’ve got and it’s up to you to make the best of that.
But it’s not a question of can it be done…it’s a question how can it be done?
So in this article on the Guardian, it was all about seeing whether she could cut back and save money for a deposit…she was talking to Martin Lewis from Money Savings Expert.
Now, I’ve got nothing against Martin Lewis…if you want to know how to save money, he’s definitely your man…and that’s exactly what he was talking about in this article. Save, save, save.
In fact, there were some interesting figures they mentioned…
The average deposit for first time buyers is £32,899. If you want to buy in London, that’s £106,577.
That’s a lot of money…but even aiming for the overall average, the 32 grand figure...if you’re trying to build that up from savings alone…you’re going to be waiting a seriously long time.
The amount you can save is literally capped at the amount of money you bring in. You will never, ever be able to save any more than you bring in…the money has to come from somewhere.
And in reality you’re never even going to get anywhere near that figure either.
We’ve all got expenses that need paying…some of which can only be cut back so far. Some people have more in expenses than they bring in…and digging themselves deep into debt.
Now, of course you should live within your means, that’s hugely important…but my point is that saving will only get you so far…and usually that’s not very far at all.
I talk a lot about how savings accounts are effectively useless. If you try and do this by saving, you’re fighting a losing battle. It’s an up-hill struggle.
Not once in that article was bringing in more money even mentioned….which, if only for the sake of sanity, needs to be done to achieve our goal.
Spending years on a self-inflicted austerity program makes for a pretty grim lifestyle.
It’s not about giving up on the things you want to do (within reason, obviously) but it’s about raising more money to be able to support what you want to do and achieve.
That should always be the goal given the choice of the two.
But I say it like it’s easy…”just earn more money”.
I appreciate it’s not that easy but with a bit of craftiness and a bit of initiative it’s do-able.
The big difference between raising more money and saving is that while saving is capped at how much you earn…how much you earn is potentially endless. Trillions of dollars and pounds are exchanged daily, it’s just about re-routing some of that money in your favour.
So let’s say you’re set on buying a house for yourself.
You’re sick of paying rent and having that money just disappear from your account forever. You’d rather some of it went towards paying off the house you live in…and that makes sense, it’s definitely a good option.
But remember, most of the time…your house isn’t an asset. I posted a video a little while back on the blog which explains the difference between assets and liabilities.
Assets cashflow money into your pocket, liabilities cashflow money out of your pocket.
If you’re living in a house, it’s usually going to be costing you money. It’s not bringing you in any income and the mortgage and bills have to be paid…but most people would agree that those costs are preferable to paying rent, which I’d agree with. Even if it’s costing you money each month the property still has the potential to grow in value (which you won’t have if you’re renting). This is provided the market is working in your favour, of course…which it generally is over the long term.
If you wanted to, you could also rent some rooms out to lodgers to make a bit of profit or at the very least cover your living costs…then it would actually be an asset which is a great way of doing things.
So say you’re set on buying this place…the first place to start is by speaking to a good mortgage broker.
Personal residential mortgages are very different to buy-to-let mortgages.
Personal mortgages are all about you and the income you bring in…whereas buy-to-let mortgages are more about the property itself and the income that brings in…although that’s a very simplistic view.
The size of the mortgage you can get will be dependent on an array of factors based on your personal circumstances like your income, your expenses, any debts and your credit score…things like that.
A good mortgage broker will go through all of this, check out which products you’d be able to get and tell you what size loan you can get.
Unless you’ve got a particularly large salary, you may well be pretty underwhelmed with the figure you get given. If you’re buying with a partner then this will help massively as your combined salaries can push the number up considerably.
Once you know how much you can borrow mortgage-wise, you can then start looking for a place.
The difference between the mortgage value and the price you can buy your property for has to be filled with cash…which is your deposit. The more cash you can put in over the mortgage value, the more you can pay for a property. There’ll be a minimum amount of cash you have to put in too and for residential properties it’s usually about 10 or 15% of the purchase price.
Let’s assume you don’t live in London and use the average that was mentioned before.
You need to get about £30k from somewhere to use as a deposit.
The mortgage broker will explain to you where this money can come from as there are limitations with lenders as to its source so confirm with them what you can and can’t do.
Here are a few options…
There are, at the moment, some mortgage products that allow family gifted deposits.
Normally lenders are OK with this…but this is different from a loan.
With a gifted deposit, there’s no obligation to pay it back…as it’s a gift. This normally needs a declaration of some kind to be clear.
That’s not to say that you can’t pay it back eventually and most of the time you probably would. Perhaps you sell the place in the future or the property value goes up and you can re-mortgage and pull it out one day. Who knows? The cash doesn’t go anywhere, it just sits as equity…unless you decide to sell at the bottom of a recession. (You should probably avoid doing that.)
You might be thinking...who on Earth is going to just give me 30 grand?!
Well, you would be amazed at how many family members are happy to help you get on the ladder. It’s always worth asking. Chances are, you’ll probably get a big, fat no and I’m well aware that there will be plenty of people where this won’t even be a glimmer of an option but some people may get lucky, although most won’t…regardless, it’s a good place to start if only just to rule that out.
