Money: A User’s Guide. Laura Whateley
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are saving up to buy your first home use either a Lifetime ISA or Help to Buy ISA and you get some free cash from the government. See more details in savings chapter 5.
Help to Buy Equity loan
This government scheme has been extended to run until 2021. The idea is to help those with small deposits to access bigger homes and better interest rates. By its terms, you have to buy a new-build property from an approved house builder, with a 5 per cent deposit, receiving a 20 per cent loan from the government. This means you can take out a 75 per cent LTV mortgage; those buying in London receive a 40 per cent loan, so they need borrow only 60 per cent LTV.
The 20 per cent loan is interest-free for the first five years, then you have to pay interest at initially 1.75 per cent, a rate which increases in line with CPI inflation (for more on what that is, see the savings chapter 5). In exchange, the government, like the bank, owns 20 per cent of your property. You pay this off if and when you move, or you can pay it off sooner if you have managed to save the money.
Your mortgage should be a lot more affordable because you have a lower LTV despite your small 5 per cent deposit. Typically monthly payments are reduced by a third compared with what you would be paying with a 95 per cent LTV. As a result many first-time buyers using Help to Buy have been able to afford a slightly bigger property. There is a limit on how much you can pay for your home. In England this is £600,000, in Wales, £300,000. In Scotland £200,000.
One of the downsides is, as some people who took out their Help to Buy loans five years ago are now finding, that if your property does not appreciate in price much you may struggle to repay the government stake and buy another home. If you sell you may find that you have gained little. Many will sign up for Help to Buy assuming that they will use the increased value of their property to remortgage and pay off the equity loan. There are also complaints that those who come to the end of their original Help to Buy mortgage term may struggle to remortgage on to a better deal; there are fewer Help to Buy eligible remortgage products available.
You can find more details on the Help to Buy website (helptobuy.org.uk).
Shared ownership
If you cannot afford a whole property you can actually buy part of one, from just 25 per cent of it to 75 per cent of it, through the shared-ownership scheme. You rent the rest from a housing association, as long as you earn less than £80,000, or if you are buying in London, £90,000. This is per household though, so combined income if you are a couple. You can search for eligible properties on sharetobuy.com.
Take a three-bedroom flat available in Cambridge. Its full price is £415,000 but you can buy a 30 per cent share in it for £124,500, which requires a mortgage deposit of just £6,225. Your monthly cost would be £1,407, made up of a £624 a month mortgage, rent of £666 and a service charge of £117. Sounds like just the solution, but there are a lot of catches with shared ownership, so do your research to see if it actually suits you.
First, that massive service charge. Though you own only, say, 30 per cent, you have to pay 100 per cent of the service charge, which is a monthly charge you pay the housing association for maintenance. Service charges are infamously expensive, and notorious for rising steeply. Likewise, rents on the proportion you do not own may also rise and become less affordable, though rents are less than would be charged on the open market – usually 2.75 per cent of the property value per year. You can start to buy more shares in the property, up to 100 per cent of the whole thing, in a process known as staircasing, but again, if property values rise you may not be able to afford to do this. Also you may be limited to how many times you can ‘staircase’, so you couldn’t for example buy just 1 per cent each year.
Shared-ownership mortgages come with higher interest rates than conventional mortgages. There are also certain restrictions on what you can do with your home because, really, you are still considered a tenant. You cannot sublet it, for example, which makes life a bit difficult if you have to move elsewhere for work. If you fall behind on rent there is the risk you will lose the property.
You can always sell and realize any gain you have made on the portion you own, supposing that house prices have risen, but the housing association has a right to find a buyer before you sell through the open market.
Debt is a dirty word, so much so that a long time back the financial services industry rebranded it as the much more enticing ‘credit’. But although many of us often called ‘generation debt’ are up to our eyeballs in it, not all debt is created equal, or owed equally urgently. You should not unnecessarily freak yourself out about borrowing money to the detriment of its many positive benefits (your own flat, university degree, iPhone, car, good credit score) or of getting a decent night’s sleep.
Wrapping your head round how to borrow well is also one of the most efficient ways to avoid wasting money, which is why I think it is a topic worth addressing ahead of how best to budget, or start a savings account or pension. There is no point in having money set aside if you are paying out hundreds of pounds in interest on overdraft or credit-card debts because you have not managed to clear them quickly enough.
If you were to borrow £3,000 on a credit card, with an interest rate of 19 per cent (some credit cards now charge interest rates of over 50 per cent), and only make the minimum repayments, starting at £74 a month and reducing over time, it would take you twenty-seven years and seven months to pay it off, and you would have paid an additional £4,192 in interest in the meantime, highlighted the Financial Conduct Authority, the financial services industry regulator. That £3,000 would have cost you £7,192. If you could stretch to repaying £108 a month, by not saving until the debt was cleared, for example, you would get rid of it in three years, and pay £879 in interest. The debt would have cost you £3,879.
I will come on to how best to have and use credit cards, but, having dealt with mortgages, I’ll start with the second-biggest debt you are most likely to be juggling – a student loan. Ironically, that is the debt that should cause the least insomnia. I will then outline the debts that are far more pernicious, and how best to handle them in a way that helps you save money.
If you are mired in really messy debt with a bank or similar lender there are things you can do and people available to help you out of it, so please don’t let it harm your mental health. I have covered this in chapter 11 on money and wellbeing.
Student loans
Putting aside all the controversial politics of whether or not students should have to pay tuition fees, and the rising cost of living at university, you have to admit that student loans have suffered from a shocking PR job. We have all read the news reports about bright young people being forced into £50,000 of ‘debt’ that they will be lumbered with for the whole of their twenties, thirties and forties, at least. While this is technically true, the implications are often misunderstood. The connotations of the dirty D word can be dangerously offputting, especially if you have grown up in a household stalked by debt, or cannot rely on BOMAD to bail you out.
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