It’s a favourite pastime of older generations to berate millennials for eating avocado toast rather than saving for a deposit for their first home. But you don’t have to be a maths whizz to figure out that we’re going to have to skip a lot more than brunch to get on the ladder these days. In London, prices have jumped by close to 800% since the 1980s – the time when many of our parents were buying their first home. (My mum and dad, working as a taxi driver and a milkman, bought a beautiful Edinburgh garden flat in 1980 for – wait for it – £7,000, including furniture. Too bad they sold it – it’s now worth nearly half a million.)
But don’t despair. While it’s much, much harder for us, if you are earning an alright- ish wage, it’s not impossible. Making a five-year plan means there is time to start getting to grips with your credit score with the help of CreditWise® from Capital One, start saving (if you haven’t already), research the best savings accounts and financial options for you and look into the best areas to buy in.
We're fully aware that buying a property is not an achievable goal for everyone (especially in London, let's be honest) and there are plenty of things you can still do to invest in your future without owning bricks and mortar. For those of you who are determined to buy, taking a few steps now means getting on the property ladder will be that little bit easier.
Read on to find out more about our five-year plan for getting on the property ladder.
Start taking control of your credit score
To line you up for a mortgage, it’s a good idea to start managing your credit score. Lenders look at a credit score as a way of determining how trustworthy you are and, put simply, how likely you are to pay them back. This means they'll always check your credit score before they offer to lend you the money.
The good news is you don't have to pay to find out your score and see your report. For example, the CreditWise tool from Capital One is free and easy to use. After entering details like your name, date of birth and postcode, the tool will show your score out of 700, as well as helping you to understand what’s impacting your credit score both positively and negatively. You’ll get to understand what could be holding you back from having a stronger score, including making sure you’re on the electoral register and that you haven’t missed any financial payments such as a phone contract.
Jillian Thomas, managing director and chartered financial planner at Future Life Wealth Management, said lenders like to see people acting in a consistent and reliable way with money, which shows they are trustworthy. This includes things like making payments for your phone bill on time every month.
It’s not always necessary to have used credit previously in order to get a mortgage: I bought a property with my sister in 2015, and the only kind of borrowing I had was about £15,000 worth of student loans.
If you already have outstanding payments or have accumulated debt, paying that off as soon as you can is the first priority, according to Iona Bain, founder of the Young Money blog and agency.
"That doesn’t necessarily mean student loans – it depends on the year you graduated – but certainly anything with a high interest rate," she said. "Only making the minimum repayment over the long term is not a good idea."
Bain recommended setting up a direct debit for payday, ensuring you are steadily paying off any outstanding balances when the money is in your account. If you're not sure where to start with paying off your outstanding balances, you could speak to Citizens Advice who offer advice for free.
The sooner in the process that you check your credit score with a tool like CreditWise, the more time you have to make a plan to manage and improve it. This way, you'll be in the best possible situation when it comes to applying for a mortgage and your credit score is checked.
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Start researching where you want to buy
Once you know you’re on the right track with your credit score, it’s time to get serious about how much you need to save for your deposit. This will depend hugely on where you want to buy, and how much you want to spend.
"You need to have a clear goal in mind," said Bain. "It’s not enough having a vague ambition to get on the housing ladder. You need to know when, where and how you’re going to do it."
Oxford Economics predicts the average London house price will reach £1 million by 2030, so Bain advises researching affordable locations.
"Many younger people based in London and the southeast are frustrated they can’t translate their savings into a property," she said. "In London there is little chance for someone progressing up the property ladder even if they get on the first rung."
Bain recently relocated to Thanet in Kent, and chose an ex-local authority property, which is a popular option for younger people.
Thomas, who works in Sheffield, added that house prices are "vastly different" north of the M25. "I could buy a house in Sheffield for the same amount of money as a garage in central London," she said. In fact, several of my friends have purchased flats with bay windows and wooden floors for less than £200,000 in Edinburgh and Glasgow.