You could look at doing it as a loan, some lenders will be OK with this…again, you need to check with a broker. They will confirm everything for you.
With a loan you should get a formal loan agreement knocked up which might cost a few hundred quid with a solicitor. This is essentially one step up from them “gifting you” the deposit where you have the “intention but not the obligation” to one day pay it back. Doing it this way just makes it clear that it absolutely is a loan…there may be no interest on it but it’s definitely getting paid back one day.
Or...you could actually offer interest on the money.
Now read this next part very carefully…
If, for instance, your parents have got a low mortgage, or no mortgage, you could ask them to draw down £30k from their lender and you could pay the difference that this costs them to do.
Interest rates on residential mortgages at the moment are ridiculously low…I’m talking 2% or 3%.
They’re as low as they’re ever going to be which means they’re only going to be going in one direction...and that's up.
This means that firstly, if they’ve got a property with a paid off or low mortgage, they’re potentially sitting on a huge amount of cash that isn’t earning them anything which they could reinvest. As long as they invest at a higher rate than the 2% or 3% they borrow at, they’re winning.
If they’re ever planning on re-mortgaging, now is the time to do it if they want to lock in a low rate for a good period of time.
Secondly, it’s cheap for you to pay the difference.
3% on 30 grand is £900 a year…which is £75 a month.
Bear in mind that that’s just the interest, it’ll be a little bit more if they have a repayment mortgage…but if you pay them the monthly difference it makes no difference to them and you’ve got yourself a deposit.
Now that’s pretty simple to achieve really…and it’s an option that’s going to be viable for a lot of people.
Again, speak to an adviser to confirm the best course of action with these things because this will also affect the amount you can borrow as it changes your affordability.
You could also look at something like a joint venture type arrangement...
You could do a joint borrower, sole proprietor type arrangement where you own the house but you and your parents are on the mortgage together…which means you can take their salary into account so you can borrow more…potentially.
It’s important to make sure you can afford the payments though obviously and there will be limitations as to the term of the loan because their ages will be taken into account.
Another option, if they’re really tough negotiators, would be to offer them a share of the equity perhaps…as joint owners.
There’s lots you can consider…but I reckon the loan option where you cover the difference they would pay is the best option for a lot of people…and that’s not limited to family by the way.
As you can see, there are lots of things you can do…I’ve just floated a few ideas here.
Hopefully it helps a bit…but residential mortgages don’t make life very easy. There are a lot of limitations as to what you can and can’t do. It’s tricky.
So let me throw something out of left field here…
You’re paying rent and you want to get yourself on the property ladder…I get it.
But what if you looked at this a bit differently...
It’s a lot easier to raise funds if you’re going to use it in a good investment.
I’ve just explained that a home is usually a liability so it’s unlikely a particularly good investment…although that doesn’t mean you won’t necessarily make money eventually.
Readers of my blog will know that I talk about this a lot. Good deals generally don’t struggle getting funded. People want a piece of the action and with good deals there’s usually enough to go around.
So if you get good at finding great deals (or leverage people that are) and you bring it all together, you can build a property portfolio using other people’s money.
They’re happy because they don’t have either the time or knowledge to find good investments but want better returns than what a savings account is giving them and you’re happy because you've found a great deal and you get your share of the profits. You just get a loan agreement drawn up which clearly explains the terms of the loan and everyone wins.
You’re still acquiring property. You’re well and truly on the ladder…you’re just not living in it. However, the income you receive from your investments can offset the rent that you're paying.
Sure, you don’t own your own home but with that comes the freedom to move around if you want.
Most people don’t want to start settling young so this is a good option for some…and that’s really what InvestorCircle is all about. It’s about creating the freedom to do what you want.
By finding good investments it won’t take many to cover your rent and eventually completely cover your expenses…which is when you can retire, if you want.
And, after a little time, not only can you use your increased earnings to get a larger personal mortgage, you’ll be able to “save” more money for a deposit…if you want to. It’ll all help you buy your home when you finally do want to buy it.
So that’s just another way of looking at things…and of course, you’re not limited to that either.
There are so many ways that you could increase your earnings...
We live in a time where it’s easier than ever to start a business from the comfort of your own sofa and that’s thanks to the internet. It’s what you’re on right now, you may as well put the time you spend online to good use!
Lack of time really isn’t an excuse either. So many things can be outsourced.
Money also shouldn’t be an issue…there are so many fundraising websites for exciting startups. Some businesses hardly even need any money.
Just a little entrepreneurial spirit can go a long, long way.
The only things stopping you from doing any of this are knowledge and mindset. If you get those in line, there are no other limitations.
Most things are achievable if you know how and you’ve got the gusto to pull it off…and they’re a lot more fun than “saving”.
Most of the time you just don’t know what you don’t know…now you know.
So give this a like and a share. Subscribe, follow…all that jazz…and let me know how you get on.