This is a three part series about how I bought property including my flat in London. The first post can be found here.
Getting My Deposit Together…
The first deposit I saved was in 2005. I was living in London earning £25,000 and saving £400 a month. By the years end I had my deposit and an expired visa! I blew all the money on a last minute European tour.. I hadn’t travelled like I had intended and panicked that I would never be able to return. Ever. 20 countries in 30 days seemed smart!
I didn’t know about the Excess Baggage company and rocked up to the airport 20kgs over. Depressed to be leaving, and in hindsight physically ill from too much wheat and dairy, I paid £500 to the airline without blinking. I returned to Australia with £43 and absolute fear that my Dad would find out!
I saved essentially 25% of my take home salary by doing everything that was free in London. There is so much if you look for it and more now that museums are free. I didn’t eat out much and always made my own lunches. After I paid my rent and bills, bought some food and my travel card I had £50 a week to play with. I quickly learnt that a night out or an extravagant lunch with bill splitting friends wasn’t for me. I didn’t have the internet and only rang home every three months. I had my hair cut at the Toni and Guy training academies and beauty appointments in Old Street, which was extremely dodgy at the time!
This first time I bought I had lived at home for a year and a half saving. I was studying my masters with the plan of qualifying for a visa to return to the UK. My parents have always made my sister and I pay rent unless we were studying. I took advantage of the low terms, $100 a week. I freelanced in the advertising industry, earning a full-time wage for three actual work days. Those days pre GFC were fantastic! I had no social life, made few friends and the money built up in the bank. I knew I would need it to return to the UK and my biggest expense at the time was a personal trainer. I was keen to lose the 20kgs I had put on whilst previously living in London!
Then the GFC happened, all my UK friends advised me not to come and it made sense to use the money towards a flat. My parents were moving cities and I was able to take advantage of a small wobble in the Australian market.
For my third deposit, in London, I rented a three bedroom flat in SE London, where the subrent for two rooms more than covered the total flat rent and bills. I found that most rooms rent for £800 each and the flats monthly rent was £1250. My landlady knew that I was subletting and didn’t mind provided it didn’t impact her. I used a legal contract found online to cover myself.
It was one of the best flats I’ve seen in London, ex council meaning the proportions were great, split level with bedrooms upstairs and living downstairs. All double glazed and insulated, we rarely had to run the heating for long. I would sleep with the window open through winter! It was a good life and at one stage my sister was able to live with me too and I covered her rent.
The UK government promotes saving through an ISA and this is a great scheme. If you can take advantage and get free money, why wouldn’t you? I’d give you the same advice about pensions! The government will not allow new ISA after 30 November 2019 so get started. You can deposit as little as you like as long as it is under £200 a month.
On top of your loan deposit there are other costs to consider. My UK flat required me to pay £2500 in advance for the service charge and ground rent. Legal fees were another £1000 and for some strange reason here you also pay the sellers legal fees, another £1000. Go figure!
As I was buying a new build the developer also wanted various deposits at certain times throughout the build. I secured the flat with £2500 and they wanted another £5000 12 months before completion. I spoke with the developer a few days before it was due, who agreed to waive the need for this deposit. They would get the money from me later when we completed the exchange. I didn’t see the benefit in them having £5000 of my money sitting there when I could be earning interest from it.
All up I needed £30,000 to secure the loan and pay all the upfront costs to be handed the keys. Wow! That is a lot and I am sitting here quite proud that I did this for myself!
Getting A Mortgage…
Ask around and find out who your friends have used for mortgage broking. Mortgage brokers use a system that shows all banks offers and can sort by your requirements. I found it quite fascinating to look at the different variables. The banks will be paying the mortgage broker once you have signed. Some brokers charge an additional fee especially if they are based in London. I found one outside of London as they tend not to charge a fee.
Stop. Consider the mortgage amount that is being offered and the monthly repayment amounts. This is the time to put a budget together if you don’t have one to understand your monthly costs. My London flat costs me £1600 a month for my mortgage, service charge, ground rent and utilities/internet/tv licence. Ask the mortgage broker to advise you how much the repayment will increase each month if there is a 0.25% interest rate increase. For my mortgage each increase in rate of 0.25% is another £40 a month. Knowing these figures will help you understand what your maximum payment threshold is. You can lock in your mortgage and repayments, typically for two years. However, it is good to be prepared in case rates go up during this time and when you renegotiate your mortgage repayment is higher.
Don’t feel like you must take all the money on offer. My parent’s first mortgage offer would have meant nearly all their monthly income went to the mortgage. What about food, bills, fun? The banks at the time didn’t consider this. Now, post crash, the banks are meant to be more responsible. I was offered £320,000 for a mortgage in London but I didn’t want to spend over $300k and brought my flat for £286k. The difference in repayment amounts was £150 or my grocery budget for the month! Typically, banks will offer 4-5 times your annual income. Your % deposit will then influence the interest rate you are allocated. The higher percentage deposit you have, the smaller the interest rate. This is a result of the bank viewing you as a lower risk and rewards you as such.
Another trick that will shorten your mortgage is to request a shorter term. Most first home owners will be offered loans of 25 or 30 years. You can ask for shorter terms of 10 and 15 years. This means you are paying less interest overall and paying it off a lot earlier. Your mortgage broker can adjust the term quickly on their software, to determine what works best. Again, understanding how much you can really afford on your repayment each month will help you make this decision.
Weird part – you don’t get a mortgage offer until you have made an offer on a property. This can be a little confusing and there is a small risk that things will change. This happened to me. I was still able to borrow the amount I needed for the property overall, but the banks had decided within a space of a week to ask for a higher deposit amount. Initially the ask went from 5% to 20%. No one has that laying around let alone me. Fortunately, my mortgage broker was able to negotiate to 10%. Quite stressful as I had put down my £2000 deposit for the property and was at risk of losing this.
Finding My Flat…
Everyone has an idea of the type of house or flat they are interested in. For my first purchase I really wanted a 1 bedroom flat, that was modern, and I was happy to do some repainting but wasn’t really interested in new bathrooms or kitchens. Once I knew my budget I started looking around and location was dictated by availability. In Australia most people live in houses and the stock of flats are typically in the very inner city. Housing doesn’t move that fast which meant I could see a property online, view it on the weekend and it was still available a few weeks later! This allowed a lot of time to compare and really hone in my requirements. My budget was proving difficult and I had conceded I would have to purchase a studio; the upside of this was that they were all brand new!
For the London purchase I was completely open minded about location. I had been renting in Blackheath for four years, loved the openness and tree lined streets of SE, but was happy to go where my budget allow. Once I had confirmation of how much I could spend, I took a tube map and used Zoopla to help me figure out where I could afford. After a few quick searches for 1-bedroom flat prices, in Zone 3 appeared affordable and one spot in Zone 2. London is like Doctor Who, always regenerating! Knowing this I researched the areas to understand future planning and how this might increase the value of my purchase. At the time I also read this article about small living and it inspired me to consider a smaller flat further in.
Understanding your mortgage limit is key before you start even looking at home porn. I implore that you have this information before you start looking. I have two lots of friends feel heartache having set their sights on living where their budget doesn’t allow. I chose to purchase off plan in London to avoid being gazumped by another’s offer or have the seller pull out. This also meant I was able to secure the flat a year before it was ready, saving more of a deposit.
This is a three part series. Part 3, publishing next week, talks about completion dates and the realities of moving in. Asset rich, cash poor! If you have any questions about home ownership or anything I have spoken about here I am more then happy to discuss. Write a comment or contact me in my DM’s on instagram.