BUYING A HOMEPart 1

Jason Butler,

Head of Financial Education, Salary Finance

STUFF HAPPENSWe’ll all face many changes in our lives, many of which involve money.

Some will be welcome, like buying a home – the subject of this guide. Others will be more challenging. Some are planned and happen slowly, while others come suddenly and out of the blue.

A HELPING HANDTo help you navigate these changes, we’ve produced a series of easy-to-read guides.

Each guide looks at a different, life-changing event, and sets out simply and clearly what you need to know and, more importantly, what you need to do to make smarter money decisions.

This is an educational guide. Salary Finance does not give financial advice. Seek help with planning your financial numbers from a competent financial planner/ coach and use a regulated financial adviser to purchase any investment, pension or insurance products.

SO, YOU’RE THINKING OF BUYING A HOME… NOW WHAT?

Buying a home is one of the biggest financial decisions most of us will ever make.

And because it’s not something we do every day, the home-buying process can be daunting for both first-time buyers and existing homeowners alike.

Poor decisions could cost you thousands of pounds and good decisions save you similar sums.

So, here in part one of this guide, we outline the issues to consider to:

• decide if buying a home is right for you right now and, if it is…

• make your home-buying challenge easier

JUMP TO:

Is buying right for you… right now?

The costs and risks of home ownership

The benefits of home ownership

Should you sell before you buy?

Get your deposit together

Work out how much you can borrow

Factor in your other costs of home buying

Consider the government help schemes

Help to Buy: equity loans

Choosing a home - what really matters

Checklist

HERE'S WHAT'S INSIDEIf buying a home is right for you (whether you’re a first-time buyer or you’re moving home), it’ll be easier and less stressful if you follow a sensible process.

Here are the steps we cover in part one of this guide, to help you on this journey.

IS BUYING RIGHT FOR YOU… RIGHT NOW?The conventional wisdom for owning your own home is often reinforced with phrases like, ‘you need to get on the housing ladder as soon as you can’ and ‘paying rent is like pouring money down the drain’…

But real life is not this simple – and whilst buying a home (or moving up the housing ladder) can offer significant benefits, it also presents risks to your finances.

Here are some key issues to consider, to help you decide if buying a home is right for you – right now.

THE COSTS & RISKS OF HOME OWNERSHIP

YOU’RE LIKELY TO PAY A LOT TO BORROW THE MONEY

Did you know that on a mortgage of £100,000* over 25 years at an average interest rate of 5%** you’ll repay about £175,000 in total?

That’s about £75,000 in interest that you’ll pay to your lender. You might also think of that as ‘money down the drain’ as it’s effectively rent on the money you borrow to buy your own home.

YOU’LL HAVE TO COVER A LOT OF BUYING & SELLING COSTS

Be aware of all the upfront costs of buying a home, like: legal fees, mortgage and valuation fees and stamp duty if that applies to you (first-time buyers enjoy a higher tax-free threshold for stamp duty).

Add in your ongoing costs of home ownership – like buildings insurance and the potential costs to maintain your property – which could be considerable depending on the condition or age of the property you’re buying. Boilers, windows and roofs are expensive.

And, if you’ll want to sell up and move on in a few years’ time (as many people do) you need to factor in your sales costs (like estate agency and more legal work) as well.

*Scale these numbers up or down for your mortgage. e.g. on a similar type of mortgage of £200,000, you’d repay £350,000 in total. **5% p.a. is higher than standard mortgage rates at the time of writing. But interest rates are currently at historic lows and we should not assume they’ll stay down at these levels over the long term. An economic recession could mean interest rates are held down for a number of years – but that would pose risks to house prices.

YOU COULD FACE A SIGNIFICANT RISK TO YOUR CAPITAL

You might like to think of your home as a place to live rather than an investment, but it’s also only natural to hope that your home rises in value during the time you own it.

And, if you buy your home at a fair price you could do very well financially from home ownership. Certainly, the long-term history of UK property prices is on your side.

However, to compare home ownership to renting (which allows you to move on at a much lower cost) you need to consider the financial risks if you have to sell your home after a short period of time. Clearly in this case, any upfront costs and falls in property prices will matter a lot.

