Life v Mortgage: Can You Afford Both?

Written by Karen Bryan

£20 and £10 notes diagonal 240You probably know at least one person or couple who seems to work constantly. They appear to work every day, perhaps in two or three locations, sometimes accompanied by Facebook statuses that tell their friends about their busy life. Do you envy their work ethic, or pity them for their situation?

I heard of someone who works at a gym in the morning, security at football matches or events in the afternoon, and the doors at nightclubs in the evening. He has a busy summer at Glastonbury and other events, but always in a working capacity. He probably has 10 days a year where he doesn’t work, which don’t usually include his birthday or the busy (and well-paid) Christmas period.

The reason for this punishment is a mortgage that is too large, which results in a house he’’s rarely in to enjoy. He’s by no means alone, because although mortgage interest rates are at a fresh low of 2.87% the average interest rate for a new buyer is usually higher, and perhaps as much as 5-6%. That’s a difference, on a £125,000 home with a £20,000 deposit over 25 years, of £186 a month – or more than £2,200 a year.

A traditional loan is different from a reverse mortgage because reverse loans do not require you to pay back any part of the money borrowed right away. What are the reverse mortgage pros and cons? – The biggest advantage is having no monthly bill to worry about. You simply request money against the cash value of your home and spend that money however you like. You will be under no obligation to pay it back for as long as you own your home. The loan balance with only be due when you pass away or reside elsewhere, such as in an elderly care facility. When you retire, a reverse loan can give you a way to have more cash available to help you enjoy your retirement and worry less about finances.

So those who are more likely to want the ‘life’ of going out, travelling, buying gadgets and regular new clothes, eating at funky restaurants and driving good cars, are most likely to have those spends curtailed. Cut down into the numbers and one can see where the problems arise.

The median wage for the UK is £22,044, which equates to take home pay of around £1,500 a month. If one deducts a mortgage of £600, council tax of £100, numerous bills such as utility bills, TV licence, car insurance and others, and you’re soon down to £800 or so. That also does not factor in Christmas, birthdays and other seasonal ups and downs.

The most heartbreaking aspect for aspiring homeowners is that these payments are often largely the same as when they rented. but because they have not been able to get the deposit saved up. If they have a poor credit history, from financial mistakes made as youngsters, gaining a mortgage may prove impossible.

The brutal truth is that budgeting to save for a deposit and the various other costs that will ensue such as solicitor’s fees, will require saving without the intervention of rich parents or lottery wins. Sites such as the Money Advice Service (MAS) can help calculate the damage, but only the saver will know what they’re missing out on as they save. Putting aside £100 a month would take almost 17 years for a £20,000 deposit; for comparison, at year two alone you’d have saved £2,400 which is enough for two flights to Sydney and £1,000 for accommodation. By year five, you’d have racked up £6,000, enough for a good second-hand car. And so on.

The simplest way of halving these problems in one fell swoop is obvious; get a partner. The 17 years would become eight-and-a-half, or perhaps one person could save for a trip to Australia and the other saves for the mortgage. Either way, your prospects become much rosier.

Another option is to try to beat the odds by buying a lottery ticket.

The mortgage market review initiated by the FCA in 2014 was designed to push lenders into being more stringent in assessing the finances of applicants, without completely emptying the market. The  conclusion is that if more people are being forced to organise their money properly so that they aren’t stretched to the limit, and more are also getting mortgages, then surely the message is getting through – buying a home doesn’t have to stop your life.