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Getting on the housing ladder 
Recent research from the Royal Institute of Chartered Surveyors suggests that during the Blair decade, it has become almost three and a half times as difficult for young people to get onto the housing ladder.
This means that parents of school aged children need to start thinking about strategies that can help them prepare for the “inevitable” plea for help later.
In 1996, a young working couple could expect to pay 21% of their take-home pay to cover the deposit and stamp duty on their first home. The position today is that they will need to save up 96% of their net income to cover these costs, if they are both on lower quartile earnings of £26,667 a year. The same couple would have to spend 44% of their net income to cover the typical first-time-buyer mortgage; in London, the proportion is just over half. It would be easy to blame trouble in the US “sub-prime” mortgage market (that is, lending to people with poor credit histories, or high loan-to-value-mortgages) and ever increasing interest rates, for these costs. But the truth is that it is rapidly rising house prices that are mainly the cause. Whereas in mid-1996 the average first time buyer home cost £46,822, by this year, the price had risen more than 200% to £151,923. This may be good for homeowners, but for those trying to get a foot on the ladder, it represents a real challenge. During roughly the same period, average earnings have increased by just over 55%. So how are young people to afford their starter home? Short of robbing a bank, which is probably not a good idea, there are fundamentally only three options: saving hard, borrowing from parents or grandparents – or seeing a third way. Saving is probably how most of us got started; but in those days, the cost of housing was lower. As a result, deposits and ancillary costs such as stamp duty, legal fees and mortgage/survey fees did not represent such an imposition. Nevertheless, putting money aside each month can be a good discipline, if only to demonstrate that the couple is able to allocate the sort of money that will be required to cover a mortgage, property maintenance, council tax, insurance and so on, down the years. Of course, those in rented accommodation already face some of these, but the costs associated with home ownership can be unpredictable. Seeking a parental contribution could seem like a good idea, especially if the parents are sitting on substantial equity within their own home. However, except for those who are very lucky, this could simply involve the parents re-mortgaging and having to pay a larger mortgage themselves. And there is always the question of what happens if relationships break down, either between the couple, or between the generations. It is absolutely essential that a formal contract is drawn up. Otherwise family money could suddenly start draining away in unexpected – and unwelcome – directions. The “third way” that is becoming increasingly popular is house sharing with strangers. In this case, three people or even two couples, might seek to reduce the cost of getting on the housing ladder by sharing the cost of a property purchase and agreeing under what circumstances they will move on. Again, tight agreements are essential. If you require any further information about the services that we provide or would like to review your financial planning position, please contact us |