The value of your home will need to have risen by several percentage points between the time you buy and sell it, just to cover those costs and make you better off than you would have been by renting.

Property prices are not guaranteed to go up every year and sometimes when property prices are at an all-time high, they can fall in value quite a lot, like happened in the early 1990s.

Also, if your mortgage is going to be a high proportion of your home value, your risk of falling into negative equity* in a property market downturn, is much higher too.

*Being in negative equity (where the sale value of your home is less than you would need to clear your mortgage) is a stressful situation if you want to sell your home (for whatever reason) at that time.

THE BENEFITS OF HOME OWNERSHIP

YOU COULD SAVE A LOT OF MONEY OVER THE LONG TERM

Whilst you might fix your mortgage payments for periods of time, over the long term these payments will rise and fall with interest rates generally – but they won’t increase year after year, in line with inflation like a rental payment.*

Once you’ve repaid your mortgage, you’ll be free of those repayments altogether – unlike rental payments which never stop.

So, all things being equal, you’d expect to pay out less to buy a home for life than to rent a similar property from a private landlord. After all, with your own home, you’re not paying for the landlord’s profit.

You might find that your monthly mortgage costs could be less than rental payments on a similar type of property – even if you have a relatively large mortgage as a proportion of your home value.

That said, such immediate savings situations are the result of super low interest rates – and you should not assume that low rates will continue for long.

*However, because interest rates are currently (February 2019) at historic lows, you need to be aware that they could increase a lot if they return to more ‘normal’ range nd you don't have a fixed rate loan.

YOU COULD BUILD A LOT OF WEALTH IN YOUR HOME

The upside is you could build a great deal of wealth through home ownership. And for many people, their home is the most valuable asset they’ll acquire in life.

By a combination of your home value rising and/or your mortgage debt being eliminated through your repayments, you could build up a sizeable amount of equity* in your property over time.

It’s up to you what you do with your equity. So, you could:

• Continue living in your home for very little cost once your mortgage is paid off

• Rent out your property for a time, to generate an income

• Extend your mortgage (or remortgage) to release some of the equity

• Release some of that equity (if you’re over 55) to boost your income whilst staying in your home. More on this here

• Sell your property (and enjoy tax-free** proceeds) to use as you want – perhaps as a large deposit on your next home or, in later life, to buy a smaller home – using any remaining balance to boost your income

*Your equity is the value of your home less any debts you owe on it. **There’s (currently) no capital gains tax on the sale of your home.

CONCLUSION

We suggest that you avoid any rule-of-thumb / ‘common sense’ guidance you hear.

And weigh up the costs, risks and benefits of home ownership, taking account of your personal situation now – and looking ahead to your future.

SHOULD YOU SELL BEFORE YOU BUY? THIS SHORT SECTION IS FOR EXISTING HOMEOWNERS.

Most homeowners complete the transaction to buy their next home on the same day as they sell their existing one.

This avoids the risk of being out of the property market if prices are rising – and avoids the inconvenience of moving home twice (first to rented accommodation and then to their new home) in quick succession.

However, there can be advantages to selling your home in advance of buying your next one. It’s certainly worth noting the pros and cons to this approach and these are nicely set out here.

GET YOUR DEPOSIT TOGETHER THIS SECTION IS FOR FIRST-TIME BUYERS WHO NEED TO GET A DEPOSIT TOGETHERIf you’re an existing homeowner looking to move but have little or no equity in your current property, you’ll need to find a new deposit too. You won’t be able to access the special ‘bonus’ ISAs for saving – but if you’re buying a property jointly with someone else and they are first time buyers, they can save through these bonus ISA plans (more info below).

THE IMPORTANCE OF YOUR DEPOSIT

In general terms, the bigger your deposit, the less risk you pose to mortgage lenders, so, you’ll be able to access a wider range of mortgages and lower interest rates.

Having a deposit of 10% of your home’s purchase price could give you access to a much lower interest rate than if you only have a 5% deposit. And that difference is worth checking with your mortgage provider.

