Savings Log of a 26yr old on low pay

MoneyWaster2007

I know it's the Help to Buy mortgage guarantee that I need, I was asking if it works in the same way as the Equity loan, except the difference is it applies to existing properties as well as new-builds. Whereas, the Equity loan only applies to new-builds...

If this is the case then I can't see that there is any profit to be made when it comes to selling on, as you will still be required to pay the gov't loan off, as well as the mortgage, meaning most certainly negative equity. I'm struggling to see how this scheme will be good apart from giving people somewhere to live of a decent size, where they couldn't afford to previously. However, I think it would only be beneficial to those wishing to stay in the property for perhaps 10 years plus, as by that time the house may be in positive equity. Does this make sense?

bowlhead99

MoneyWaster2007 wrote: »

I've had a look at the Gov't Help to buy equity loan - which is not the scheme I'd be interested in, as it applies to new builds, however, in the example they provide, even with the value of the property rising by £10k (from £200k - £210k), the buyer only gets £168k back, which must pay off the original mortgage, plus the Gov't loan. So, it would appear that there is no money to be made by taking on this scheme, only money to be lost. Am I seeing that right? I'm guessing the scheme to be introduced in 2014 will be the same? Please see link...

https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-equity-loans

No, you're not seeing it right. The house is sold for the 210 k and the government takes out its 20% interest leaving you with 80% of the proceeds AFTER the government has taken back its cash.

So out of the 168k, you only have to pay off your mortgage of 150k leaving 18k for yourself. You have turned your 10k deposit into 18k. It is completely wrong to say there is no money to be made and only money to be lost. You were double-counting the government loan .

The government puts in a share of the total cost and takes out the same portion of the total proceeds. The rest of it is financed by you - either with a small deposit and a large mortgage or a larger deposit and a smaller mortgage.

Now of course you have to pay interest on your mortgage, you have to pay stamp duties and solicitor fees and mortgage arrangement fees when buying and you have to pay estate agent fees and solicitor fees when selling. So it's not a one way street to riches if the house does not appreciate in value very much. But that's exactly the same mechanical process whether you are using a government equity loan or not, and doesn't change the general risks of buying property.

As mentioned by others, this current 'help to buy - equity loan' scheme is not for you (if you don't want a new build) and the one that can be used on non-new builds comes in next year with an entirely different structure. Also, you said "I'm guessing the scheme to be introduced in 2014 will be the same?", but no they are completely different schemes with different risks (because the 2014 scheme has you funding the house yourself with with a larger mortgage and different interest rates).

Back in post #585 in a response to Father Abraham I went through some of the key points of each of them which you said was insightful and much appreciated - but perhaps you didn't really follow it after all

MoneyWaster2007

Post #565 was by rickysaving, but I know the one you are referring to

Thanks very much for clearing things up for me here, it's just given me new hope! I think I may well take the help to buy guarantee in January. Just hoping my credit will be ok, as I've not really had any credit since my loan which ended around 5 years ago. Does a phone bill, regularly paid on time help to build good credit?

Also, I will have £9k plus by Jan', is this likely to cover fees/costs on top of £5k deposit (if buying a £100k flat)?

One more question, with a low deposit of £5k, will the monthly repayments be too much for me on £15k salary? or is that too expansive of a question to ask...

mike88

While money might be tight would it be possible to take advantage of the tax free rent a room allowance of up to £4250 per annum? Of course sharing is not ideal but it is a way to get yourself on the housing ladder.

I couldn't understand why you thought the Government's help to buy mortgage guarantee was not for you but now I get it as bowlhead has cleared up the confusion. As you can now see the scheme is designed specifically for people in your position and all you have to do now is convince the lender that you can afford the repayments. It is of course not a real issue for lenders as they will always be able to get their money back from the government if everything goes pear shaped. Keep a look out for details when published in January.

bowlhead99

MoneyWaster2007 wrote: »

Thanks very much for clearing things up for me here, it's just given me new hope! I think I may well take the help to buy guarantee in January. Just hoping my credit will be ok, as I've not really had any credit since my loan which ended around 5 years ago. Does a phone bill, regularly paid on time help to build good credit?

Typically phone bills from BT etc are not on your credit report, though mobile phone bills generally are (with flags if they're not paid on time). I don't know how much they count for, compared to having a 'real' credit responsibility; will vary by lender and assuming they are all 'nil default' will probably not affect one way or another except for someone right on the edge of having a suitable credit record who's being checked out manually by an underwriter.

