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?

 

 

 

Building up momentum – house viewings and free money!

Before I continue, I should probably explain the ‘free money’ part of my post before people begin to think I’m running some kind of give away!

You may recall in a previous post how we had filled our Lifetime ISA.  This is a special account that you can use for the purchase of your first home or retirement.  You can save up to £4000 in it each financial year and the government will top up the balance by 25%.  Well, we just received the bonus today, it was a good feeling! Even better was that for this first year you could transfer your Help to Buy ISA and receive the bonus on that amount too.  It has given our house deposit fund a good boost.

Another exciting development is that we have booked to view three houses next week! All three are located within 10 miles of my husband’s family.  We’re still not sure where we want to buy but these three places tick a few of our main requirements which are:

  • Be freehold (find out more about that here)
  • Be within our price range (this should be common sense but it is surprising how many people overextend when looking at properties!)
  • Between two to three decent sized bedrooms (one has 4 bedrooms!)
  • Have a good sized garden
  • Have an good sized kitchen

Our criteria are still pretty broad at this stage in the game but I’m certain that once we’ve seen these places we will continue to narrow down our key requirements.

The first house we are seeing has been owned by the same couple for 50 years! The interior will need some updating and it also has a strange bedroom layout where you have to go through one bedroom to reach the other one.  But it looks great outside and has an absolutely massive garden.

The second house is three bedrooms and the garden backs onto a lovely peaceful river.  Unfortunately it is on a main road and doesn’t have central heating but the house looked nice enough to warrant a look.

The final place is 4 bedrooms (that we could even consider looking at a 4 bed place on our budget is a testament to how much cheaper homes are in this area compared to London).  The interior is… interesting.  Very bright and every room has a different patterned wallpaper but aside from this (and let’s face it, we can always redecorate), it seems to tick all of our boxes.

We still have to wait a week until the viewings which isn’t ideal and we may lose out on them for not being quick enough but even if we only end up viewing one, I think it will be a valuable learning experience.  I feel like I’ve been all talk about buying a house but no action and finally the wheels are being set in motion, it’s all very exciting!

What were your criteria when looking at houses? How many did you view before you knew you’d found the right one? Do you have any viewing tips for these real estate newbies?

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?