You could side-step the need for a larger deposit by using the Government’s Help to Buy: Equity Loan scheme. But there are risks as well as benefits with that scheme as outlined in section 5. So, look carefully before leaping into it.

BUILD YOUR DEPOSIT WITH A 25% FREE BONUS

Whether you’re saving on your own or with help from your family, it could be worth routing your deposit money through one of the two special ISA savings products outlined below.

HELP TO BUY OR LIFETIME ISA

Both of these products will give you a FREE 25% (government) bonus on your savings when you buy your first home.

The Lifetime ISA allows you to save more – and therefore enjoy more FREE government bonus. You just need to be aware that there’s a c.6% penalty on your funds if you need to access your money early – and not for house purchase. And, because of this government-imposed penalty feature, very few banks or building societies offer this product and the interest rates on them are not always the best. Your capital will also fall and rise in value if you invest in stocks and shares, rather than cash.

The Help to Buy ISA has a lower limit on what you can pay in. But it offers penalty-free access to your money for any reason and there’s a wider choice of these products on the market. So, they tend to offer slightly better interest rates.

You can learn more about both of these products here.

CUTTING OUT WASTEFUL EXPENDITURE

If you’re saving on your own – or with a partner – for your deposit, the task can seem daunting at first. But if you can find just £6.60 per day (the price of two take-away coffees) you could, for example, ‘max fund’ a Help to Buy ISA (at £200 per month).

If you can afford to save more than that amount, you might want to consider the Lifetime ISA product.

And, with a modest amount of interest paid on your account plus the FREE government bonus of 25%, you could look forward to having a deposit fund of £16,000 over 5 years (Or £32,000 if you’re saving with a partner).

WORK OUT HOW MUCH YOU CAN BORROWUnless you have the cash (or equity* in your current home) to buy your new home outright, you’ll need to know how much you can borrow on a mortgage before you go looking for your home. Estate agents are unlikely to let you view properties unless they know that you have the capacity to buy.

* Your equity in your property is the excess, if any, of your home’s value above any outstanding mortgage or other loans.

THE AMOUNT YOU CAN BORROW WILL DEPEND ON VARIOUS FACTORS INCLUDING:

• The amount you have available as a deposit (or, for existing homeowners, the equity in your current home)

• Your income, or incomes if you’re buying with another person. (The self-employed may also have to provide three years’ worth of accounts, certified by an accountant)

• Your regular bills and other outgoings (including lifestyle expenditure) and how these could change in the future

• Your credit history

• The value and type of property you want to buy

• The type of mortgage you want (fixed or variable, the interest rate and term)

• Any other assets you could offer as security (like another property or investments)

• The lending criteria of the mortgage lender you approach – which can vary quite a lot.

Use an online calculator like this to get an initial estimate of how much you could borrow. And then search online and seek advice from an independent mortgage broker to understand your mortgage options.

A good mortgage broker should be able to find the best mortgage terms for your personal situation and obtain competitive terms for any associated buildings, life and health insurance policies you’ll need alongside. Find out more about the insurances you might need and the best way to buy them here.

Which?, the consumer organisation, provides mortgage advice from the whole market. You could also consider the HomeOwners Alliance which offers all sorts of home-buying guidance for a modest fee.

Your aim at this stage is to find the best terms (for your situation) on a mortgage that you could comfortably afford. And then, to obtain a 'Decision in Principle' (DIP) (or Agreement in Principle (AIP) or Lending Certificate) to confirm the amount you can borrow. This is what you’ll need to show to estate agents.

More details on mortgage affordability can be found here.

FACTOR IN YOUR OTHER COSTS OF HOME BUYING

On top of your mortgage deposit, you’ll need money for the other costs of buying your home such as:

• Home valuation and mortgage arrangement fees

• Solicitor fees, Land Registry fee and local authority searches

• Stamp Duty

- This is a tax paid on homes costing £125,001 or more. But note, First-time-buyers do not currently pay Stamp Duty on the first £300,000 for properties worth up to £500,000

- To work out how much Stamp Duty you’ll need to pay – use this calculator

• Buildings, contents, life and protection insurance

• Decorating and furnishing costs

• Moving costs

This list only covers the big, upfront costs. You can find a more complete list here

Try to cover these expenses with your savings (rather than adding them to your mortgage), but if you don’t have the funds for all of them upfront, aim to overpay your mortgage in the early years to avoid long-term interest costs on them.

