Many of us dream about owning our own home, but is it just a sure fire way to bankruptcy??
To afford the average house in London you would now need to earn just over £71,000 a year* even if you put in a 25% deposit, a hefty £107,500.
Assuming you do have a spare £100k+ lying around for the deposit (plus the extra needed for solicitors, etc) AND that you do earn £71,000 a year, that means you’ll then have to pay roughly £1,300 – £1,400 a month for your mortgage.
If you earn £71,000 a year that’s unlikely to be a problem but most people don’t and this rough monthly repayment is even based on the exceptionally low mortgage rates available at the moment.
But what happens if rates jump up like they have in the past and are predicted to in early 2016?
Well, if rates to what they call “a more normal rate” of 4-5% then you be paying up to £1,905, and if rates went up to 12%, like they did in the late 70’s and early 80’s, after the last recession. Then you’d be paying as much as £3,400 a month.
That would leave you with a mesely 15% of your salary (approx £640) to spend once the mortgage has been paid each month, even if you are on a £71,000 salary. And that is just the mortgage, it doesn’t include bills or other expenses associated with owning a property.
It’s no wonder then that The Bank of England have raised an alarm about homebuyers taking on bigger mortgages when even someone on £71,000 will be left in a lot of difficulty if interest rates rise as predicted. But it’s all just due to the amount someone would need to borrow in order to buy in London now with the average price at just under £430,000.
Even for a first time buyers, the average property price in London is now at a whopping £300,000 (approximately). Not only will the debt therefore be of concern for anyone on an average or even average to high salary but this continued rise in prices has meant the average deposit for first time buyers in now just under £70,000.
So what can you do if you don’t have £70,000 or want to make sure you have a large enough deposit so as not to put yourself at financial risk?
As I discovered personally the easiest way to make enough money to be able to buy property is, possibly somewhat perversley, to invest in property.
I started out with investing just £8,000 in a property and within 2 years had enough money to then be able to afford a deposit on somewhere else on my own. That’ll be harder nowadays given the amount needed for deposits but if property prices continue to rise putting money into property is probably the most effective way to then have enough to buy. Relying on a less than 2% interest rate on an ISA just wont cut it when, even though the market levelled off for a bit in the last year, prices in London have still increased overall by 7%.
There are lots of ways to find property investments and we’re happy to advise on any you do find or discuss the ones we have available to see if they’d best help you in what you’re trying to achieve. Just get in touch on info@thepropertybuyingexperts.com
*based on the bank lending no more than 4.5 times salary
Sources
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http://www.moneysavingexpert.com/savings/best-cash-isa#best
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http://www.standard.co.uk/business/business-news/shock-fall-in-uk-house-prices-but-the-london-market-bucks-the-trend-10359831.html?origin=internalSearch
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http://www.standard.co.uk/news/london/alarm-on-home-loans-as-prices-surge-10361137.html?origin=internalSearch