Websites like Rightmove and Zoopla show average prices in different cities, as well as how much they have grown over time, so it's worth checking these.
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Save, budget, plan
Now you're on the way to knowing how much you need to save. You've researched property prices and what a deposit looks like, which may start from as little as 5% for first-time buyers, but it looks like an awful lot, given your current outgoings.
Louise Oliver, a certified financial planner at Piercefield Oliver, recommended working out your outgoings and disposable income, and putting money aside as soon as you’re paid to put towards your house savings.
"Of course, you may have other commitments, but you can set up a direct debit for whatever you can afford – it means you don’t miss it and you’re pleased when you see the savings adding up a few months down the line," she said. "It’s one of those things you wish someone had told you years ago."
Oliver also advises making a financial plan for your future living situation, noting down income and expenditures as they would be once you’re living in the property.
"Put yourself in the situation of being in that house and roll the numbers," she said. "What might take the train off the tracks? How long are you paid if you’re ill and how would you cope? It’s advisable to have a contingency fund of at least three months’ income to cover emergencies."
While some people will be happy shopping around to find the best savings account with the highest interest rate, other first-time buyers might be keen to take advantage of some government-backed products, like the Help to Buy ISA or the Lifetime ISA (LISA). Other options include things like Help to Buy equity loans and shared ownership.
Bain recommended spending time researching which product is right for you before investing. Ultimately, it comes down to preference and personal financial situations, so being aware of what's out there is key.
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Speak to your friends and family
With a couple of years still to go, it's time to figure out if you’re going to buy alone or, if you're lucky enough to have family help, whether you're going to use that.
Thomas said that some young people are in the fortunate position of getting help from the family, even if the money is a loan – for example, parents might consider loaning money to their children to offset a mortgage.
Bain purchased her house with the help of her dad. "We did lay it out in clear terms and when I would be able to pay the money back," she said. "If you don’t lay it out in writing, whether it’s a loan or a free gift, it could lead to problems further down the road."
First-time buyers may also consider making that first purchase with a partner or friend.
"It’s a way of getting a foot on the ladder but there could be problems as to who invested the most or spent the most on a property, and there’s the risk that one person will want their money back," said Oliver. "Just keep a record of who has paid what, as that’s where the arguments come in."
If you do decide to go in with a friend, partner or family member, it’s worth checking in with them about their credit score and finances too, as there is a chance that how they manage their finances could affect yours in the long run. Of course, it really depends on the situation.
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Put aside even more
Put aside as much as you can in those final months, as the experts reckon you will always need more than you think. Thomas estimates house buyers can spend thousands of pounds on solicitor fees, lender fees and insurance alone – not to mention furniture removal, any structural issues that arise from a property survey, and maybe a few takeaway pizzas before you figure out how the new oven works.
Once your bank has told you how much money it is prepared to lend you, you can start looking for houses while keeping your original budget in mind. Resist the temptation to spend up to the maximum on your mortgage – it means your monthly payments will be higher.
Thomas recommended doing research on what mortgages are currently available, looking at the interest rates and the terms. It also might be worth discussing options with an adviser or mortgage broker to work out which mortgage option is best for you.
"When I’ve personally taken a mortgage, I’ve gone for the longest fixed period I could find as it meant that wherever interest rates went, up or down, I knew I could afford the mortgage for that period," said Thomas.
Many fixed-rate mortgages (which mean you pay a fixed rate of interest throughout the term, regardless if interest rates go up or down in that time) are on the market for two or three years but some providers offer a five-year term.
"Because rates have been low for almost a decade, forecast your outgoings on a higher rate and make sure you can afford them," added Oliver. "A lot of younger people have never experienced higher interest rates. We also tend to factor in inflation going up about 3%, and rising inflation means your food and utilities are more expensive."
Hopefully within five years (don’t worry if it takes you longer) you will have saved, budgeted and planned your way to getting on the property ladder.
If you make it to moving-in day, give yourself a pat on the back – it will most likely have been a long old journey. Housewarming party, anyone?
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