Are we ready to buy a house?

I was exploring Pinterest the other evening and found a thoughtful article by Kristina a few years ago at Cents + Order about the questions you should ask yourself before buying your first home.  I took some time to ponder them and my answers are below.

Have you saved a deposit?

The short answer is yes, we have.  Is it enough? To be honest I don’t think you can ever save too much.  The article and many other websites recommends a 20% deposit.  There are many benefits to having a larger deposit including better mortgage interest rates, meaning you’ll pay less interest over the life of the loan and better protection in the event of another crash because you’ll own more of the property.

Mrs Frugalwoods says:

The smarter way to go is a 20% downpayment, which ensures good rates on a “conventional” mortgage. If you can’t put 20% down, it’s probably a good idea to keep saving. A solid downpayment signals to a lender that you’re a responsible saver and reduces the chance that the property will be worth less than the loan’s outstanding value in the future.

Although occasionally a 5% deposit will be enough (especially if you use the Help to Buy Scheme and purchase a new build home), the general advice is to save at least 10%

Michelle from Money After Graduation says:

In order to keep extra cash in your monthly budget and protect yourself from volatility in the real estate market, you need to put at least 10% down on your first home. Ideally, you’d put 20% down, but with the average house price in Canada nearly $500,000, there are very few 20- and 30-somethings with a spare six-figures lying around. A 10% down payment is enough to lower your monthly mortgage payment, reduce your mortgage default insurance, and secure enough equity in your home to whether small dips in the real estate market.

So really, saving the deposit is only the first step in deciding if you are ready as there are going to be lots more expenses along the way.

Will you be happy in the same house for many years?

Putting emotion to one side, it’s recommended that generally you keep a house for five years to avoid a financial loss through the closing costs and so you’ve started to make a dent in the principal of your mortgage.

Moneyning says:

Usually, it isn’t until you’re about five years into paying down your mortgage that you’ve made enough progress on the principal to make it a better deal than paying rent each month.

I’ve moved around a lot in my twenties. Aside from my childhood home, our current rental in London is the longest I’ve lived anywhere and it has seen us through some of the highlights of our relationship including getting married and having a baby.

I’ve talked about the emotion behind owning a home but one of the reasons we started looking for our own home is that we feel ready for a larger place.  We have talked about what we want from a new home and been using these criteria when booking viewings.

Ideally we want to buy a house that we would stay in for at least 10 years.

Are you handy (or not handy)?

dane-deaner-284390-unsplash
Just a splash of paint and she’ll be good as new!

Unfortunately not.  We won’t be building our own studio space a la Mr Money Mustache (although to eventually have a space like that would be awesome!).  Older houses can be beautiful and have character too.  Sometimes they can also be cheaper due to the cost of modernising. For this reason, there are some places that we would skip viewing if it looked like there was too much work to be done.

If we were to consider an old home to do up, we would need to carefully weigh up the cost of the repairs with how much value they would add to the place.  Cosmetic renovations like painting and decorating would be cheaper and we could potentially learn how to do that ourselves (you can learn anything from Youtube these days, right?)  Major structural work would cost a lot and not add very much value to the property (but make the house far safer and comfortable to live in).

Michael Holmes, author of Renovating for Profit says:

 Buyers should be looking for “the worst house you can find on the best street you can afford” and consult a builder or structural engineer when putting a renovation budget together – although project managing the process yourself (ordering materials, liaising with the relevant trades and generally moving the project along) could save you 15-20% of the total cost… Most importantly, he adds: “Leave money in the budget to make structural repairs, and to make sure [the property] is warm, dry and weather tight.”

Since we would almost certainly need to hire contractors to do the work, we will most likely try to find the not-worst house on the best street (not quite as catchy!)

What will it cost to live there?

This includes many upfront costs when purchasing the property such as:

  • stamp duty,
  • valuation fee required by the mortgage provider,
  • surveyor’s fee (to ensure you haven’t bought a place that has hidden problems)
  • solicitors fees,
  • land registry fees
  • electronic transfer fee of £40-£50 that covers the lenders cost of transferring the mortgage money from the lender to the solicitor.

