Getting onto the property ladder is seen as one of the most aspirational things for most young people. And it makes sense, once you own your own home you have the autonomy to do whatever you want to the property and you don’t need to worry about a landlord raising your rent or evicting you.
Financially however, it also has a lot of advantages in that your mortgage repayments (minus the interest) become a form of forced savings. It also means that you can benefit from when property prices increase because you effectively get a leveraged return on your initial investment because you are borrowing 80+% of the asset value.
Your primary place of residence as well is free from capital gains taxes so any gains you make on a property are tax free. A lot of people look at their home as not being an investment but by buying in an area where you want to live and that has good capital growth prospects you can get ahead very quickly.
I myself have been savings aggressively for the past 4 years and am now in a position to be able to buy my first home. Yay!
So if you are like me and are wanting to get onto the housing ladder here are some of the tips/ tricks I have learnt along the way.
In the UK the government has tried to make it a lot easier in the past few years for people to get on the ladder. Even though house prices are at record highs and with interest rates at emergency low levels there are some ways to build a deposit if you start early.
Doesn’t the government love a good ISA? The lifetime ISA is a tax free wrapper that allows you to invest up to £4000 each financial year. They will then top up this amount with 25% of the value you deposit which means you can save an additional £1000 each year without doing anything. The only catch is this money must be used to purchase your first home and this must be a primary place of residence.
So if you start early enough you can easily net an additional 5-10k for your deposit. This money can also be invested in either cash or shares so you can benefit from the magic of compounding interest to further grow your pie.
I think out of all the schemes the UK Government runs for first time buyers this is the best one and it’s the one I would start with if I was starting again from scratch (not financial advice btw 😉
There are some other schemes available such as the help to buy equity scheme or shared ownership. Whilst I think these schemes can help some people get onto the ladder faster, however the issue I have with these schemes is that they are only for new build properties.
New build properties often don’t have great capital growth prospects as they are overpriced relative to other properties (the developer has to make some money right?)
For that reason I would stay away from these schemes.
Buying in a city such as London
One of the big challenges with living in a city like London is that property prices are high relative to incomes. Banks in the UK generally only lend up to 4.5 times your annual income so unless you are on 80-100k it is quite hard to get the mortgage initially.
Buying with a friend as an option?
If you have a friend that is also on a decent income in London and you know you can live with them then purchasing a property with them could be an option. This will mean you can get the approval to get the loan as your combined incomes might be above the 4.5 ceiling.
This strategy can also work well if you buy a property where you can let out a room to someone else as the government has a room to rent scheme which allows you to receive £7500 per year without paying any tax on it. In a lot of cases this can mean the lodger can pay a significant chunk of the mortgage.
Take the example where the property price is £450,000 and the loan is £400,000. Assuming this is a 3 bedroom property, at current interest rates (assuming 1.8%) you would need to pay £1439 in mortgage payments per month.
If you rented out a room for say £700 which is pretty standard in London you would be splitting a mortgage of £739 each month.
This can help you build equity fast as each month you would be paying around £700 in principal repayments which when starting on a mortgage are usually roughly half of the overall monthly payment. This strategy is similar to house hacking but in essence instead of your rent you are doing this with your mortgage.
The only caveat with this strategy is that you need to find someone to live with that aligns with your long term goals for the property and is someone who you enjoy to live with. It’s also recommended that this strategy is used when you know you will live in the property for at least a few years because the costs to sell in terms of agents commissions can eat into your returns quickly.
I hope the above has helped you to find the best way to get onto the housing ladder faster.
Let me know in the comments if you have any other strategies that you think are better for the average punter.