The property market is all balanced out by affordability. Buyers have to have some way of paying for a home. But in recent years we’ve seen steep rises in house prices and living costs, making it much harder for people to get on the property ladder and afford a house.
Most of our articles give tips on what to look out for when buying a home. But in this post we’ll explore the ways people actually get to home ownership in the first place.
While some people take advantage of government support schemes, others find other ways to get financial help (like banks or their families). Careful saving and investing has also been a proven way to grow wealth and afford homes.
High Incomes
People with high salary jobs are generally able to afford better housing
How? Because of three factors:
Higher Deposits
High earners have the ability to save more of their salary each month. For lower earners this is just not possible. The costs of living and maintaining life are harder for people on lower incomes.
It’s worth pointing out that high earners don’t always save their income. Many become adjusted to a higher standard of living and end up ‘trading up’ on purchases – like better food, more expensive wine, designer label clothing.
But assuming a high earner does save for a large deposit, this gives a lender much more confidence when the high earner wants to buy a property. Banks like borrowers who are able to put down a high deposit. The higher the deposit percentage is of the home value, the less money the bank has to risk in the mortgage (see our post on How Mortgages Work).
Larger Mortgages
Lenders do a lot of work to assess mortgage affordability. But a big part of working out how much they will lend to you is to first look at how much you’re earning. As a starting point they will look at your salary. A lower salary will generally mean a lender will only provide a smaller mortgage to you.
Although there are other checks that lenders do on your spending, some mortgages can be up to 5.0x your income. So 5 times a larger income means a much larger mortgage.
Rainy Day Savings
Higher earners can tend to save more each month. When they don’t spend all of their income, the rest can be saved for the future. Times may get hard in a few months or years. Someone could lose their job or have a big financial expense.
With a higher amount of rainy day savings, these types of buyers can sustain a longer time period of difficult economic problems compared to others who simply don’t have as much money put to one side.
In some rare cases, higher earners end up saving so much over the years that they don’t even have to get a mortgage and can pay for a home themselves.
Good Savings Habits
Saving money for a larger deposit helps you get the best mortgage deals with the lowest of interest, saving you more money in the long run. However, even if you don’t have a large deposit to start with, there are ways with which you can afford housing.
According to Bankrate UK, an average first-timer buyer sets down 15% deposit on their home purchase, which is a lot, so people either start saving a few years before this, or look for other sources to finance the deposit.
Of course, there’s also the option to look for a mortgage offer that lets you pay a lower percentage deposit for example, 10% or 5%, but for that you’ll have to do thorough research. A lower deposit also means a higher loan to value ratio, which can mean the interest rate on your mortgage is much higher.
The best way to easily pay a deposit is to plan and work towards your goal amount. Putting in money regularly to a savings account will increase the size of your savings depending on how much you can set aside each month.
ISAs
ISAs are a great way to save – they have the benefit of being tax free, allowing you to preserve your wealth.
Many savers put cash away in ISAs for this reason. If you have money sitting in a regular UK bank account, it is likely that any interest you get on money will be taxed (although interest rates are very low at the moment).
It’s key to understand the difference between cash ISAs, stocks and shares ISAs and other ISAs, as each comes with different pros and cons.
Government Help
Government buying schemes are a great way to get a foot up on the housing ladder. Some are more beneficial than others, and not all of the government schemes are open to everyone.
Here are a few schemes:
Lifetime Individual Savings Account (LISA)
These are useful for long term savers and those saving for their first home. At this current time it’s available for anyone in the UK aged between 18 and 40 to open.
If you open one of these accounts, the government will add a 25% bonus to your savings, for example, if you had £1,000 in your savings account, by the end of the year that amount will be converted to £1,250. This makes it easier for you to finance your deposit for a home using the savings from this account.
Remember some key points about buying a home with the LISA:
- You have to be a first time buyer to use a LISA to buy a home.
- The maximum price of the home is to be no more than £450,000
- You have to live in the home that you’re going to buy – this scheme doesn’t allow for people to buy a home to rent out.
