When coming to buy a house don't make the mistake of only looking at your how much you earn. Just £5,000 of savings could make or break your dreams.
You may be thinking you will never earn enough money to own a home so why bother saving. I hope to convince you that this is just not the case and you should begin saving right away as you may not realise what difference a few grand can make later on.
You may look at your friends who are in a couple and, combined, their salary is of course way more than yours on its own so you may think you will never be able to afford as much as them. Lets run through a couple of examples to see if that is true.
You are single and you have an annual salary of £35,000. You live at home with your parents and you have managed to save up £20,000 over the last few years.
We have an article on how much mortgage you can borrow and it is worth a read but lets keep things simple and say you are a standard employee with a salary of £35,000 before tax without bonuses or other complicated bits. Most lenders will multiply this by 5 meaning you could borrow £175,000. You also have that £20,000 in savings remember so these add up to £195,000.
Like your friend in scenario A you have an annual salary of £35,000 but you also have a partner who earns £25,000, making a combined income £60,000. Together you have £15,000 in savings too.
When the mortgage lenders multiply your joint salary by 5 you could be lent up to £300,000 which is approaching double what your single friend could borrow. Add your savings of £15,000 to this and you have a grand total of £315,000! Can you really buy a house that expensive?
As discussed in our previous article what type of house can you afford you must never forget moving costs as these could change everything. Moving costs must come out of your savings and so they will of course reduce your deposit. The more your moving costs the less deposit you are left with. Let's go back to our examples:
We decided in scenario A, your salary of £35,000 and your savings of £20,000 would make £195,000 in total but we didn't talk about moving costs.
Stamp duty on this sort of price range will be a bit less that £2,000 and so will the other moving costs. This will add up to between £3000 and £4000, lets be cautious and say £4000. If you take this out of your savings you are left with a deposit of £16,000 and a house value of £191,000. This means you have just over an 8% deposit which, since the help to buy scheme was introduced, is a bit more than you need so that is great.
In this scenario you and your partner's income would enable a huge potential mortgage of £300,000 which, combined with your £15,000 in savings, would make £315,000. However, is this realistic when we look at moving costs too?
At this level stamp duty would be calculated at 3% meaning you will have to pay £9,450 in stamp duty alone. Add say £2,000 in other fees and the amount left for your deposit is minimal! As discussed in how much mortgage can you borrow, the amount you can borrow ultimately comes down to two things: how much you earn and the percentage deposit you have. At this rate, you almost need a 100% mortgage which as good as don't exist anymore.
Okay so let's reign it in a little. Let's go all the way down to £250,000 houses which is the highest amount in the 1% stamp duty threshold. You will now owe just £2,500 in tax which is a saving of around £7,000! So, take this and your other legal fees from your savings and you will be left with just over £10,000.
£10,000 of deposit on a £250,000 house is still less than 5% which means you are still unlikely to get a mortgage! If you come all the way down to £200,000 houses you will then be able to claim a 5% deposit after all your costs have been deducted.
Scenario A now lives in a £191,000 one bed flat in suburban London and is happy. Scenario B now both live in a lovely £200,000 one bed flat in the same road as their friend Scenario A and they are happy too. Scenario A is slightly jealous of Scenario B's superior kitchen. These scenarios are fictional by the way but I like to think everyone ended up happy.
Hopefully we learnt that there are two parts to what you can borrow, your income and your savings. Scenario A was limited by earnings, Scenario B earnt a lot more but were limited by their savings. I'm sure both parties will be very proud to be property owners and having secured a place on that ladder.
These examples really go to show how even £5,000 of savings can make such a huge difference and why it is so important to start saving as soon as possible. For help with savings read our great guide to saving for a house and start now!