Once we eventually purchase a property, some of the expenses we would then need to think about would be:

  • moving costs
  • furniture costs (our families have a lot of hand me down furniture in excellent condition and we intend to purchase secondhand off Gumtree but will still need to have some money in the budget for this)
  • mortgage payment
  • home and contents insurance
  • council tax
  • utilities
  • transportation from the new location
  • ground rent if we chose a leasehold property
  • childcare costs

As you can see, quite an extensive list.  I believe once we’re in a new home, we’ll be able to make the monthly expenses work like we always have done.  The closing costs are probably going to eat a bit into our savings which means less money to go towards the deposit so we will need to remain diligent with our savings.

Do you have what you need to furnish and care for a home?

The dream is once you have bought your home, you can let your imagination run wild and have multiple Pinterest mood boards dedicated to every area of the place, all perfectly coordinating.

The reality is, coming from a partially furnished rental property, we are going to need to purchase a few large bits and pieces such as a bed and bedroom furniture and seating for the living area.  We won’t do this all at once, and as I mentioned before, we have very generous extended family who will help us out with some of it.

I’m only thankful that we’re not moving to a homestead from the city like the Frugalwoods did.  Each month Mrs Frugalwoods update us on their monthly expenditure and although they’re doing it frugally, there are some absolutely massive expenses on their lists!

Do you have an emergency fund?

Emphatically, YES! Writing this article has alerted me to the sheer number of additional costs associated with home ownership. As Kristina says in the closing paragraph of her article:

Home ownership is a serious investment that can come with unexpected expenses if you are unprepared. Consider the neighbourhood, your life plan, and whether you can afford all aspects of home ownership before you buy your first home.

We are continuing to work hard to achieve our dream of home ownership and by doing exercises like these and taking time to properly consider our circumstances, we become more prepared to make the leap.

Thanks for reading! What questions did you ask yourself before purchasing your first home? What other questions should we be asking ourselves?

 

 

 

What is an Agreement in Principle (AIP) and why do I need one when buying a property?

The more I learn about the home buying process, the more I think it’s all about the acronyms.  In most of the research I’ve done, the first step of the home buying process, before you even begin to view properties, is proving that your lender MIGHT lend you the money to buy a house.  This is called an Agreement in Principle (AIP), but also can be called a Decision in Principle (DIP), Mortgage Promise or Lending Certificate.

What is an Agreement in Principal?

An Agreement in Principal (I will refer to them as AIP for the rest of this post) is a certificate or statement from a lender to say that ‘in principle’ they would lend a certain amount to a particular prospective borrower or borrowers based on some basic information. Most providers will require you to complete a form detailing your income and expenditure and the amount you think you would like to borrow.  They may also conduct a credit check.

Although an AIP doesn’t give any guarantees over what size of mortgage you may be offered once you formally apply, it will give estate agents some peace of mind that you can potentially afford the properties that you are viewing.

That all sounds good, where do I sign up?

Hang on just a minute! Many banks boast that you can get an AIP from them in just a few clicks however if they do a ‘hard’ credit check, it will leave a footprint on your credit file, regardless of whether you go on to borrow from them. Too many credit checks on your file can make it hard for to arrange a loan, and the fact that a lender has checked your file stays on record for six years.  Some lenders will leave a soft footprint but they are few in number and may not be the right one for you.

Why should I get an AIP?

Theoretically you could skip the AIP and speak directly with a mortgage broker as they aren’t compulsory but there are a few benefits to getting one.

  • If you have a poor credit history and aren’t sure if you would be accepted for a mortgage, the AIP can give you reassurance about your borrowing prospects.
  • It can give you more credibility with estate agents as it shows that you can move ahead in the process if the offer you make on a property is accepted.

 

We are looking at mortgage brokers now with the view of starting to look at properties from next month and will probably have a chat with the broker before applying for an AIP.

I’d love to hear your experiences with AIP’s.  Did you find it useful in your house hunt? Were you able to get a mortgage without one?

We filled a LISA, mini-goal achieved!

I didn’t really know what to post about, afraid that I didn’t have anything interesting to share, but then considering this blog is about our journey to home ownership, this seemed particularly relevant. Sometimes you just have to celebrate the small wins.

