Feasibility of buying first house at 23 when I may leave the country in a few years to work/travel (UK)

Question

I am 22 years old and in my final year of study towards an Engineering degree, with a graduate job secured for next year with a starting salary of £25,000.

I currently have ~£47,000 in savings, comprised of £5,000 in a regular savings account and £42,000 in a stocks and shares account which has seen a roughly 9% yearly increase.

Knowing that next year I will likely be able to save ~£15,000 (I interned at the same company last year and managed to comfortably save £12,000 of my £18,000 salary), this puts my total savings at approximately £60,000.

I would like to get on the property ladder as soon as possible, knowing that I want to one day own my own home rather than be like many people I know who are stuck renting. However, I equally do not want to get stuck with a house/flat that I have to pay for that would stop hinder my freedom and stop me from being able to travel for a year or two if I wanted.

Given that average prices for the area vary between £200,000-£350,000,

What I would like to know is:

• Can I afford to buy a house in the first place?
• What are the 'hidden' costs I should be aware of as a first time buyer?
• How easily would I be able to rent out the property if I decided to stop living there?
• Assuming I don't use the full £60k as a deposit, what would be the best amount to put down?
• Any other potential risks I should be aware of?

Answer 1

Buying a house at those prices does not seem like a wise choice at the moment.

In general, in the UK you're going to be limited to borrowing no more than 5 times your income but most banks are going to be more conservative and limit you to 4 or 4.5 times income. I'd expect a bank to be more conservative with a fresh grad that doesn't have a huge salary. That would mean that you'd probably be able to borrow £100,000 at the outside. Even if you put down the full £60,000 as a deposit, you'd still be £40,000 short for the low end of the price range you're quoting. Even if you managed to get a mortgage at 5 times your salary, you'd be £15,000 of your low end target. The reason banks are going to limit your mortgage based on income is, of course, to ensure that you have enough income to repay the mortgage, live your life, and deal with emergencies. If you're getting a mortgage at the upper end of your allowed range, you might be able to make the monthly payment but you wouldn't have much of a cushion remaining.

You're going to need to spend several thousand pounds on the transaction itself (@carrdelling's breakdown is good). But then there are ongoing expenses of ownership beyond the mortgage. Things like maintenance (roofs need to be replaced, water heaters die at inopportune moments, etc.), council taxes, etc. That's going to be at least a couple hundred pounds a month. Likely more if you're getting a really inexpensive property because those properties are cheap often because their maintenance has been deferred.

If you decide that you want to travel, you either have to sell the house (which is going to cost several thousand pounds for agent fees and the like) or convert it to a rental. If you want to convert it to a rental, you're probably going to end up paying more on the mortgage because owner occupied mortgages are less risky to banks and thus are given at lower rates. Finding someone to rent the place probably isn't terribly hard in the London area (assuming you price it competitively). But being a landlord is not trivial-- particularly if you're going to be travelling. If the toilet backs up or the heat goes out, do you want your tenants calling you at 3am when you'e out of the country? Do you want to deal with arranging for a plumber to come by or agree on a quote for getting work done from hundreds or thousands of miles away? Your stocks and shares account won't ever wake you up in the middle of the night to tell you that the roof is leaking. There are companies that exist to manage rental properties, of course, but that's an additional expense that is going to make your rental less profitable. If you're not someone that can personally do a lot of the small repairs around the flat (either because you're not handy or because you're not there), that is going to seriously limit the profitability of the rental.

Given that you'd, at best, likely be at the outside edge of what the government would allow a bank to lend you in order to get the mortgage in the first place, it is entirely possible that you either wouldn't be able to convert your mortgage into a buy to let mortgage if you wanted to travel. If you could, that plus the ongoing expenses, could put a serious crimp in your budget to the point that it could easily make travel impossible (and that assumes that travel means going elsewhere to work where you'd earn the same income not spending a year travelling with no income).

It would seem far more sensible to rent for a few years. As a new graduate, your salary is likely to increase relatively quickly in the first few years which would allow you to qualify for a larger mortgage. If you keep saving at the rate you're saving, your down payment would be much larger. If you decide you want to travel, you'd have the freedom to do so without worrying about maintaining a property back home. One of the major benefits of renting is the freedom to move elsewhere. When you're ready to settle down, you'd be in a much better position to buy a home.

Answer 2

Fellow UK (wannabe) first time buyer here:

Can I afford to buy a house in the first place?

Edit: In my original answer, I forgot to take into account the maximum mortgage amount in the UK, which - as @Justin Cave explained - is roughly between 4 and 5 times the combined annual gross income of the applicants. So, with that in mind...

No, you can't. Or, at least, you cannot reach £200,000 in the situation described above. This is because, with an annual gross salary of £25000, the maximum amount that most banks will lend you will be around £125000, which combined with your total savings (£60000), gives you a combined total of £185000 (from where you'd need to discount all the associated costs that are discussed below)

Realistically, you'd need to either budget for properties in the range of £160000 (or lower) or wait until you have a higher annual income (maybe as a result of promotions/different jobs, additional means of income or maybe just applying for a mortgage with a partner).

What are the 'hidden' costs I should be aware of as a first time buyer?

• Stamp duty: £0 if you are a first time buyer and want to buy the property as your primary residence. If not, for £350000 you'd need to pay about £7500 in tax (there are a lot of online calculators that you can use for this).
• Various mortgages fees: Sometimes £0, sometimes up to £2000. Be careful here, because it is very likely that a mortgage without a fee can end up being more expensive on the longer term. Check all your numbers before committing to anything.
• Solicitor: Depends on where you leave/want to find him. For London I'd budget up to £2000.
• Surveyor: Only necessary if you want to buy a house. May be free (paid by the bank/not needed), may need to be a full structural survey (£1500).
• Land registry: I am almost sure you need this only for houses, but just in case, budget a few hundred for this.
• Plus moving costs, furniture...

That should cover most cases (some of them may not apply in your current situation)

How easily would I be able to rent out the property if I decided to stop living there?

Depends on the area and how desirable is the property for your would-be tenants.

A caveat here is that you may have to convert your regular mortgage into a buy-to-let one, and you may be liable to pay stamp duty (if you paid nothing at the beginning). Also, over time buy-to-let in the UK is becoming less lucrative than what it was several years ago.

Assuming I don't use the full £60k as a deposit, what would be the best amount to put down?

The amount that lets you minimise the mortgage interest rate, of course!

In the UK, the major factor in mortgage prices is the loan to value ratio (LTV), which basically is the ratio of money that the bank lends you VS the total value of the property. So, if you want a house of £250000 and you put £50000 as deposit, then you have a LTV of 80%.

Cheapest deals are at a 60% LTV. Then you have 75% LTV, 80%, 90%, 95% (and I am not sure if there will be more tranches, may be even bank dependent). So, a good strategy is to try budget for extras, and then optimise for the smaller LTV you can realistically achieve, and finally keep the rest of the money as liquidity (emergency fund, invest in something that could give you more return than the mortgage interest... depends on your financial situation).

Any other potential risks I should be aware of?

In the future, you may want to just sell the property instead of letting it. Also, people always assume that house prices will continue growing in the future - which may not be true. And it would be good for you to have a plan B just in case of, say, the company goes south or lets you go and you cannot find easily a new job for a few months.