How to escape the renting cycle and buy

Practical tips for first time buyers to get on the property ladder

Rosie Murray-West – Virgin Money Living Mentor

by Rosie Murray-West | Independent Money Mentor

Award-winning personal finance and news journalist

From everyday pleasures like putting up pictures, to long-term advantages such as family stability, we are all aware of the many benefits of owning our own home. Recent research shows that renters, on average, spend more than £1 million more than homebuyers over a 60-year period, while they also face uncertainty if their landlord chooses to sell their property.

For many of us, though, home ownership seems like an impossible dream. High house prices and the difficulty of scraping together a deposit mean that many British householders find themselves stuck in the cycle of renting. The good news is that more of us than we think can break this cycle and end up holding the keys to our own properties, if we budget carefully and research the options available to us.

1. The first rung of the ladder

Not everyone wants to buy a home straight away – the average age of a first time buyer has risen to 33 – and it is certainly true that there are some advantages to renting a home when you are younger. Renting gives you more flexibility if your job location is not fixed for the long-term, and you do not have to worry about home maintenance at a point when you are focussing on the early stages of your career (and maybe your social life, too).

However, life often becomes more stable as we get older, and thoughts naturally turn to property ownership. A recent study by TopCashback revealed that 95 percent of Millennials (those born between the early 1980s and early 2000s) would like to buy a property at some point, although only 40 percent were sure they would be able to.

Renters often become frustrated with the amount of money they are paying out to a landlord with nothing to show for it. Average rental prices rose over 3 percent to around £940 in the 12 months leading up to March 2019. At the same time, interest rates on mortgages fell, and it is nearly always cheaper to buy than to rent, both because in the long-term there’s a cost benefit to paying down on your own mortgage rather than paying rent to a landlord, and because with interest rates still low, monthly mortgage payments are mostly cheaper than the rental for an equivalent property. 

For many of us, the first rung on the property ladder seems a huge stretch away. To break the renting cycle, we need two things: a deposit of at least 5 percent of the value of the property we’d like to buy and the ability to prove to a mortgage lender that we are creditworthy enough to borrow a large sum. Meanwhile, the average amount that a tenant spends on rent is 30 percent of salary, increasing to 40 percent in London, which doesn’t leave much space to save.

2. Building up a deposit

In the circumstances described above, building up a deposit is very difficult. However, it is important to scrape together as much as possible, as those with higher deposits can access better rates of interest on their mortgages. It’s possible to get a mortgage with just a 5 percent deposit as a percentage of the cost of the property, but you will get far better deals with a 10 percent deposit, saving you cash in the long run.

The easiest way to build up a mortgage deposit fund is to spend less and save more. Focusing on your end-goal of home ownership could prove beneficial: research shows that those with a savings goal typically save £550 a year more than those without one. [Editor’s note: you may find our article, 5 habits of successful savers, gives you some more tips.]

Try some of the following tips to build a mortgage deposit fund as quickly as possible:

  • Get the government to help

The government will give you free money to help you to buy a home if you open a Lifetime ISA. This specialist account allows you to save for your first home or for your retirement, and is only available to people aged between 18 and 39 years old.

The Lifetime ISA allows you to save up to £4,000 a year and the government will put in a maximum of £1,000 a year until you are aged 50. This can be used for your first home deposit (for homes under £450,000) or withdrawn when you are 60.

  • Be a ruthless budgeter

It’s a cliché to tell people to pack lunches and stop buying takeaway coffee to save for a deposit, but it’s a cliché for a reason. These small steps really do add up, but it’s easy to feel that it’s not worth bothering with them because buying a home looks out of reach. Instead of despairing, use a budgeting app such as You Need A Budget, to work out where you could save more towards your deposit. By allocating funds towards each necessary spend you’ll be amazed at how quickly the pot grows. [Editor’s note: You may find this Lifesaving budgeting apps article a good read to kick start your money-saving mission.]

  • Swallow the short-term pain

Moving back in with your parents, taking a smaller room in the house so that it costs less, becoming a house-sitter or property guardian to save cash on rent – all of these are more drastic ways to save money in the short term. But if you can set a time limit on these life changes it can help you to grit your teeth when living conditions are less than ideal. [Editor’s note: This First Time Buyer Hub details everything you need to know about saving for your first mortgage deposit.]

  • Remember all the other costs

When saving for a deposit, don’t forget the incidental costs you’ll have to budget for too. These include stamp duty, legal fees, and all the costs involved in furnishing and decorating your new home. The average first time buyer property is sold for £209,000, but there is no stamp duty to pay on the first £300,000 of a property worth under £500,000 if you are a first time buyer. A second-stepper would pay stamp duty of £1,680 on the same transaction. So be sure to include all of these costs in your budget too, so you have a clear idea on how much you need to save up.

3. Affording a mortgage

While monthly mortgage repayments are often cheaper than rent, you will have to demonstrate to a lender that you can afford them before they will lend you the money. The following steps could help you get closer to your home-owning dream:

  • Get your credit record right

Mortgage lenders will scrutinise your bank statements and your credit records when you apply for a home loan. So be sure to plan your expenditure carefully shortly before putting in a mortgage application, and keep a close eye on your credit record using free services from credit checking firms such as Experian and Clearscore – and remember to check that you are on the electoral roll too. [Editor’s note: Check out this article to find out more about What a credit report is and why it’s important.]

  • Think laterally

Schemes and specialist products exist to help first time buyers get only the property ladder, but they aren’t right for everyone. If your parents are willing to help, you could explore the option of a Joint Mortgage Sole Proprietor product, in which mortgage applicants who do not have the affordability to get a mortgage on their own can do so with the help of a joint applicant. Another option is a Help to Buy equity loan, for which the Government lends you up to 20 percent of the cost of your newly built home, so you’ll only need a 5 percent cash deposit and a 75 percent mortgage to make up the rest. You won’t be charged loan fees on the 20 percent loan for the first five years of owning your home. Alternatively you could consider a Shared Ownership scheme or buying with a friend. If you use one of these methods, ensure you are very clear about who is responsible for what, as well as what you actually owe.

  • Shop around

Mortgage lenders have different criteria, so even if one lender won’t consider you, another may approve your mortgage. If in doubt, a specialist mortgage broker may be able to help you find a lender to fit.

4. Next steps

Hopefully now you can take some of the tips above and put them into practice to start saving for your first mortgage deposit. Just remember, the more disciplined you are in saving up your mortgage deposit – and not being tempted by those impulse purchases – the quicker you’ll be holding the keys to your very own pad. [Editor’s note: When you’re ready to start looking for a new home, make sure you follow these house viewing tips to ensure you buy the right property for you.]

Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.