7 Tips to Get on the Property Ladder
Despite the much publicised problems in the US Housing Market, there are still many long term advantages to buying a house in preference to renting.
Buying a house has historically been a good investment; since 1945, house prices have increased faster than inflation and have also outperformed the stock market. Also, buying a house gives you the opportunity to live rent free when you have paid off the mortgage. Mortgages do fluctuate with interest rates. However, generally, mortgages become easier to pay over time. If your mortgage payments are currently $800 a month, this may seem alot, but if you income rises, then as a % of income, your mortgage will eventually fall.
Despite the financial benefits, buying your first house can prove difficult because of the high prices we currently face.
These are some tips for buying your first house.
1. Save a deposit.
As soon as possible try to put money aside for a deposit. If you have a good sized deposit, mortgage lenders have more confidence in lending bigger amounts of money. This is because you are less likely to suffer from negative equity. The problem is that to save a decent % of a house can take many years of careful saving. However, with house prices currently stagnant, it has become a little easier.
2. Borrow From Parents.
Depending on your circumstances, this may be an option. There are several drawbacks to this approach. But, for many it provides the only realistic hope of getting on the property ladder. Parents may be able to release equity from the value of their house and lend you money (hopefully for a very low interest) this can provide the necessary deposit to buy your house. Many parents are willing to do this because they realise that their generation has benefited significantly from rising house prices. In extreme circumstances parents may be willing to act as a guarantor for your mortgage.
3. Joint Mortgage.
It is becoming increasingly popular for young single people to combine their incomes with others so that they can afford a mortgage. Their own salary is insufficient. But, by buying with other people you effectively double your income, and this can enable you to buy a house. However, there are drawbacks. Firstly, you only will only own a 50% share in the house. Secondly, if you fall out with the other person, it can create an awkward situation, both financially and domestically.
4. Interest Only Mortgage.
This means you only pay interest on your mortgage loan. This means it is a cheaper repayment. However, there is a big disadvantage. At the end of the 30 year period, you still owe the entire mortgage loan. Interest only mortgages will only work if you can find an alternative way to invest in paying off the debt.
5. 50 Year Mortgage.
A 50 year mortgage means that you spread repayments over 50 years rather than the standard 25 years. It means that monthly payments will be lower than a 25 year mortgage. The drawback is that you end up paying more interest payments over the course of the mortgage. However, it is likely to still be a better option than renting. Also, if you income increases in the future, you can always reduce the mortgage term at a later date.
6. Move to a Cheaper Area.
House prices in some areas are much cheaper. If you are willing to move to these areas then you can make buying a house a real possibility. Maybe in the future you can move back to more desirable areas. It is worth bearing in mind that cheaper areas do not always mean lower quality. For example, some areas have a premium because they are close to good schools. It is worth researching carefully average house prices in different areas.
7. Self Certification Mortgage.
If you feel frustrated that banks won’t lend more than 3-4 times your income you might like to consider a self certification mortgage. Basically, a self certification mortgage enables you to state your likely income. In practise this can be a way to borrow more than under standard circumstances. Given the recent problems with sub prime mortgages it is advisable to be cautious when proceeding with this option. I mention it mainly because it is what I used to buy my first house, 3 years ago. Buying a house was a little more expensive than renting. But, self certificating was the only option to borrow enough capital. Do bear in mind, if you borrow a high income multiple (5 or 6 times income) you will struggle if interest rates rise significantly.
Getting on the property ladder is not easy for our generation. It is likely you will have to make some sort of sacrifices. However, the alternative of renting is often even more unattractive. Which ever option you choose make sure you don’t go beyond your financial limitations.
Tejvan Pettinger works as an Economics teacher in Oxford. He writes a blog about Mortgages and Finance. This Includes articles about the Housing Market, getting out of debt and paying off your mortgage early
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Comments
Peter says on September 11th, 2007 at 1:06 pm
#4, 5, & 7 are BAD ideas for most people.. the mortgage crisis we’re currently in can be attributed to these options..
Jason Mansell says on September 11th, 2007 at 1:45 pm
I agree with @Peter and will go as far as saying that this article is very irresponsible. The only good idea, IMO, is number one. Then and only then can you afford a house. Especially in with the real estate bubble that we are still in. Yes, still. I suppose number six is fine, too, but if it doubles your commute then you are likely to regret it over time. There is nothing wrong with renting until you can afford to buy a place!
Tejvan Pettinger says on September 11th, 2007 at 2:16 pm
It depends on your individual circumstances.
I bought a house in Oxford, UK, 3 years ago. It was a self certification mortgage, I borrowed from my parents and the mortgage term is 47 years.
My Mortgage payments are lower than the cost of renting and it is a good investment.
Of course, the misuse of the above factors can contribute to the problems we see in US housing market. But, also for people like me they can be very helpful. I am personally glad I was able to get an “unconventional mortgage.”
Christi says on September 11th, 2007 at 2:59 pm
As a Realtor, I shudder when I hear about “ways to get onto the property ladder”. In today’s US market, I agree with Peter and Jason. Number One is the only way to truly afford to get onto the property ladder in the long term.
For many mortgage companies, number two is not an option, because it doesn’t show the long-term financial security and ability to pay a mortgage. (Is Mommy or Daddy going to continue to bail you out if you can’t pay?)
I have seen what happens with joint mortgages and interest only mortgages. It’s horrifying when individuals actually have to bing money to the closing table to sell their property. Joint mortgages are only acceptable when all parties understand their legal obligation - you can have your credit rating ruined because someone else didn’t feel like paying the mortgage anymore.