When saving up a seriously large amount of money, like a house deposit, you may need to set yourself a few smaller goals along the way.  We achieved one of these today by filling one of our Lifetime ISAs for the year.  For a reminder of what that is, check my previous post on the topic.

This means that in May some time, the government will top whatever is in the account by 25% which is pretty exciting.  There may be a spot of constant balance-checking over that time period!

What next? We’re going to try and fill my husband’s LISA as much as possible before the deadline of the 5th April.  And then we begin saving towards the 2018/19 allowance.

Are we disappointed that we haven’t filled both this year? No! There are loads of people who haven’t even opened a regular savings account. so in that respect we’re ahead of the game.

Have you reached a savings milestone this week?

How we’re saving our house deposit

Hello!

So last week, I dipped my toe into the blogging world and wrote my first post explaining how I wanted to document our journey into home ownership.  For this post I’m going to go into how we’re saving and the reasoning behind it.

The seed is planted (2013-2015)

So I’m not originally from the UK.  I moved to London from New Zealand at the age of 24 intending only to stay for a short amount of time to travel and see more of the world…

Nearly six years later, I’m still here. Married with a child.

The reason I start with that is because while I was travelling and deciding what I wanted to do with my life, I wasn’t terribly good at saving.  Or, I did save, but it was all going towards short-term goals, like affording the next holiday.  I did discover a few Personal Finance (PF) blogs I enjoyed reading such as Mr Money Mustache, Money After Graduation and Making Sense of Cents.

The seed begins to grow (2015-2017)

It wasn’t until early 2015 when we were saving for our wedding later that year that I started saving in earnest.  I also started investing in index funds.  This was after reading a tonne of articles and books about the topic until I felt confident to part with my money (and even then not too sure!).  I found the Monevator blog incredibly helpful, especially since it was UK specific.  I also subscribed to Rockstar Finance to gain the perspective of many other people in similar or better situations.

Our accounts

Stocks and Shares ISA

I first put £150 into a Stocks & Shares ISA (Individual Savings Account) in April 2015 and have been investing monthly ever since.  The monthly amounts have ranged from £50 when times have been tough to £300 when we’ve had enough to do so. We’ve never had a lump sum to put away, the most important thing has been depositing the money and letting it grow. Buy and hold.  It seems to be working so far.

Help to Buy ISA

I first read about these on the Money Saving Expert website.  Basically you can deposit up to £1200 in the first month you open the account and then a maximum of £200 in subsequent months.  The UK government then tops up your contributions by 25% when you buy your first property (as long as you have a minimum of £1600 saved up).  This seems like a great deal however there are terms and conditions to look out for.  Particularly the value of the property you’re buying and whether it is in or out of London.  You also won’t get the bonus to help with the deposit which has thrown a few people.  Still, since opening this account in December 2015 and contributing to it every month, I’m surprised at how quickly our contributions added up.

For more information about H2B ISAs, check out the Moneysaving Expert website

Lifetime ISA

This is a relatively new product launched in the last year.  Anyone aged 18-39 can open a LISA account and contribute up to £4000 in the tax year.  The government will then top this amount up by 25%.  Although it sounds very similar to the H2B ISA above, there are a few key differences.  The money saved in a LISA can only be used to buy your first property or for your retirement otherwise you will be hit by a 25% penalty when you withdraw funds.  You can invest in stocks or cash with the LISA but there aren’t many providers out there and only one who has the cash ISA with a not so great interest rate.  A strategy that many people are employing (ourselves included) is transferring their H2B ISA into a Lifetime ISA as for the first year only, the government will pay the 25% bonus on all of it.

For more information about Lifetime ISAs, check out the Moneysaving Expert website

Our strategy

Currently we have a Stocks & Shares ISA, a cash Lifetime ISA (with our transferred H2B ISA amount) which we just received the very first bonus payment for, and a regular savings account that pays slightly higher interest rate.  We’re hoping to put more money towards our deposit fund in the coming months as I am back at work and that October deadline is rapidly approaching!

I think no matter how you’re saving for a deposit/downpayment for a home, the most important thing is to be consistent with your savings and put something away regularly (we found monthly was best for us as that’s how we’re paid).

How did you end up saving for a deposit or another large purchase?