Home Sweet Home or Headache?
| Affordable? | Birds and Bees |
Where are you on the property ladder, and where should you be? When property slumped in 2007-08, many homeowners were on a rung too high for their income - and some ended up homeless.
How much can you afford?
This is a logical question for property hunters, whether first-timers or owners looking to trade up.
But it is also important to address the related and often-overlooked question: How much will your property need?
Tenants, students and those still living with mum and dad generally don't shell out for repairs and general maintenance. Things break and get fixed and, so far as they can see, no money has changed hands.
So when they become homeowners, their awakening can be extremely rude. Most homeowners know that there is always something in the property that needs fixing. Many homeowners know that property can seriously drain resources.
Often, It starts on day one and with a surprise that should not be a surprise. Your door lock. The previous owner has surrendered their keys, but maybe there is a stray set somewhere. Why take a chance? Buy new door locks.
As other jobs surface, you may want to save money by doing it yourself. Do you have tools? What about cutlery for your first meal? Garden equipment?
The size of your loan is not necessarily what you can really afford.
More on Affordability
Affordability was specially written for Property Without Pain and has links to additional pages with information related to affordability and costs associated with property ownership..
The More You Save...
Welcome to the world of Loan to Value. The higher your deposit, the less interest you pay.
Example: two houses, each selling for £500,000. Buyer A has a deposit of £100,000 and takes a loan of £400,000. Buyer B has a deposit of £150,000 and takes a loan of £350,000.
Buyer B benefits in two ways: lower monthly payments because the loan is smaller, and a further bonus in a lower rate of interest. For example, Buyer B might have to pay only 4% whereas Buyer A will pay 4.5%.
"He would sell his London house: he had decided. Property values in London had risen out of proportion, he had heard it from every side. Good. He would sell and with a part of the proceeds buy a cottage in the Cotswolds. Burford? Too much traffic. Steeple Aston, that was a place."
John Le Carré, Tinker Tailor Soldier Spy, 1974.
Loan-to-Value is usually presented as a percentage. In the example above, Buyer A's LTV is 80%, and Buyer B's LTV is 70%. On a loan of £100,000 or more, Buyer B's savings might run to thousands of pounds annually.
How Much is it Worth?
"Location, location, location" hogs all the attention but price can be all-important. For sellers, an asking price just a few thousand pounds too high can put off genuine buyers and delay the sale by many months. Buyers don't want to overpay. And sellers don't want to get less than their property is worth.
Numerous internet sites - many are described and listed on the Valuation page - provide valuable information and calculation tools.
Calculations
How much of a mortgage can you get? Many property and personal finance websites provide electronic “calculators” to help you determine how much of a loan you qualify for. Calculators are, in effect, charts or tables in which you key in your income, savings and other assets on one side, and your expenses on the other. From the totals of both, the calculator determines the maximum mortgage you supposedly can afford.
How good are these calculators?
They are very good at quickly and accurately crunching complicated numbers and formulas. Some are better than others: in calculating your expenses, for example, the best calculators jog your memory on such items as whether you smoke or not (if yes, add possibly several hundred pounds per year to your outgoings). They also get you to consider whether your new home will mean higher council tax or transport costs.
Even the best, though, are hopeless in predicting whether or not you will lose your job (or when). They are clueless about whether, when and in what direction interest rates will move. Their mathematical wizardry has nothing at all to do with your particular property and is in the dark on such vital questions as when your boiler will pack up and what the next bad storm will do to your roof tiles.
Can you afford to miscalculate?
This site contains several specially-prepared articles describing all sorts of costs associated with home-owning.
A Tale of Two Houses
1 - It was the best of houses, it was the worst of houses. A young family – true story – bought a detached period house, moved in, and hired a decorator - who reported that the walls were on the verge of collapse. Instead of a paint job, the house needed more than a year’s worth of massively costly and disruptive renovations.
2 - The sudden deaths of two boilers hit the newspapers recently. One occurred after the buyer and seller exchanged contracts but before completion, and the second shortly after the new owner moved in. Who should pay? In both instances, the failure was deemed due to normal wear and tear, not vendor deception. Each buyer was saddled with the unexpected cost of a new boiler.
Sellers versus Buyers
Sellers want the most they can get, buyers want to pay the least. Thanks to modern electronic technology, property valuations are more accurate than ever before but are nevertheless still uncomfortably inexact. Valuation tells you more about the tools and internet sites relevant for this vital aspect of conveyancing.
How Good is Your Mortgage Adviser?
True Story (August 2007): Punter goes to her bank for mortgage advice and asks the advisor to explain compound interest. The advisor says that she can't as she doesn't understand it herself. She explains further that she just plugs numbers into the electronic calculators and relies on those results. She doesn't do much more than that, and she doesn't know much more than that. Financial advisers and specialist mortgage brokers, on the other hand, do understand the underlying mathematics.
Independent versus Independent
A basic thing to know about your mortgage adviser: will they give you choices from one lender only, from a specific group of lenders, or from the whole range of possible lenders? And if you are also buying your insurance from that adviser, ask the same question regarding insurance.
Look, Signal, Manoeuvre
Most of us expect to offer a bit less than the asking price when we buy property - but are shy in other areas.
What about trying to get a break on insurance, estate agent commissions and other products and services? If you are selling a pricey house in a hot area, many estate agents will try to get a standard two or 2.5 per cent commission but may well take 1.5% rather than lose easy business. If you are insuring anything, get several quotes: some insurers charge twice as much as others for essentially the same service.
Price versus Value versus Quality
Expensive is not always smarter or better than buying cheap, but we often do get what we pay for?
For example, some internet-based insurance companies or online conveyancers are very attractively priced, but if you need to contact them, communication can be slow and awkward. If their website is down, communication may be nonexistent. And with each question, you may have to pay extra.
The PWP Affordability Collection
Affordability basic issues
Hungry House something always needs doing
Green and Greedy your garden will soak you
The Birds and the Bees predict unpredictable but inevitable expenses
Diary of a New Homeowner additional expenses at the coal face
Insurance
If you have a mortgage, building insurance will be mandatory, and even if you don't have a mortgage, it is highly advisable to cover yourself against the host of problems normally covered by buildings insurance. Contents cover is separate - and you may also want boiler insurance, mortgage protection cover, and a host of others.
Rebuilding costs vary from year to year. To calculate your costs, BCIS (Building Costs Information Service - a division of RICS) provides an online calculator (calculator.bcis.co.uk). This calculator page also has a wealth of related information, including a list of 14 items usually covered by buildings policies.
Payment Protection Insurance (PPI) - is it for you? The Financial Services Administration has an interactive page to help you decide (www.fsa.gov.uk/tables/bespoke/PPI).