Move to a cheaper area? That’s a terrific idea - if you can sell your existing property, which, if you haven’t noticed lately, is becoming more and more of a challenge.
As far as a self-certifying mortgage, you will be hard pressed to find that option available, especially if an individual is trying to buy his or her first house. The majority of lenders just won’t risk that.
The best option for individuals is, in my opinion, to save as much as possible, put the 20% down to avoid paying PMI (private mortgage insurance) and DON’T BUY MORE THAN YOU CAN AFFORD ON YOUR CURRENT INCOME.
That’s unfortunately what got many people into trouble in the first place, and is causing the majority of sub-prime lenders to post significant losses due to foreclosures.
Don’t worry that you won’t be able to find a bargain in today’s housing market; worry that you will have wasted your money in a bad financing scheme getting you into a house you can’t afford.
Steve says on September 11th, 2007 at 3:04 pm
Another tip to save money and still buy the house you want is to purchase a home with a basement apartment.
My wife and I did this a couple of months ago and will be paying almost half of our monthly mortgage payment from rental income.
If you’re interested in reading up on my story, check out my article ‘Goal Setting - Our New Home’.
http://www.stephenmartile.com/?p=45
Stephen Martile
Personal Development Made Simple
http://www.stephenmartile.com
Toby says on September 11th, 2007 at 11:21 pm
“since 1945, house prices have increased faster than inflation and have also outperformed the stock market.”
Please give the source for this statement. Also, please clarify which housing market and stock market you are referring to. Every article and book I’ve read claims the opposite is true (The US stock market outperforms US real estate over the long term).
I’m curious to read the source of this dubious claim.
kevin says on September 12th, 2007 at 8:07 am
This article is irresponsible and a complete joke.
Christopher Lotito says on September 12th, 2007 at 8:35 am
As a Realtor I’m pleased with this article, enough to share it with my readers: http://pequannock.blogspot.com.....-home.html
Honestly, it delivers what it advertises: 7 Tips. It also encourages homebuyers at a time when consumer confidence is historically low. If you want financial advice, go to a financial adviser. If you’re looking for an in depth of the mortgage crisis, go get your MBA then read the morning paper.
brandon says on September 12th, 2007 at 3:59 pm
This article is irresponsible and worthless. No wonder so many people are in trouble with advice like this floating around. Of course realtors and mortgage brokers love this….start thinking for yourself.
http://www.smartmoney.com/home.....story=rent
lizzbee says on September 12th, 2007 at 7:42 pm
Jeez, could you guys be any more irresponsible? All of the arguments the author has made and all of the tips, aside from #1, will get the first-time buyer into a heap of trouble financially for years, if not foreclosed upon. Shame on you!
Rob says on September 13th, 2007 at 8:07 pm
“since 1945, house prices have increased faster than inflation and have also outperformed the stock market.”
IMPOSSSIBLE.
Historically, Real Estate has been a horrible investment, only *slightly* outpacing inflation! I demand to see data suggesting that Real Estate outperforms stocks.
Im sure this was a very selective use of statistics.
Dan B says on September 13th, 2007 at 10:08 pm
Sadly, a bad and irresponsible article on a site that generally offers good advcie. How come this one slipped through the net?
Listen to your readers comments here and do something about this article [like deleting it].
pat says on September 15th, 2007 at 11:40 pm
Lifehack generally has great articles, this one is a travesty. Not to mention it has no real place in US markets- How many morons do you know that have a 50 year mortgage? FYI I live in NYC. This may not apply to Cleveland (foreclosure heaven), OH for instance.
I’ll reply to each point:
1. save for a deposit- 25% down is dogsh*t now. that means you have to rent & save twice as long.
-finance 105% (including closing costs) and pay mortgage + what you were saving or paying for rent your previous rent payment.
-put your previous rent payments into some high yeild fund (5-10% is fine (also consider 3% inflation per year) for a ballon payment (or automated mortgage payments later).
-make your mortgage payments bi weekly, 26 times a year vs. 12, you end up with one month on top)
-there are other methods too.
2. borrow from parents (wtf?!) - If you can’t make your payments, your parents will be pissed (and their credit ruined).
3. joint mortgage - might be good when your 25 and get married to some slut. then she takes your house 3 yeasr down the line when she catches you in a hottub with her sister. Besides all property owned by married people should be owned by an LLC that person who makes the money (wife or hubby) sets up, FOR THE EXACT REASON OF DIVORCE. Joint ownership will break up your family if one partner decides to do so.
4. interest only mortgage - probably the best piece of advice here, provided you have the means to pay it or or what to move and live in a high market area (nyc, bos, San Fran, London, etc) were property values always increase, and you don’t want to live there for say 30 years. 3/1 or 5/1 ARM’s are good if you don’t want to live in the place for longer than 3 or 5 years respectively.
5. 50 mortgage - wtf?? 20-255 extra years of interest payments
6. move to a cheaper area - spend more time commuting to work wasting days a year that could be used for vacation.
7. self cert mortgage - usually only works if you know a lender and have high income, but still a bad idea.
I’m surprised (but not shocked) that this type of info is coming from Oxford. Wow. These type of experts are the same people that lead us into the current mess…. the author Tejvan is on the side of the banks!!!!
pat says on September 16th, 2007 at 12:24 am
sorry corrections, i thought the comment section would be more intelligent and preview the comment before post:
4. 3/1 or 5/1 ARM’s are only good if your GOING TO LIVE AT THE PROPERTY for 3-5 years respectively, NOT 3-5 years or more as orig stated.