If you have a 6 month ish window it would not hurt to get a basic credit card from your bank which you spend on and pay off in full each month. That at least shows you can pay bills on time rather than (as might be assumed) you have never had the responsibility of paying bills or taking on financial commitments. Your loan, if it was paid on time when it ended, will disappear 6 years after it ended so might not even be there by this time next year.

Having a credit card with some available credit but no balance when you apply for a mortgage can only be a good thing IMO in terms of your ability to manage money and cope with something unexpected rather than being stretched one month and miss a mortgage payment because of it. Of course different lenders may have different attitudes but would generally not hold a nil balance credit card against you. Some would look at it and say 'well you might borrow £1k on it and then have to pay 3% a month which is a potential £30 monthly commitment' but most would not, as far as I know.

If you are going to get more credit cards do it now rather than trying to get them right before an application for a mortgage.

Also, I will have £9k plus by Jan', is this likely to cover fees/costs on top of £5k deposit (if buying a £100k flat)? Yes, as solicitors and surveys and the first year insurances don't cost £4k. It depends how much you would want to have to spend on the new place and set aside for maintenance of the flat and its contents from day one (now it will be your responsibility rather than a landlord's) and a personal rainy day fund, etc.

One more question, with a low deposit of £5k, will the monthly repayments be too much for me on £15k salary? or is that too expansive of a question to ask...

Unanswerable; depends how much you spend on personal living. If the interest rate is 4% and you take a repayment mortgage for 28 years of £95,000 it will cost you £475 a month to repay. At 6.25% same terms it would be £605 a month. Shorter repayment period, more per month. Longer repayment period, less per month but the mortgage goes down less per month and in total costs you more over your lifetime. If the interest rate is not a 'fixed' deal for very long, be aware what it might cost if it increases to a new, higher, market rate sometime down the road.

Although the government scheme is likely to make low deposit mortgages more affordable (lower interest rate due to the reduced risk of the government guarantee, and more lenders in the market competing for business), their support will fall away at some point. So particularly if you haven't made much headway to clearing down the mortgage principal be prepared for a higher rate in future.

As an example, Nationwide's rate for 95% LTV borrowing at the moment is over 5% and monthly would cost somewhere between the two figures I gave above. And that's in the current market environment where the UK interest rates are at all time lows and they are getting cheap money from the government to lend. In more 'normal' economic conditions for a high loan-to-value loan, going back over history, you would be looking at paying quite a bit more than 5% which puts you with a spend of quite a bit more than 5000 per year just for the interest to service 100k of borrowing, so by the time you throw in the 'repayment' element you are looking at serious cash for someone on a 15k gross salary.

MoneyWaster2007

mike88 - re the tax free rent a room allowance, I thought a condition of the help to buy scheme was that you cannot buy to let? Would this apply here? As in, although I'd be living there myself, having a tenant there aswell would mean renting out? Correct me if I'm wrong here..

bowlhead99 - with me earning £15k per year, do you think it would be asking too much of my wage to get a mortgage using the minimum 5% deposit? You mentioned about what may happen once a fixed period ends re the interest, and also the effect a rising base rate would have. I'm now thinking this could be a big mistake, one which on the surface appears to be very enticing, but may sting me further down the line...

I suppose one option would be to save a bigger deposit, but this will take time - how long do the gov't propose to offer this scheme??

A completely different option would be to meet a girl, and then go halves...this is all wishing on a prayer though...

Alternatively, as mentioned in a previous reply of mine, I could scrap the whole idea entirely, resign myself to a lifetime of renting and enjoy some of the money I have accumulated to date, whilst keeping some back as a cushion. At a bit of a crossroads here...

Eponym

MoneyWaster2007 wrote: »

mike88 - re the tax free rent a room allowance, I thought a condition of the help to buy scheme was that you cannot buy to let? Would this apply here? As in, although I'd be living there myself, having a tenant there aswell would mean renting out? Correct me if I'm wrong here..

I'm not Mike, but the Rent a Room scheme is for live-in landlords and lodgers (as in, you live in the flat and rent the spare room to a mate, for example), whereas buy to let is you buying a property which you rent out without you living there.

The Government allows you to earn £4250 in rent from a lodger/s tax free. Anything over that is taxable. See https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

bowlhead99

MoneyWaster2007 wrote: »

bowlhead99 - with me earning £15k per year, do you think it would be asking too much of my wage to get a mortgage using the minimum 5% deposit?

Well with the figures I quoted it would seem tight for affordability as you've seen, and to be honest if you are not planning on increasing the £15k or buying with a partner or friend you are not going to get a £95k mortgage because it would be over 6 times salary and nobody is really offering that at low LTVs.

