Introduction
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will be looking at some more absurd financial “journalism” as well as looking at how house buying has become so much more difficult in the last few decades.
Weekly Update
My health is no better since last week, unfortunately. I now have extreme pain in both feet and ankles. My legs cannot support my weight as I stand, and I have to use crutches to stumble around my home. Last night my sleep was constantly disturbed by pain at the slightest movement in the bed. I’ve had a lot of time off work in the last year, but it’s not as fun as it sounds. The worst part, after the pain, is the loneliness. I am on my own for most of the day and in too much pain to go out even if I wanted to. I’m alone with my thoughts. When I do speak to people, all they want to speak about is my health, with the same questions coming up each time. The person asking the question does not realise that I’m answering these questions to several people. As an absolute minimum, I am already discussing my health with six people; my two parents, my girlfriend, my boss, my doctor(s) and my insurer. This does not include friends. I’m starting to feel that almost all my conversations are health based. It’s a bit boring and a bit depressing.
My mental health is not in a good place either. For two years my physical health has been deteriorating. I keep getting told, “it can’t get worse” but the evidence is suggesting the opposite. I’m not sure what the endgame is for my health, but it’s not sustainable as it is. Living in constant pain is horrible. I’m sick of hospital visits. I’m sick of wondering if I’m going to fall over as I stumble from the chair to the kitchen.
I’ve seen my orthopaedic consultant and my cardiologist, and they are recommending I speak with a rheumatologist. There is a theory that I might have some form of autoimmune issue that could be causing several of the health problems I’ve got. It makes sense to me that there must be one or two causes at the heart of this, because it does not seem right that a 36-year old would have as many health problems as I have.
Financial Update
Premium Bonds: £13,000 (up £550 from last week).
Stocks and Shares ISA: £8,234.33 (up £15.33 from last week).
F**k It Fund: £1,513.11 (up £1.26 from last week).
Property Value*: £181,626 (up £8,125 from last week).
Total Assets: £204,373.44 (up £8,754.59 from last week).
Credit Card Debt: £47.06 (up £47.06 from last week).
Loan Debt: £3,370.33 (no change from last week).
Mortgage Debt: £133,960.57 (down £318.54 from last week).
Total Debt: £137,377.96 (down £271.48 from last week).
Total Wealth Figure**: £66,995.48 (up £8,963.07 from last week).
Investment Income in 2020: £0.00 (no change from last week) (Target £2,000).
*valued at £181,626 according to lender’s index.
**total assets minus total debt
I had some spare cash this week and I invested most of it in the Premium Bonds. I’m on the home straight to the target of £14,850. The closer I get to that target, the more impatient I am. My credit card went up because I did not get the opportunity to make the payment before writing this post. We have paid for our visas for our upcoming India trip and with the pain I’ve been in, I forgot to make the payment. This should be back to zero soon.
In the last week I was made aware that my property value has increased. My mortgage lender has an index valuation for each property and their estimate of my property’s worth has increased by just over £8,000. Whilst this does not mean much, as something is worth what one is willing to pay, it is still a sign that house prices are increasing generally. As the valuation continues to increase as my mortgage balance comes down, it also means I can look at extra borrowing sooner to free up cash to use as a deposit on another BTL.
Financial News
Yes, the esteemed financial publication ladbible posted an article on 31/01/2020 about how a young couple saved up a £13,000 deposit for a property in six-months.
The basic facts of the case: they are aged 19 and 20. They earn roughly £37,000 between them (£19,000 and £18,000 each). In six-months they saved £13,000. To me, those numbers did not add up and sure enough there was a lot the headline and initial information did not disclose.
It turns out that this couple was able to live with family whilst they saved. Although not directly stated, it’s strongly implied that they paid little to no rent and/or contributions to bills. The couple did admit that they cut down on nights out and takeaways though.
There are a few things about this type of story that annoy me. First, it makes saving sound easy. It’s not. Saving money, especially at that age is difficult. Second, but more importantly, had they not had family that was able to subsidise their living expenses, then they would not have been able to save the deposit. This is not a story about a young couple saving. It’s a story about parents gifting a deposit to their children. The deposit was not handed over in one go, but rather over six-months of subsidised housing, food and shelter.
For many young singles and couples, saving for a deposit is a pipedream. Instead of saving over £2,000 per month, they are lucky to save a tenth of that. This article does nothing to help the typical young person buy their own home. It risks damaging their self-esteem when they scroll through Facebook and see this young couple flaunting their new, three-floor house which they bought for almost a quarter of a million pounds.
I have nothing against the couple in question. They did not choose their circumstances, but they did take full advantage of the opportunity provided to them, so full credit where it is due. I do think they have made some mistakes though.
