Video Transcript – Basics of Mortgages
While as a young person buying a home might feel far in the future it is a major worry for many young people that it is becoming harder and harder to buy one’s own home. This is true as in the UK in the last 20 years average house prices have nearly doubled whereas median incomes have grown by less than 70% in nominal terms (that means without adjusting for inflation). Therefore, the gap between what one is likely to earn, and the cost of a house is widening. Despite this, home ownership remains possible but requires careful financial planning and saving for a number of years. Most people can access a mortgage up to 4 or 5 times their gross salary. So, imagine a couple who want to buy a home for £300,000 and have combined gross income of £70,000.
They will generally be able to afford a mortgage of £270,000 (as it is less than 4 times their combined gross income) with a 10% deposit of £30,000. A 10% deposit is standard and while it is sometimes possible to access a mortgage with a lower deposit, these deals are more expensive. To save £30,000 the couple could each use their LISAs saving £4,000 per year plus the £1,000 bonus so together they could amass the deposit in just under 3 years. Obviously, this will depend on their income and expenses. It is worth noting that home ownership is a great way for ordinary people to grow their wealth. Instead of paying rent toy repay your mortgage. Eventually, once the mortgage is repaid the home is fully yours and with house prices growing it is likely to be worth a lot more in 20 or 30 years’ time.
Video Transcript – Fixed, variable and tracker mortgages
Mortgages come at a variety of deals offered by banks. The choices that you need to make as a home buyer are: (1) the duration of the mortgage (usually banks allow up to 25 or 30 years, but it might be less depending on one’s age); (2) whether the interest rate will be variable or fixed and if fixed for how long (banks tend to offer fixed rate deals for 2 and 5 years, sometimes for 10 years too); (3) whether to go for a deal with a fee and slightly lower interest rate or without a fee and slightly higher interest rate. You can obtain mortgage advice.
The key to these choices is to ensure that your mortgage remains affordable. You should think about bad case scenarios and see in that cases would you still be able to repay. You can ask the bank officer to calculate your monthly repayment for different scenarios e.g., if it is for 20 years or 25 years or if the interest is variable or fixed. As about the choices between a deal with an upfront fee (usually around £1000) and without a fee it generally makes sense to go for the deal with the fee when the amount you borrow is big enough.
For instance, one large bank offered in March 2025 a 2-years fixed rate mortgage either at a rate of 4.44% with 0 fee or at a rate of 4.19% with £999 fee. The difference of the rate is 0.25% so for a mortgage of £200,000 over 2 years it will cost in higher repayments slightly less than £1,000. So, for this amount it is not worth taking the fee deal as you would pay more in the fee of £999 than the interest you would save. Also, in two years the £999 you would pay, will earn some interest if you keep it in the bank, say of £60. But if the amount of the loan is high enough it will be worth choosing the deal with the upfront fee. You can ask the bank officer to run calculations for you (e.g., how much interest you would pay under each deal) and compare it with the amount of the fee not forgetting to add the interest the money will earn if not paid as a fee upfront.
Take your time and make the choice that works best for you. Remember if you ask them questions, they are obliged to give truthful answers, but they are not obliged to tell you if you pick a deal that is not the cheapest for you. Again, the principle of “let the buyer beware”. It is important to keep in mind that if you do not keep up with your monthly repayments the bank can eventually force you out of your home and sell it to recover the amount lent and any interest and other charges.