CONSIDER THE GOVERNMENT HELP SCHEMESThe government schemes that aim to help people buy their own home include:

The Right to Buy/Acquire scheme for council tenants who qualify to buy their home at a discount

The shared ownership schemes for those wanting to buy a share of their home – who might want to buy the remaining share in the future.

The Starter Home scheme – which makes new-build homes available to first-time buyers under 40 years old with at least 20% off the market price

The Help to Buy: Equity Loan scheme – which offers a 5-year interest-free loan to both first-time buyers and existing homeowners buying a new-build house.

The availability and terms of these schemes vary across the UK and some are only available for a limited time. So, check out the scheme details here and check your eligibility here.

And consider these schemes carefully, noting the risks as well as benefits in each – like those we outline here for just one of these schemes: the popular Help to Buy: Equity Loan scheme.

HELP TO BUY: EQUITY LOANS – TAKING A CLOSER LOOK

THE BENEFITS OF THIS SCHEME

• You only need a deposit of 5% of your home’s purchase price. So, you can buy a home more quickly with less saving

• The government provides an equity loan of 20% (or 40% in London) of the purchase price and you borrow the remainder from a mortgage lender

• You might access a cheaper mortgage rate than if you were taking out a mortgage for, say, 95% of your home’s value

• Your equity loan will rise and fall with the value of your home. So, if your home price falls – so will the amount you owe the Government

• You pay no interest for 5 years on your equity loan from the Government

• In the sixth year, you’ll pay an interest fee of just 1.75% on your equity loan

THE RISKS WITH THIS SCHEME

• Your home choices are limited with this scheme as it’s only available on new properties – and only with some developers.

• You’ll have a restricted choice of mortgage lender. They don’t all offer Help to Buy mortgages and some charge more than on their standard mortgages, because they have to deal with an additional party (Homes England).

• There’s a risk that you’ll pay over the odds for a new home on a Help to Buy development when compared to comparable homes in the area, because of the increased demand for homes generated by this scheme.

• If you overpay for a home, there’s an increased risk of finding yourself in negative equity* if home prices fall. There are also concerns that when the scheme stops (in 2021 or earlier if the funding is used up) this could add downward pressure on home prices.

• The sudden start of fees on your equity loan (after 5 years) could come as a shock unless you plan for it. And your equity loan interest fee will rise every year – after year six.

• The fee will increase by any increase in the Retail Price Index (RPI) plus 1%. So, for example if for the first year of increase, the RPI increases by 3%, your fee will increase by 4% (3% + 1%) to 1.82%. This is still a competitive rate for borrowing – but it will continue increasing each year, even if there’s no inflation.

• Your equity loan is quite unlike your mortgage debt which, if you pay interest due, remains fixed in value. Your equity loan will rise and fall with the value of your home. So, if your home price increases, so will the amount you owe the Government.

*Negative equity means the sale value of your home is less than you might need to repay your mortgage.

CHOOSING A HOME - WHAT REALLY MATTERS1. How will the location affect the size of your home?

• If you’re considering various locations, make some quick searches online to get an idea of how prices vary in each area. You may have to decide what's more important: the type and size of home you have or your location?

• For example, for a given budget, the home you’ll get in London will be much smaller than what you could buy outside. And, in some parts of the UK, property prices are only a fraction of London prices.

2. How will the location affect your cost and quality of life?

• Factor in your travel costs and the cost to your quality of life and health of time spent commuting to work.

• Owning a larger home away from a city is of limited value if you end up sitting in traffic (or on a train) at 7am and again at 7pm most days. (Very long work days are seldom good for relations at home either).

• Living costs and leisure activities might cost more in London and other cities. But, if you want the city life and facilities, then living near it will give you what you want and save you time and money.

