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?

 

 

 

Things I learnt when my brother-in-law moved to Denmark

Two weeks ago we said farewell to my brother in law who has finally made the move to be with his long-term girlfriend in Denmark.  They have been long distance for almost the entirety of their relationship so it’s great to finally see them living together.  Now that he has somewhat settled into his new home, I had a chance to reflect on what his life changing move has had on us.

Keep your eye on the prize

Not that his girlfriend is a prize to be coveted, but once they had gotten through the initial ‘honeymoon period’ of their relationship, they both started to think about their future together and where it would be.  Both the UK and Denmark were considered but ultimately, my BIL’s job was more transferable and his girlfriend had just started her university degree (which might I add is fully funded by the state… not envious at all…) so Denmark seemed like the logical place for them to begin their lives together.  Once this was established, they set a date for him to move and steadfastly worked towards their goal.

The importance of regular saving and an emergency fund

As you can imagine, it can be a bit expensive moving to another country.  I know firsthand after moving to London from Auckland, New Zealand but my brother-in-law had never saved substantial amounts of money before but soon realised that he would need to in order to make his dream a reality.

He moved back home in order to save money paying rent, gave up expensive habits such as smoking and cut down on going out with mates to the pub.  Once he started saving a bit more, this motivated him to increase his monthly savings so he had a good cushion once he arrived in Denmark.

Time spent in planning and preparation is rarely wasted

To be fair, his girlfriend takes most of the credit for this next point.  My BIL is laidback almost to a fault so she found affordable accommodation near her university for them to live, researched the documents you need to live and work in Denmark (think the equivalent of a National Insurance Number in the UK) and started finding potential jobs he could apply to.  My BIL started learning Danish and has enrolled in a Danish school. He updated his CV and had an interview booked the same day he arrived, which he got. As a stroke of luck, one of his new coworkers is from the same town in the UK!

Read the T’s & C’s before you sign!

Unfortunately there was one pot hole in the road in the lead up to the move.  After deciding he would sell his car before moving to add some more money to his savings, he was a bit shocked to discover that he had purchased with PCP (Personal Contract Purchase) finance. With this kind of finance, rather than paying off the entire value of the car, you instead pay how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you’ve put down. This means that the monthly payments are usually lower.  At the end of the deal, you can either give the car back or trade it in for a new one (less penalties for going over stated mileage or damage) or pay a balloon payment to own the car outright.

My brother-in-law had been hoping to add to his savings pot but instead found himself having to pay to give the car back.  Thankfully he had an emergency fund to cover himself but it does highlight the importance of carefully reading contracts so you know exactly what you are signing for.

Support networks are crucial

As I mentioned before, his girlfriend has worked very hard to ensure his adjustment to Danish life has been as smooth as possible.  Both her family in Denmark and his friends family in the UK have tried to do everything they can to support the couple as they enter this next chapter of their relationship. They have offered practical advice, reassurance when fear creeps in and moral support over Skype.  Although many people have moved long distances alone, knowing that there are people out there willing you to succeed can certainly help you when having a down day.

 

Have you or one of your family members moved a long distance away? Did you find yourself reflecting on the experience? What did you learn?

5 ways to get out of a rut

I’ve been meaning to write a blog post for some weeks now but the ideas weren’t flowing nor did there ever seem to be the time to actually sit down and draft something out.  I’m off for a week over Easter and I finally had some time to consider what was wrong.  I would like to share a few tips that I’ve used over the past few days.

Consider external factors

You’ve probably heard of Maslow’s Hierarchy of Needs or seen it displayed as a pyramid with the most basic physiological need such as food, sleep and shelter are at the bottom, progressing through to self-actualisation, or the need people have to achieve their full potential.  You cannot begin working on the more psychological growth needs until the more basic needs are satisfied.

Over the past few days, our son has been having trouble sleeping at night, constantly waking almost every hour. This has led to an unhealthy lack of sleep for both of us.  The off shoot of this is as well as being chronically tired, we’re not taking time to eat well or exercise which perpetuates the cycle.  If you’re not feeling particularly inspired, have you stepped back to ensure all of your basic needs are being met?

Try the 5 Whys Technique to establish the root of the problem

The 5 Whys technique was created by Sakichi Toyoda, founder of Toyota Industries in the 1930’s and the company still use it today.  I first read about this in a blog post and have found this an excellent way to pinpoint the exact cause of my worries.

You begin by defining the problem and then ask ‘Why?’.  When you have answered this question, ask yourself why in response to your answer.  This process continues until your answers to why produce no more useful responses.  The five in the 5 Whys is subjective, you may be able to reach the root of the problem in only 2 or 3 whys or you may need to keep questioning further.

In my situation, I felt the cause of my lack of productivity was caused by uncertainty about our housing situation. I’ve previously written about where we want to eventually live but we are still currently saving our deposit so feel a bit in limbo at the moment.

Look at your long term goals and check the short term goals that you need to achieve them

It’s important to set goals however it can sometimes be overwhelming considering the steps required to take action. Unfortunately simply dreaming about what you want will not get you where you need to be.  Similarly, dwelling on potential problems can be as equally paralysing.

Instead, break the goal down into smaller, easier-to-tackle parts. Completing these smaller steps can generate positive momentum, a bit like the debt snowball you frequently read about on personal finance blogs. If you need help with setting goals, the SMART method (Specific, Measurable, Achievable, Relevant, Time-bound) is a useful tool for drafting them.

Our end goal is to own our own home.  To do that we need a mortgage so one of my smaller attainable goals has been reading everything I can about the process to maximise our chance of a successful application.

Take action

“A journey of a thousand miles begins with a single step”

– Lao Tzu, Chinese philosopher

Of course, writing your goals down is the easy part.  Enacting them is the challenge which is why it is important to have a time scale in mind. Regularly review your goals and check your progress, are you on track to achieve them in the time you’ve set?

Taking action can also mean admitting to yourself something is not going to plan and rethinking and potentially abandoning that goal. Some of the bloggers I have read that have been steadily working towards FIRE (Financial Independence, Retiring Early) have achieved the goal, successfully retired early and then have found that it’s not the right path for them. Have they failed? Certainly not! They had to reach that point in order to know it wasn’t right for them and now they are setting new goals for the future, with far more financial resources to help them.

One of our mini goals was filling one of our Lifetime ISAs for the current tax year. And it does give you a boost to know that you’re on the right track.  We now need to check our goals for our next achievement towards that ultimate goal.

Take a break

Sometimes, you just need to take a step back to recharge. Scientific studies have shown that the brain is able to perform better when given the opportunity to divert from a task. A chance to rest and the time away can give you a fresh perspective when you return to the task and help avoid getting into a rut in the first place.

I’m only a couple of days into a week off work and already spending time with my family and using my free time to pursue my hobbies and even just sit back and watch Netflix has enabled me to approach my projects with fresh eyes.  I was able to look at some of our house buying goals and not feel hopeless anymore. Incidentally, I do believe this is going to be my longest blog post to date so I’m going to accept that as evidence that taking a break works!