This month, Mitch Hopkinson, a winner of the Financial Times ‘UK Independent Financial Advisor of the Year’ award, answers questions on getting a first mortgage and the implications of putting off saving for retirement.
Question: After living with my wife’s parents for a few years, we’ve managed to save a deposit for a house. Before we go to our bank, what are the main things we should be aware of?
Answer: Congratulations on saving your deposit, which is enabling you to step onto the property ladder! It’s always an exciting time buying your first home.
You’re absolutely right to want to have some issues addressed in your own minds before speaking to a lender. I’d recommend asking yourselves three key questions.
Firstly, ‘How much can we afford to borrow?’ This will probably be the most crucial point and it will be linked to how much of a deposit you have saved.
You should aim to have a deposit of at least 10 per cent, although to access most of the best deals 20-25 per cent would be ideal.
Most lenders these days work on ‘affordability models’ when assessing how much they will lend you, but a good rule of thumb for the maximum that you can borrow is to work on a multiple of three or four times your gross annual income.
So, someone earning £25,000 could borrow between £75,000 and £100,000. This means that if you’ve saved a £20,000 deposit, you could be looking for a house in the £100,000 to £125,000 price range. For a couple, both of your incomes would be used, meaning most couples would be able to borrow 3-4 times their joint income.
The second big question is ‘What is the best type of mortgage for us?’ This really depends upon what you feel might happen to you in the next few years. If you feel that your careers are about to take off and that your incomes might go up a lot, you might be more likely to opt for a mortgage that is flexible and less worried about fixing your rate. People who feel that their earnings may stay the same should probably opt for the security of a fixed mortgage. With interest rates at an historic low, long term fixed rates can be an attractive option for many borrowers right now.
And thirdly, you should ‘Are we getting the best rate?’ The best way to answer this is to seek advice from a specialist independent mortgage consultant. But, to be honest, 10 minutes of your time on a reputable search engine will show you what rates are available. The main thing to be wary of is the costs of the various products, as fees can vary massively, so always factor in the fees as well as the headline rate!
Question: Despite my almost annual New Year’s Resolution to do so, I’ve still not managed to sort out a pension. How serious a problem is this going to be?
Well, I’m not sure how old you are but delaying your pension will have consequences whatever your age.
Failing to start saving from an early-ish age will only mean that you have to catch up when you are older, and this will inevitably mean a lot higher contributions if you want to enjoy a financial security in retirement.
To put this into perspective, let’s look at an example. A 20 year old man who wishes to have a pension pot of £500,000 when he comes to retire at age 65 (this might seem like a big pot, but in reality it is about the minimum you should aim for –but more on this subject another time) would need to contribute £247 every month until he retires.
If he delays making the contributions until he is 30, in order to have the same pension fund at age 65, his monthly contributions would need increase to £440. The cost of putting off his contributions for a further 10 years is, of course, greater as if he decides to wait until he reaches 40, the contributions would need to be hiked up to £840 every month.
All research shows that those who take a long-range approach to their financial planning are significantly more likely to be successful at reaching their ultimate financial target.
However, it’s never too late to start retirement planning as there are always things that can be done to maximise your retirement income. Whatever age you are, the time to act is now to be in with the best chance of achieving financial freedom in your ‘leisure years.’
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, the world’s largest independent financial advisory firm.