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'I'm 20 and I own a £250,000 four-bed house'
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Ok, 25% is a guide, but certainly above 30% and you're in crazy town heading for some sort of financial disaster.
The thing to do is rid one self of debt. It's not inevitable.
That big house is a mistake. If they had that level of financial muscle, they should have used it. By that I mean buying a much smaller cheaper property and using spare money (if any) to pay off the mortgage, and fast.
That's where the money is. Why waste years paying unnecessary interest?
🙂
I doubt she's earning as much though so that's a huge amount of debt.
As to the house price - there's loads of choices outside the south. We manage to live quite well out of the smoke!
I've no doubt that if everyone was in a couple earning £53k that they'd be able to rent "something" for 25% of their take home.
It might be a room in some crammy dump though, but I give you your "majority" categorically.
If you understand that there's a tonne that don't live in a couple, that there's a tonne of people under even that average salary , and who might want to properly rent a flat or house in their own right, I'd imagine the irrefutable "majority" you mention...
might not be one at all
But perhaps people earning under the average salary simply cant afford to rent a flat or house in their own right. You can argue that rents should be lower and minimum (or indeed general) wages should be higher, both of which I would likely agree with, but that doesn't change the maths of a general budget, and if the aim is to prosper financially, there are certain principles you have to stick to.
The term "average" can be somewhat opaque and whilst that means a lot of people earn under £25,000 it also means you can rent for cheaper than £749 a month - the statistics don't specify location (other than outwith London) or size of property.
For a small percentage of the population on extremely low wage, this becomes near impossible of course, but is anyone suggesting their situation is ideal? How many of those people are on housing benefit/credit? Ideally, they would raise their income, which is what 'society' would be trying to help them with, be it through benefits, retraining etc. The frighteningly high levels of people filing for bankruptcy or losing their homes is oftentimes testament to the unsustainable payments they'd signed up for.
Btw Peter. Is that how you get financial security? Deal with the house first and then somehow in your 40's (too late) start to think about getting around to giving the idea of retirement some consideration?
Sure, of course you want to do both as early as possible. But to get a decent private pension is probably as much a month as a mortgage. Not everyone will be able to do both. But if you are mortgage free you can save a lot more a month for 20 years to a 65 aged retirement. If I had to choose, I'd get the house sorted first as you can always downsize at retirement to obtain a lump sump should you need to.
Flyaway - as for not spending more than 25% of your income on housing, yes, you can conveniently exclude London however quite a few people do live in and around London so millions are probably spending far in excess of 25%. I live on the outskirts of London and relatively speaking it's quite cheap here but a small 2 bed house will cost about £1200+ a month to rent.
Peter - the reason I excluded London is that for many jobs, wages are higher in London too, as you get paid a London weighting for precisely that reason, so it complicates things. As do the extremely high rents on things like two bed penthouse suites in Mayfair.
At the end of the day, you can spend as much as you like on rent. It's your money. That just means you'll have less to save and less to spend in your retirement, and puts you in a somewhat precarious financial position. Doesnt bother me either way. Just understand that it's a choice you've made.
Round here it's not much of a choice and don't get me started on London weighting!
When my wife and me rented (1991 to 93) It cost at least 50% of our income.
Our mortgage by comparison (1993) was half of the rent so used the extra money to reduce the mortgage. The running costs were lower too.
The mortgage was only 75% of the figure the bank offered us. Tempted? No. We wanted some spare money, so bought pretty well the smallest property available to us. We didn't have much choice mind.
We got rid of the mortgage in less than ten years by throwing every bit of spare money (bar the pension contributions) at it.
The security of a roof over our head which cannot be taken from us is what we wanted. Ok, it's just an ex council maisonette, but it'll do.
🙂
A 3.5% rate was quoted above, you'd struggle to get a 2 year fixed rate at less than 4%-4.5%
Paying your mortgage off early:
in most cases, even more so with rock bottom rates paying your mortgage off early (unless doing so purely for psychological reasons) is a false economy.
It can delay retirement/financial independence. Putting the overpayments across various current accounts (3-5%) will generate an income margin greater than most mortgage interest payments (less than 2%). With a medium risk-high risk appetite a balanced equity portfolio or investing in a BTL can return double digit growth.
Compounded investment growth over 10, 15, 20 years and factoring the relative decrease in mortgage interest vs RPI. Paying off your mortgage early is counter intuitive. It also denies easy access to 'cash', you can't liquidate your 'flexible or drawdown' mortgage like you can with invested cash/equities or even BTL.
You forget BB, it's odds on that most people don't use 'over payments' with which to invest with. They use it for immediate consumption, or to fund a lifestyle beyond the scope of their wages. Basically, they liquidate their home as and when.
I came from an era where average mortgage rates were 12% and watched them get hiked 3% overnight. I'm not saying history will go back there any time soon but who knows?
