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With the price of property ever increasing and no sign of the long awaited bursting bubble of the housing market, we ask what can young first time buyers do to gain their freedom and set up a home of their own in such an expensive arena and what is a mortgage anyway?
A promise to pay
On every note of currency in circulation in Britain today there is a promise to pay the bearer a sum of five pounds, ten pounds or whatever. Given that promise the piece of paper has become the money itself. Originally there was only the currency in circulation that equivalent to all the gold reserves held in the vaults of England. Not any more though.
The same is true of the buying a house. If you see a property for sale at say, £150,000 nobody expects you to have £150,000 to pay for it. (There are of course those lucky few who do have the readies, but they are unlikely to be reading this article). So, in order to get the house that you want, you borrow that amount and promise to spend twenty five years or so paying it back along with all the interest.
The magic mortgage
Let's say you have a bit of cash, let's assume that your beloved auntie has recently died and left you a small fortune, which is handy, and your parents help you out a bit to buy this house that costs £150,000. Let’s say that despite advice to the contrary, it’s in such good condition and you find the current owners so pleasant that you decide to pay the asking price. So, you stomp up a deposit of £50,000. The remaining £100,000 will be your mortgage, your loan.
Traditional High Street borrowing
Let’s assume that you borrow from a traditional High Street name, such as the Abbey National. They will offer you the £100,000 and a variety of options as regards the interest. As a first time buyer it is vital that you understand the significance of the interest rate.
Unlike personal loans the interest rate can vary. This fluctuates on all loans depending on the base rate set by the Bank of England. They use interest rates to try to control the economy of the country. So, if the governor of the Bank of England raises interest rates by 0.5% that will have a significant impact on your monthly repayments against a mortgage of £100,000.
One of the products that your lender will offer you is a fixed rate mortgage. This will be fixed for a period of between typically two and five years, sometimes more. Other options might include a capped rate which means the rate can fluctuate up to a certain figure, but not above it. Both of these types of mortgage are useful if you are on a tight budget.
You should always speak to somebody to get actual figures of how much your repayments would be if the interest rates rose by a few percent so that you know when you might get into trouble with the repayments. This is something that you should do before you consider how much of a loan you can afford.
The ladder and when to get on it
Waiting for the house price bubble to burst might be an appropriate choice, or it might not. Nobody can guess what the market is going to do. It has for the last few years neatly avoided doing what most experts predict. So, if the experts are fooled then what chance do us mere mortals stand of predicting what it will do?
With prices going up all the time if you want to buy a house or a flat, then the sooner you get on the ladder the better. But whether you want to stretch your finances with a mortgage ultimately has to be a decision that only you can make.
Many developers are building "starter homes". These are small properties priced so that people can make a start on the ladder. Once you have a property and you can increase its value, over and above the market rises, you can sell it. Making a profit will allow you to buy a slightly more expensive property without necessarily having to increase your mortgage by a lot. In this way you can slowly climb the ladder.
A moving story
The alternative is if you live in a region of the country that is expensive, (such as the South East), then you might consider moving to a cheaper region. The North South divide is still quite noticeable and so what can only buy a small property in the South can buy something quite substantial 'up North'. But this does assume that you can either work from home or expect to get another job where you move to.
The decision you have to make is, does it really matter if you are on the housing ladder or not?
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