Buying Your First Home
The timing of this article is interesting as a friend contacted me a couple of days ago to get advice about buying a home. There is relevance to both this couple, and my friend, in what I am about to write.
You can only buy your first house once. It sounds obvious, but it is something you should think about. Being a first-time buyer generally entitles you to certain benefits and schemes that people buying their second or third property are not eligible for. This includes better interest rates, lower deposit requirements and access to certain types of equity loans, of which is seems this young couple did take advantage of.
My friend bought his first house with his ex-partner many years ago; probably close to fifteen years ago now. Although my friend moved out shortly after, he is still named on the mortgage. This has hamstrung him ever since. Despite having nothing to do with the property, or mortgage, since, if he was to buy another property, he would be liable for stamp duty. Assuming a £100,000 purchase price for a modest one-bedroom apartment, that would be a £3,000 charge just for stamp-duty. I might be doing my friend a disservice, but I suspect this possibility never crossed his mind all those years ago. When you’re a teenager still, why would it? Also, although he has an informal agreement with his ex-partner regarding the payments on the mortgage, if she stops paying then the bank is within their rights to pursue him for payment. If the property is repossessed it will count against my friend for many years.
This young couple should not have bought so young, nor should any couple. Buying a home is a massive commitment and the biggest financial commitment you will mostly likely make. At 19 and 20, you have not finished becoming “you”. Although legally an adult, you’re not the finished article. Also, I’m assuming most couples at that age have little experience of living together as a couple, or of running a household. A little google-fu suggests that the average relationship in your 20s will last just over four years. Unfortunately, I see the same pattern time after time in my job and my acquaintances. It goes something like this:
- Young couple scrape money together for a house.
- The couple get married still in their early 20s.
- A baby soon follows.
- The combined stress of owning a home, paying a mortgage, working a job all combine and the relationship suffers.
- Divorce and arguments about what to do with the property follows.
My advice to any couple, regardless of age, is to live together for at least a couple of years before buying. Don’t think of the rent as wasted money, but as an investment to make sure you are really suited for each other. If you break up, it’s easier to exit a tenancy than a mortgage.
I mentioned before that I felt the young couple in the ladbible story had made a few mistakes. Buying too young is just one of them, but it would not have been so bad had they bought a smaller, older property. Instead, they went for a new build over three floors. In terms of affordability, they have purchased the property for £222,995. Of which, it seems they have taken a 20% Help to Buy equity loan and then put 5% down themselves. £222,995 x 5% = £11,149.75. That seems about right with their £13,000 savings when you factor in legal fees, valuations and whatnot. The mortgage will be for £167,246.25 (75% of the purchase price), which is 4.5 times income. That sort of income multiplier is pretty much at the limit of what a high street lender will consider. No doubt, as a first-time buyer they will have a decent introductory interest rate, but what about when that ends? I would imagine they have bought a large house to fill up with kids – it’s what most couples typically do. The thing is, if they could only buy the house with help from family, the Help to Buy partner, and the bank, then how will they afford it when rates go up and they have to start paying bills and potentially look after their own family?
Let’s have a closer look at the Help to Buy scheme as well. The couple seem to have taken a 20% equity loan using this scheme. This would amount to £44,599. Normally, no interest is charged for five years. Following that, they must start thinking about paying the money back. Normally, people approach their lender to borrow the money to pay the equity loan off. This is where things can get interesting. Assume for a moment that the house increases in value by just 1% per year. In five years, it will be worth approx. £234,370. When the Help to Buy people ask for their 20% back, they are not asking for £44,599. No, they are asking for 20% of the current valuation, which in this example is £46,873. 1% as an annual increase is probably very unrealistic and it likely that values will increase much more quickly. Assume a 3% annual increase, which is not beyond the realms of possibility, then they will have to pay back £51,700. There is no such thing as a free lunch.
If you are young, and single, and you can afford to buy a property then it makes sense to do so. If you are a young couple and you have not lived together before in your own place I would strongly suggest renting briefly before buying. You don’t really know someone until you’ve lived with them, and as I said earlier it is easier to exit a tenancy than a mortgage.
Social Media is unhelpful at times and this sort of article serves no purpose. It does not help anyone. The only part of it that is vaguely helpful is that it mentions the Help to Buy scheme which can be useful in certain circumstances. However, any decent article would have gone into detail about the pitfalls of the scheme, namely that the equity partner does not loan you a cash amount but rather a percentage of the property’s value which can change over time. With the scheme you can end up owning much more than you originally borrowed if your property increases in value.
Final Notes
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