The property ladder are steps most young people want to take at some stage in their lives. However, the average age of first time buyers has increased from 31 to 33 over the last decade, making these steps seem all too far away. You can put yourself on the right path though, so that the dream of owning your own place doesn’t seem so far away. And, understanding how a mortgage works early on can really benefit your money mindset and put you on the right track to keys to your very own front door.
Tom Lester, founder and director of Lester & Co Mortgages has answered a few questions for you, to help students and young people understand what the deal is when it comes to getting a mortgage:
What is a mortgage? How does it work?
A mortgage is a type of loan that is attached to a property. The reason why the loans can be so large is because if the borrower fails to pay over a period of time the bank can repossess (take back the property). Banks and building societies offer mortgages. You can go to them directly but most people go to a mortgage broker/independent financial adviser so they can shop around and give the correct advice.
What do I need to do to get a mortgage?
A deposit (lump sum of money) to put down (before Covid there was talk of 100% mortgages coming back);
An income to match the amount you want to borrow (roughly 5 times your salary);
A credit score that will suit the lenders’ requirements i.e. paying your bills on time. Be good!
What things should I start thinking about at school and university to put me on the right track? Is there a certain amount of savings I should aim for?
The market is starting with a 10% deposit at the moment, but you only needed a 5% deposit before Covid (they may still make a comeback and are available for some first time buyers1). However, the greater your deposit, the better interest rate and cheaper mortgage you will get (this could reduce your monthly payments and overall loan amount).
My best advice to students would be to try and keep their noses clean as best as possible during their study years and early career. I was a student once and students would take credit cards out, run them into the ground and not pay. Live for the day was the motto but those students will have that on their credit file for 7 years. Probably isn’t worth it…
Is it better to have a mortgage than to rent a property?
The pro of renting is that you have flexibility. If you don’t like the area, you can usually move after a few months, depending on your contract. Also, if anything goes wrong with the property the landlord will have to fix it. The cons are that you are paying for the landlord’s mortgage and almost certainly paying them an income on top of that.
The pros of owning your property are that the mortgage will reduce over time and that is equity (asset value) you will have in your name. If you buy a property, the property will invariable go up in value (judging by the last 100 years) so that is equity you will benefit from as you own the property.
The con is that you have to fix anything that goes wrong with the property. Also if you put a deposit down on a property too early it might be a challenge to pull it back out quickly if you wanted to go travelling so I would advise you get all that done first and think about property when you are settled into your chosen career.
Investing in property is what I see so many adults do and make a living from. Where can I find more information on this or is there anything you would recommend?
I would speak to as many landlords as possible and find out their story. The main ways to make money from property are as follows:
You buy a residential property to live in and it goes up in value. Perhaps you could rent a room out as well to help with bills.
Purchase additional properties and let them out to families, professionals or students. This is known as a buy to let and unfortunately you will need a 25% unlike 10% on a residential mortgage.
Flipping. You buy a run down property cash or with short term financing( bridging loan) Make the property look lovely and sell it for a handsome profit.
Like Tom says, if you want to get on the ladder sooner rather than later:
think about your priorities and make sure you are ready for a long term financial commitment;
10% or more is the golden number of savings for a mortgage – there will be other expenses (solicitor fees, moving costs and more) but, focus on that 10% to begin with.
Be mindful of your credit rating – have fun, but don’t go too wild…!
1 https://www.onthemarket.com/content/governments-new-5-deposit-mortgage-scheme-explained/
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