The current low rates are but a trap. Borrow masses -it costs next to nothing - lose your house 30 years later to the bank.
Yes, if you're full of money minded obsessions and business ideas there's many ways to do things.
But at the end of the day. A roof over of your head which cannot be taken away is security.
🙂
Is this per annum?
Sounds like the typical claims made by high street bank financial advisors. You don't happen to work for a bank do you Barlos?!
overpaymensts are usually the best to do if you can afford it ever since they got rid of tax releif for mortgage payments.....
it would be hard to get anything like 3-5 % for your savings unless you were putting them in at risk account.
on that one I actually agree with Ric..
I also agree with Barley that I cant see the affordability criteria being met now.....10 years ago when the banks because silly on these things yes.but the way they have tightened up.no way...which is why i said there must be parental help here.Maybe as guarantors.or something..
but If I felt I could get my dream home at that age.....and struggle financially for a few years maybe with the bank of mam and dad helping out or getting a second job then I think i might be tempted.. Hard time for the first 10 years and then hopefully easier time......or maybe they have a few elderly grandparents that will be leaving them something in the future...
renting in this country where there are such crap regulations to cap rents is just a waste of money.....I would rather give a £1000 a month into my own mortgage than £500 a month towards someone elses in rent
Maybe that's what they're planning on doing with their relatives?
Dammit cougie, not again!
a lot of people are in this situation apparently, which is why inheritance tax thresholds are being increased because an elderly couple now cant leave their £650,000 house to their grandchildren without them having to pay inheritance tax....
so if their is a strong demand for this threshold to increase then there are a lot of grandchildren waiting for their big nesteggs.......
Yes I do work for banks.
Many mis-conceptions held by people that dont work in the industry, including that most 'bankers' caused the financial crash. They also convienently forget the UK Financial Services Industry is responsible for 10% of UK tax receipts.
Most people dont understand financial services and/or cant see past the prejudices maintained by the media or their friends down the pub.
You can get 3% on a current account today with Santander and have been able to for 3-4 years, its up to £20,000 but you can open multiple accounts. Other lenders offer current accounts with up to 5% interest up to £5000. Next to no risk as covered by FSCS protection limit up to £85000 per institution.
Those with a higher appetite for higher risk can return a double digit growth, not every year. Those with a lower appetitie should note that medium risk investments have ALWAYS outperformed saving rates over the long term.
Look at these two scenarios:
Family 1, mortgage paid off, £10,000 invested
Family 2, £100,000 morgage, £110,000 invested, 3-7% annulised savings/investment return.
Family 2 have the same roof over their head. Family 1 have taken on the lenders equity risk, leverage and tied up their cash in an illiquid asset.
Yes, of course double digit growth is possible in some years, but so too are double digit losses, for an investor with a higher appetite for risk - such is the trade-off between risk and reward.
Even with a very long investment horizon, I think it's pretty naive to expect double digit annualised returns. Those days are over. Given where we are today, even a pure equity portfolio would be hard pressed to deliver that.
Oh, and I'm not bashing banks. Many people that work in the banking industry think that those that don't are full of misconceptions about financial services and believe everything they read in the press.
the 5% interest rates in other banks only covers up to around £3000. very rare £5000 santander is way out from the others but it is going to charge £5 a month for the privileged
yes you could open up to about 5 accounts as they all want 2 DD that are with one of the main companies.....and they all need at least £500 going in each moth.some £1000....... there would be a hell of a lot of work going on to get your 3 to 5% interest ..... and they can change their rates at any time.....and it would still only cover you up to say £35,000 or so....
Im no chearleader for Santander customer service etc but the account is excellent. If you move your DDs etc the cashbacks more than cover the account charge.
Yes you can open 5 accounts, yes its some working but we all work for money. Looking after your finances shouldnt be work it should be a matter of principle.
Oh hang on we can always blame the banks cant we.
Some people find it to much work to review their lending product every 2 years, ive just changed mine to 1.59% (it had reverted to base rate after 2 year fix). Ive not got a massive mortgage but it'd take me a few weeks to earn the saving.
i didnt blame the banks..i just said they went lending happy 10 years ago....and now they have really really tightened up so I couldnt see how the couple could of got the mortgage they got..
and yes I would still want to be the family with the mortgage paid off and the £10000 invested.....and that with me having a mortgage rate of just 0.79%,,,can you beat that rate
and dont forget that at the moment the savings interest is all taxable taking another chunk of the rates
BB, you're really recommending people play silly buggers with money they don't have in order to make money.
Lets face it. Most people don't have any money, or at least spare money; especially in five figures, to do these things.
You're also assuming that earning the money is a done deal guaranteed for as long as you wish. It isn't. It's finite.
Seron funny that rate of 0.79%. You didn't happen to take out a 0.29% plus base rate tracker with Barclays by any chance?
🙂
Ric. with Woolwich before they were taken over by Barclays
I wonder how many of us are still using the first bank accounts they started ?