Buying your first home can be a daunting prospect financially. For many Londoners, it can seem a faraway fantasy. But property has always been regarded as a desirable asset and a worthwhile investment, and that’s exactly what it is: an investment. It’s not just about buying a house in the same way as you would a new road bike or Mulberry Handbag. Purchasing property of your own is not only a sign that you’re moving up in the world but also that you’re making a long term financial commitment. A sign that you’re officially engaging in what young graduates migrating to London refer to as ‘adulting’…So, when is the time to cut back on any unnecessary luxuries of city life and begin saving for your deposit?
Can I afford a mortgage?
Congratulations! You’re beginning to think about putting some of your hard earned pennies towards your very own property. In order to increase your chances of being approved for a mortgage, the main thing to consider is affordability. Spending beyond your means when it comes to the deposit and/or the mortgage repayments will only put you in a bad position that could leave you worse off than you are now: ‘property-less’ and in debt.
When you apply for a mortgage, mortgage lenders look at the following:
- Annual income before tax
- Monthly take home pay
- Any additional income
- Monthly outgoings
- Who is applying (for example are you applying on your own or buying with someone else)
- Future changes of circumstance
The process of breaking all of this information down for yourself will give you a good indication on where you’re at in terms of affording a mortgage. This is a big first step because there are very few people who don’t need to do a certain level of financial planning before even applying for a mortgage. So however boring this research may seem, it’s progress.
What do I need to save for?
The deposit is the sum of money you pay outright when buying a property and represents the proportion of the property that you own outright. Deposits tend to range from 5% to 25% of the total asking price. Whereas your monthly mortgage payments are likely to be manageable – particularly if these are shared with someone – and not much more than your current rental costs, you may well need help with the deposit. Usually, the more you pay as a deposit, the better your mortgage rates will be. Don’t worry – we’ll discuss this in more depth later.
The other one-off costs involved in buying a property that are often overlooked are the fees. These include arrangement fees, booking fees, valuation fees, Clearing House Automated Payment System (CHAPS), broker fees, legal fees and stamp duty. In terms of financial planning, do your research to find out more about the fees you may be paying and roughly how much these will be before you start applying for a mortgage.
Mortgage payment plan
Once your deposit is paid and you have taken out your mortgage, you’ll sign a monthly repayment plan and contract that outlines your mortgage rates and how much you‘ll be paying the lender each month. This will continue until you have cleared the debt, then you will own the property (wahey!).
According to MoneySuperMarket data, the average monthly mortgage payments for first-time buyers is £761. However, the amount you pay each month will depend on the size of your deposit as well as your financial history and the economic climate.
Before you even apply for a mortgage, figure out which type of mortgage is most appropriate for you. Make yourself aware of the benefits (and downsides) to each type, as applied to your current financial situation. Here’s a summary of the different types of mortgage available.
- Long-term or Short-term mortgages
- Interest only mortgages
- Fixed rate mortgages
- Adjustable rate mortgages
- Tracker mortgages
- Offset mortgages
You can find out more about the above mortgage types in this guide.
How much do you need to save?
The main expenses you need to save for are the deposit and the fees. Mortgage repayments – particularly when shared with a fellow buyer – are unlikely to be much higher, and may actually be cheaper, than your current monthly rental costs. If short-term affordability is a problem for you, an interest-only mortgage may be a good option as it provides higher affordability on your monthly payments. Read IMC Financial Services’ tips on paying off an interest only mortgage here, as well as a summary of how this differs to other mortgage options.
What kind of property can I afford?
When stepping onto the property ladder – as a first-time buyer or otherwise – your prime consideration should be affordability. And this is affordability in terms of the deposit, the professional fees and the long-term mortgage payment plan.
When calculating your budget for buying a property you’ll probably work backwards:
- Decide what type of property you would like to buy. For example, a two bed flat or three bedroom house.
- Get a feel for the asking price of these properties in the area where you’re looking to buy.
- Then, get an estimate for how much your deposit is likely to be: calculate around 15% of the total price (or whatever percentage deposit you wish to put down).
- Calculate the remaining amount – how much you will need to borrow – by subtracting the deposit from the asking price.
There are a number of online mortgage calculators which you can use to get a rough idea of how much you could realistically borrow, here are two of our favourites:
This will then demonstrate whether or not you’re able to take out a mortgage for the type of property you’re currently looking at. If not you can adjust your search accordingly. While the above are helpful, these calculators should be taken as guides only.
Get a feel for property prices in South West London on our property for sale pages. You can refine your search according to postcode, number of bedrooms and price.