As the housing market runs out of steam, mortgage lenders come up with crafty ways to attract new borrowers. Here's yet another funky home loan to avoid.
Heading home on the train last night, I was leafing though Metro, a free London newspaper, when I came across an advert for a funky new mortgage.
This hip home loan is called 'share to buy' and comes from mortgage broker graduate network and lender Britannia BS. The ad shows four young, trendy, metropolitan types lounging about below a headline that reads,
share to buy
Four friends. Average salary £24k.
Just bought a £320,000 house.
share to buy enables young professionals to buy property together, offering:
salary multiple of 3 x up to 4 incomes.
free legal agreement
My first thought was, "Blimey. Are they mad?"! I then started to do some sums:
- These four young dudes earn £96k between them, but are buying a £320k house.
- They can borrow up to 90% of the house value, which is £288k. Hence, they must raise a deposit of £32k between them, which comes to £8,000 apiece.
- They are borrowing three times their combined income (288 / 96 = 3), which is about a fifth more than traditional borrowing limits (2.5 times joint income).
- The mortgage interest rate is the Bank of England's base rate + 0.85%. This gives a current rate of 5.6% a year.
- So, for a 25-year repayment mortgage, the total monthly repayment will be £1,786, which comes to £447 a month apiece.
So, these four lucky graduates stop paying £450 a month in rent, become first-time buyers, and start paying £447 a month towards owning their shared flat. Sorted!
However, the fun doesn't end there. Stamp duty will be £9,600 (3% of £320k). A 'Home Buyer's Report' from Britannia's surveyor adds another £370 (or £730 for a full structural survey). Solicitor's fees put another £449 on the tab. Buildings insurance will add, say, £300 a year to their bill.
Life, critical illness and ASU (accident, sickness and unemployment) cover are required by the legal agreement between buyers, increasing their monthly outgoings by hundreds of pounds. Although you could shop around for this cover, share to buy 'strongly encourages' you to buy from its partner, Friends Provident. And will Friends Provident provide the best value-for-money cover for our four hip young things? I doubt it, but I bet our fun-loving buyers don't bother shopping around for boring old insurance!
So, going from being happy, carefree renters to being responsible homeowners isn't as easy as it appears. Firstly, our four friends are going to have to stump up 32,000 + 9,600 + 370 + 449 = £42,419 in upfront costs, or over £10,600 apiece. With the average graduate debt at £12,000 and rising, do you really think our young chums have this kind of money lying around? My guess is that they'll end up borrowing it from someone, probably their parents!
What's more, their £450 a month rent (with no maintenance or other housing costs, other than utility and Council Tax bills) looks quite attractive when compared to the true cost of owning and maintaining their home. This could easily be the thick end of £650 a month or more.
And that's before you ask how they've managed to find a habitable four-bedroom home for £320k. I can't think of anywhere in London where you could pick up a suitable property in a decent area - except perhaps the cheapest properties on the Monopoly board!
What's more, owning a property with three other people creates a whole new set of headaches. What about the hassles when a co-owner wants to move on, perhaps because of a job move or new relationship? Or when someone skips a mortgage repayment, does a runner, or wants to rent to an unsuitable tenant? What about bills for major repairs? Yikes, yikes and triple yikes!
To any young graduates thinking about going down this route, take some advice from "the grumpy old man of personal finance" (actually a haggard 36-year-old Fool). Don't do it. Buying property is dangerous enough at the moment taking on this mortgage would be foolhardy indeed (note the small 'f')!
More: Find a better home loan in our Mortgage centre.