3. Factoring in the family dimensions

• If you have a young family (or are planning one) you need to factor in childcare costs, which vary enormously across the country, as you can see here.

• Property prices in popular school catchment areas can cost between 10% and 40% more than those just outside. So, you might need to forego some of your other home requirements if this is a priority.

4. How many rooms do you need – and how big must they be?

• How many bedrooms do you need for yourself and your family (if you have one).

• Do you need a lot of storage space in your home? Would attic space meet your needs in this area?

• If you work from home, perhaps you need a separate and quiet office space.

5. What are the ‘must-have’ features of your home?

• Do you need a large kitchen, a utility room, a real fireplace?

• How much natural light is enough (or too much) for you?

• And what about the external appearance of the property?

6. Watch out for ongoing costs of older properties

Old, idyllic homes might have character, but can you afford to maintain one?

7. Be sure to avoid flood (and other) natural risks to your home

Some homes can appear to offer great value for money, but you need to be sure that you’re not exposed to risks from the elements, such as flood damage in low-lying areas or salt damage (or coastal erosion) near the sea.

8. Consider what man-made disturbances are acceptable

Trainlines, flight paths and busy roads may be worth considering when choosing your location.

9. Be sure to get the broadband speeds you need

There are still many areas – including new housing developments – where broadband speeds are insufficient for digital work or entertainment. And in some areas, there are no imminent plans to improve the situation either.

10. Go for the garden you need

• Do you enjoy gardening or are you prepared for the time it will take to maintain a garden?

• If you want play areas for your children, is the availability of local parks more important?

11. Do you need a parking space on your property?

Is a parking spot non-negotiable?

12. Do you want shops within walking distance?

Having shops available locally can save a lot of time on your day-to-day groceries.

NEXT STEPSWhen you’ve got an idea of the area in which you’d like to buy and you have your list of requirements, you’ll make better progress with your online searches and in discussions with estate agents in your target local area.

We suggest that you do talk to local agents for their deep local knowledge. And, that you view several properties and ask the hard questions, based on your requirements and other issues you identify whilst viewing.

In the second part of this guide, we explain what you need to know and do, from making an offer to moving in.

BUYING A HOME - CHECKLIST

Is buying right for you... right now?

Should you sell before you buy?

Get your deposit together

Work out how much you can borrow

Factor in your other costs of home buying

Consider the government help schemes

Find your ideal area and property

IMPORTANT NOTES – PLEASE READ

This presentation / document is provided for educational purposes only.

Our aim is to help you make more informed decisions about your life and financial plans. This information is generic in nature.

We do not offer regulated financial advice. This means that we do not make specific recommendations for you to buy, sell or otherwise transact investments, or to engage in any investment strategies, or for you not to do any of these things.

You are solely responsible for any decisions that you make regarding your finances and investments. You are solely responsible for any losses that you may incur from the actions you take (or do not take) having read this educational material.

We do not take responsibility for the outcomes and consequences.

It is your responsibility to satisfy yourself as to the suitability of any particular investment or action you take.

Any figures that we provide here are only examples of possible costs or outcomes.

You understand the need to conduct your own due diligence before implementing investments, business plans, or other changes to your personal life.

If you require specific recommendations on investments or pensions or life assurance, then we strongly recommend that you appoint an appropriately qualified and regulated professional adviser to advise you in line with their own terms of business.

Important: This content is for guidance and educational purposes only and is generic in nature. Salary Finance does not offer regulated financial advice. Please seek independent financial advice.

© 2019 Salary Finance Limited. All rights reserved. Salary Finance Limited and Salary Finance Loans Limited are authorised and regulated by the Financial Conduct Authority (firm reference numbers: 758053 and 734585). Salary Finance Limited is registered as a small payment institution money remittance firm (firm reference number: 788485). For loan products, Salary Finance Limited acts as credit broker exclusively for associated company Salary Finance Loans Limited. The “Advance” product is not a regulated lending product. Salary Finance Limited and Salary Finance Loans Limited are registered in England & Wales (company numbers: 09677777 and 07643748) at One Hammersmith Broadway, London, W6 9DL. Data Protection Registrations: ZA152606 and ZA099501