- You need to use a repayment mortgage instead of an interest only.
Help To Buy Equity loans – Closed
The Help To Buy Equity Loan is closed to new applicants.
At the time of operating, the scheme was very helpful:
- You can borrow up to 40% of the purchase price (20% if outside of London region) as an equity loan, which is interest free for 5 years
- The logic behind it is that a 40% boost to your deposit means a lower mortgage is needed, which should be easier for someone to obtain.
- Equity loan is only available on new build homes
- After 5 years the equity loan will begin to accumulate interest
Mortgage Guarantee Scheme
This scheme was launched during COVID after many lenders pulled away from providing high loan to value mortgages to borrowers.
COVID forced many lenders to reduce their risk during uncertain times. So it was logical that the first mortgages that disappeared were the most risky ones – i.e. those that had a high loan to value.
The mortgage guarantee scheme basically gives lenders some additional comfort from the government when they provide 95% loan to value mortgages.
For example, on a home purchase of £300,000 under this scheme the lender could provide a 95% mortgage of £285,000. This means the borrower only needs £15,000 as a deposit for the home.
The lender does retain some of the risk in the loan however, so they will still be careful about who they lend to.
The mortgage guarantee scheme is currently available on properties worth £600,000 or less.
Home Ownership for People with Long-Term Disabilities (HOLD)
This scheme is for people with long term disabilities. It lets you buy a share of any home in England on a shared ownership basis (buying from 10% to 75%). There are eligibility requirements though and this system works on a priority basis.
OPSO is available for people above 55 years of age. It works very similar to the HOLD scheme. You can buy a share of the home and pay rent on the remainder. One big difference is if you manage to buy up to 75% of the home, you will then pay no rent on the remaining 25%.
Inheritance and Bank of Mum and Dad
Sum people are more fortunate than others and have access to money through family connections. Many parents don’t want to see their children going stuck when trying to get their first home and try to contribute as best as they can. In fact, this is so popular now that it’s been nicknamed the Bank of Mum and Dad.
According to The Independent, the ‘Bank of mum and dad’ is the leading source of financial assistance for UK locals when purchasing property. Parents’ contributions at one point amounted to almost half of all first time buyer purchases for the year.
People with richer parents can also pay off their home quicker because of the larger deposit they are able to put down (although sometimes this doesn’t help if the child ends up buying an even more expensive home with the inflated deposit).
Family support or contributions seem to be peaking in the recent years because of the increase in house prices.
Stepping on the property market ladder
The last reason why people are able to afford housing in such a concentrated market and competitive economy, is that they play their cards right – buying their first property and trading up appropriately.
The rising house prices in London over the last 30 years has given a huge financial benefit to those who managed to just get on the property ladder at the start. As their homes increased in value, they were able to trade up to larger homes or move out of expensive areas to more affordable ones.
Marrying into wealth
It isn’t the most respected option to get rich, but the fact is that the majority of people who have jumped from having very little to becoming significantly wealthy have done so by marrying into wealth.
Having a wealthy husband or wife provides the other spouse with a large amount of financial stability for the future. Wealthy partners will normally own their home which you will like in too.
There are sometimes agreements that limit the amount that one side can take from each other in a divorce, but these aren’t always recognized in every country.
It is beyond the realm of possibilities for many, but there no question that marrying a wealthy partner is likely to make your chance of future home ownership increase.
Excellent Budgeting
Our last tip is more relevant than ever and can be done by absolutely anyone. Learn to budget well. Saving a few pounds here and there can really add up over the months and years.
For many people there are some luxuries that we like to have, whether that’s designer clothes, organic food, ubers in the evening or even the soft toilet paper in your bathroom. They might seem like tiny benefits individually, but collectively these could be burning a hole in your wallet.
Try swapping one of the luxuries out for a week and see if you notice the difference. Our brains are programmed to adapt with changing conditions, see if yours picks up on the difference.