Getting On That Slippery First Rung Of The Property LadderPersonal Finance
There’s no question that getting by in the 21st century is a pricey prospect. The cost of living (especially if you expect to live comfortably) is higher than ever and depending on where you live this may only get worse. Brexit, for example, will have a profound and far-reaching effect on the price of everything from food to property with the prospect of heavy import taxes on goods inside the EU trading bloc a real possibility. The UK also faces a crisis of wage repression (especially in the public sector) well below commensurate rates of inflation with the biggest real terms slump in wages since records began. Across the pond, matters are a little better in the US, although there’s wild variance between states. There are some cities in which the cost of living is skyrocketing exponentially with Nashville, Seattle, Austin and Los Angeles among the most egregious offenders.
In this climate, more people than ever are renting rather than securing their own property. While there’s nothing necessarily wrong with renting, it can be frustrating for those who are tired of living in someone else’s property. The limitations of renting can really quell one’s nesting instinct since few landlords are willing to let tenants make cosmetic changes to the dwelling that will make them feel more at home at the expense of the landlord’s ability to let the property again after the tenancy has expired. The impulse to have a place of your very own can be overwhelming and frustrating when it seems so prohibitively expensive, requiring a down payment and level of commitment that you fear your precarious job just won’t allow.
Yet, owning your own property may not necessarily be the unattainable pipe dream that you may assume. While there’s no denying that the millennial worker may find the prospect of home ownership trickier than their baby boomer parents did, owning your home is both realistic and affordable. Here we’ll look at some ways in which virtually anyone can fulfil the dream of home ownership as well as explaining the reasons why getting a mortgage is so much more challenging, especially in the US, than it was a decade ago. But first…
Is renting really that bad?
There’s no denying that renting can be frustrating. You have limited control over aesthetic changes you can make, your landlord may have a nasty tendency to increase the rent every year, and no matter how long you live there it never quite feels like home, but rent is not nearly as dreary a prospect as some make it out to be. While many refer to rent as “dead money” this is something of a fallacy. The term “dead money” implies waste and the money spent on keeping a roof over your head is rarely a waste of money. Keeping yourself sheltered is always a decent investment. Plus, rent has some inherent advantages. Down payments on rented properties are significantly cheaper (though still not cheap) than those necessitated for a mortgage. Your landlord is responsible for ground rent or service charges if you live in an apartment, and if something goes wrong… it’s your landlord’s responsibility to ensure that it is repaired. Plus, if your job or career necessitates moving to another state or even another country, most tenancy contracts will afford you the freedom to do so.
This is not to denigrate the sincere desire that many have to get on that slippery first rung of the property ladder, but it’s always a good idea to remember the advantages of renting since although owning your own home is a realistic and attainable goal, it’s rarely one that can happen quickly. There’s value in being happy with your lot in the short term while you look ahead to what you’ll do with your own home.
Why is it so hard to get on the property ladder?
It is extremely frustrating seeing property prices skyrocket while those who have long held mortgages while you continue to rent watch their profit margins grow. “Why?” you may ask, “Why is it so difficult”. Of course, the answer lies in the great global financial crisis (or credit crunch) of 2007-2008.
The years prior to this time had seen a period of systematic deregulation of the financial services industry by world leaders (most notably Ronald Reagan and Margaret Thatcher). This emboldened the banks who did a lot of irresponsible lending to debtors who were in no position to make good on their repayments. 2015’s The Big Short oversimplifies matters slightly but it provides an excellent, accessible and entertaining overview of the banking practices of the time. Plainly speaking the banks created too much debt through irresponsible lending and the nightmare of subprime mortgages, creating a black hole of debt that collapses in on itself when debtors were unable to make the agreed repayments. People were purchasing multiple properties with a condo in one state and a townhouse in another. A lot of these people were buy-to-let landlords and this resulted in a lot of people losing their homes even though they had been dutifully paying their rent.
This burned the banks badly, and many had to be bailed out by the taxpayers. With so much very public egg on their proverbial faces, banks became a lot more gun shy when it came to lending, especially potentially high stakes lending for mortgages and business lending. Rightly or wrongly, fairly or unfairly, this is why so many find the prospect of owning their own homes prohibitive.
There is a unique opportunity through Fundrise, a crowd-investing real estate platform that allows you to invest in real estate with as little as $500!
The downfall of the down payment
It’s something of a catch-22. Banks are far from the prospect of lending when debtors have money of their own. Thus, mortgage applicants are expected to have a sizeable deposit saved up (usually between 10 and 20% but depending on the size of the property some lenders may go as low as 3%) to be taken seriously. This is money that can be tricky to come by, especially when many of us are spending a greater proportion of our income than ever on rent, with millennials spending three times as much on living costs as their grandparents.
Saving up… And the alternatives
So, how do you get the money together for a downpayment? Conventional logic says that you save. Makes sense right? Well, maybe it did thirty years ago when people were spending less than a third of their income on housing. Moreover, most savings accounts have an insultingly low APY (averaging at a pitiful 0.06%). That said, you can get better rates if you shop around. Those looking for credit are increasingly eschewing high street banks for smaller online lenders. Because they have far fewer overheads they trend to have favorable rates. Here are some decent online savings accounts worth considering:
- American Express High-Yield Savings Account- Unlike many high yield savings account this has neither monthly fees or a minimum deposit but offers an attractive 0.85% APY nonetheless.
- Ally Money Market- No monthly charges nor minimum deposit
- Barclays Online Savings- If the up and coming bank, Barclays, offered this on the high street. This account offers 0.9% interest and can be linked to accounts you may have with other banks.
- CIT Bank Online Savings- Offering the highest yield for a savings account CIT is an up and coming online bank.
If your income simply won’t allow you to save up a realistic down payment within an achievable time frame, you are not without recourse. Some prefer investment to saving as not only do you have the potential to gain a much higher yield, you will also receive a dividend every quarter on each and every share you own. While investors can certainly provide a higher yield than saving it carries with it the greater inherent risk. If you keep all your eggs in one basket by investing in only one or two companies, you risk losing everything if one or more of those companies get in trouble or goes under. On the other hand, if your investment portfolio is too diverse, you are less likely to gain a high yield.
Making extra money
You’d be surprised how much of a difference a little extra money in your pocket day on day, the week on week can make. If your job won’t allow you to put in overtime or work extra shifts there are lots of ways you can make a little extra pocket money on the side with money-making apps. There are a whole lot of apps out there on the Android and Apple stores that will allow you to make a little extra money every day with little or no effort involved. You can make money by going shopping, filling out surveys or even going to the gym.
Owning your own home is not quite as prohibitive as you may have expected. The most important thing is to temper your expectations, set goals and be realistic with yourself. Even if it means renting a smaller home, working more or making a few lifestyle sacrifices, it will all be worth it when you move into your very own home.