The government guarantee might temporarily improve things but they have specifically said they do not want the mortgages to be given out willy nilly and will require minimum salaries and credit histories etc. So I doubt they would lend at 6x. Maybe 4x is more reasonable.

I suppose one option would be to save a bigger deposit, but this will take time - how long do the gov't propose to offer this scheme??

You can look it up. But once the government scheme finishes there will still be private ones or council ones or higher priced normal mortgages. As a mortgage is a 20yr+ commitment the initial price on day one is not the only thing to consider.

A completely different option would be to meet a girl, and then go halves...this is all wishing on a prayer though...

I bought with trusted friends and share the place with them. It is not for everyone but it gets us much more house space per person for the cash than we would have in our own separate flats and it gives me more free cashflow for other personal savings and investments to not worry that I'll be locked into a somewhat unusual living situation forever.

If that wouldn't work for you (and it wouldn't for most) then certainly meeting a girl is one option and I would hope at 28 you have plenty of years left of being enthusiastic about that sort of thing

Alternatively, as mentioned in a previous reply of mine, I could scrap the whole idea entirely, resign myself to a lifetime of renting and enjoy some of the money I have accumulated to date, whilst keeping some back as a cushion. At a bit of a crossroads here...

You are only young once so there's no reason you shouldn't spend some of your income on enjoyment.

But think about it this way. You have 8000 quid in an ISA. You are 28(?) now and are perhaps going to live to 108, so over 80 years (if you can keep it invested returning as much as inflation) you have £100 a year or 27p a day to spend on fun.

Of course, you might be unemployed the last 50 of those years so the £100 a year won't go very far towards your rent, or provide a particularly fun lifestyle.

On that basis, it seems a bit early to think about stopping saving or blowing a chunk of the savings, as you have basically nothing put away yet (in the grand scheme of things) and you are not going to enjoy the next 80 years if you are living paycheck to paycheck. It certainly seems too early to give up on the idea of buying a house. I was a FTB at 36 which gives you eight years to save a better deposit and still buy at the time I did, and there's nothing to say you have to race to buy one as early as I did. You can get a 25 year mortgage at 40 and still pay it off by retirement.

By all means spend some of the money you have saved hard - your potential future wife might never meet you if you are sat at home shivering over a can of beans to get an extra pound into the pot that week. But don't give up on the idea of continually saving and one day having enough to buy a house, because once you stop thinking about or planning for the future you resign yourself to not having one (i.e. a future), which doesn't do you any good at all.

Best thing to do is to up your income over the next few years which makes it easier to save, invest, borrow, pretty much everything really. Learn some new skills, take a course, something. You might meet a future female flatmate there, or open a door to a new job.

lashie

WOW!!! I never post but felt compelled to- You are amazing Moneywaster - a true inspiration, I have read your whole thread over the course of a week and cant believe how far you have come - the degree, quitting smoking, exercise and SAVING!! Fantastic. I very much hope you realise your dream of owning a home and settling down with a lovely lady! She is out there and would be lucky to have you without a doubt.

Sounds like you have some fantastic supporters here to keep you motivated.

Keep going...

x

mike88

MoneyWaster2007 wrote: »

mike88 - re the tax free rent a room allowance, I thought a condition of the help to buy scheme was that you cannot buy to let? Would this apply here? As in, although I'd be living there myself, having a tenant there aswell would mean renting out? Correct me if I'm wrong here..

Rent a Room and Buy to Let are entirely different concepts. Rent a Room is letting a person use a room in your house for rent (probably tax free) and buy to let is a person who buys a property with the sole purpose of letting it out to tenants. Rent a Room will not affect the Help to Buy scheme.

When I was a landlord it always struck me as ludicrous that people were prepared to pay more in rent than it cost me to service the loan.

Whether you can afford the mortgage repayments is a question only you can answer. On top of servicing the loan you will have a management charge of around £80 a month if you buy a flat and the usual Council Tax and Utility costs. Depending on the state of the property you buy you will have maintenance/redecoration costs (internal if you buy a flat as external maintenance is normally part of the management charge as is buildings insurance) and of course furniture -cheap and cheerful from IKEA perhaps. Possibly increased transport costs to work might also need to be factored in.

Are you paying rent and utilities at the moment? If so you will have a good idea of how the numbers stack up. My guess is, if you can qualify for a mortgage, a sharer (Rent a Room) would be essential in the early years.

Whatever you decide good luck.