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Thursday 28th April 2022
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Although we might not dream of white picket fences, the thought of owning your own home is still something most Brits aspire to. Some may argue that over the last decade or so, the idea of owning a home has moved further away from their reach. This guide will help you figure out if that’s true. And if it is, what you could do to bring that idea closer to home.
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Before you calculate how much a house will cost, you need to know how much you can borrow. We all have a dream house. However, since the financial crash in 2009, new laws set by the UK’s Financial Conduct Authority (or FCA) mean that in most cases, banks will only be able to lend you up to 4.5 times your income. This can vary depending on a number of factors such as your credit score or if you’re buying with another person.
Most banks will offer a mortgage calculator tool. This allows you to input your income with other financial information to figure out the maximum that you can borrow.
Mortgage calculators will often use something called a “soft credit search”. These will not impact your credit score which is important if you are looking to borrow money. A better credit score can lead to better rates when taking out a loan - making it cheaper in the long run. It’s best to check that the calculator you are using only involves a soft search. Some may leave a hard search on your report, and if too many of these are used in a short space of time, you may end up affecting your credit score.
Online calculators are not the only way to find out how much you can borrow for a house. You can also use a mortgage advisor to work out this amount for you. However, some advisors can only offer certain products or providers when comparing deals. In order to see all of the offers available on the market, you’ll need to make sure you go with an Independent Mortgage Advisor. If you’re unsure if an advisor is independent or not, make sure to ask as they are legally required to tell you.
Whatever method you choose will give you an estimate on how much a bank is willing to lend you. This means you can now work out how much of a deposit you want to put down.
Just like house prices, mortgage deposits can vary greatly. Generally, you can borrow up to 95% of a home’s market value - meaning you’d only need to make up the other 5% with your deposit. One thing to keep in mind is that, because you’re borrowing a larger amount of money, your repayments could cost a lot more than if you were to pay a bigger deposit.
Quite often, the best mortgage rates only become available if you pay a minimum deposit of 20%. Over time, this could work out cheaper as you’d pay less interest over the duration of your mortgage. Some banks may also have hidden clauses that require you to put a minimum deposit down. Some examples are if you’re a first-time buyer or your home isn’t a new build - so it’s definitely worth doing your research before applying.
With all this in mind, it's finally time to look at the fun stuff - properties. Property values around the UK also vary in value depending on where you’re looking to buy. According to the Office of National Statistics, the average house price in London comes in at just under half a million pounds. While if you were to look in the North East, you’d be looking at around £145,000.
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Using these figures, you’d still need a £25,000 deposit for a 95% mortgage in London. In the North East, this would be £7,250. As you can see, location plays a huge part in a property’s price. If you work from home, you might be less bothered about location. If you need to commute it might be a major factor for you. Finding the right balance between price and location might help you reach a more achievable deposit.
There are other ways to own a house outright if the location is absolutely essential to you - such as Shared Ownership schemes. These let you buy between 10 and 75% of a property, paying rent on the rest. As you’re only paying for part of the property, your deposit is likely to be much lower depending on what percentage you buy.
You can buy back shares of the property until you own the whole thing in something called ‘staircasing’. Although shared ownership might be a cheaper option in the short term, it’s vital that you can afford to pay both your mortgage and rent at the same time. If you don’t, you could end up being evicted and losing your share of the house without receiving any money back.
The answer to this question depends on how much of a deposit you want to put down. We’ve spoken about the benefits of putting down a bigger deposit and looking at how to reduce the amount you borrow. But ultimately, it comes down to what you’re comfortable with.
Once you’ve got the amount of money that you’re happy to put down, it’s a case of putting some savings aside until you reach that target. If you want to hit it quicker, you’ll have to save more each month. If you’re in less of a rush, you can take more time with less pressure on cutting too many costs.
If you’re living paycheque to paycheque, it may be even harder to build up savings over time. Budgeting is seen as a great way to analyse your spending, something that we go over in our How to Budget Money for Complete Beginners video - check out the link for that below. If this sounds like your current position then it’s definitely worth a watch and could help you save more efficiently.
With all this considered, it’s really important that we stress that this is just the basics of how to save for a house and not a definitive list. Your ability to save and afford a home depends entirely on your personal and financial circumstances. If you’re ever in doubt, speak to a financial advisor.
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