When you take the next step in your life, it can be difficult to know what to do to prepare for the future. This blog post outlines the 10 things newly engaged couples needs to do to prepare their finances for home buying.
Talk honestly and openly
Maybe now is the time to talk about Pre-Nup agreements if that’s going to be a thing for you, but just start talking about it.
It doesn’t have to be as taboo a subject as it can feel.
Open a joint account for bills
Opening a joint account doesn’t mean you have to share everything and start paying for his Sci-fi outfit fetish, or her sword collection habit.
It just means you now have a single place you can both put an agreed figure into each month, and use that as a place to spend money when it’s for the two of you.
If you live together, then things like rent, utility bills, food, etc. are good examples of what should be put through the joint account.
If you don’t, then how about agreeing a figure you both pay in each month and you use that for your date nights.
It doesn’t have to be 50/50 with how much you put in. You could do it as a percentage of your income.
Let’s say one of you earns £30k and the other earns £50k. You could agree to put in 0.5% of your salary into the joint account for fun things. So £150 and £250 each. That money then gets used for meals out, take-aways, holidays, etc.
Never need to have that stupid argument of, who paid for what last time, and it’s not fair cos you earn more than me.
From a housing point of view, it will make it much easier to demonstrate your genuine outgoings each month to a lender when they are assessing how much you can afford to pay. Instead of trying to convince them that even though one of you pays for everything and looks broke, it’s fine cos you both share the bills.
That shouldn’t be an issue, but why make things more difficult than they have to be?
Check your credit files
This is a good idea for everyone, but especially as a new couple it’s helpful to know where you’re registered to vote, what credit marks there are on your credit file, and anything that you’ve forgotten about that needs to be changed.
Most people with marks on their credit file are because of stupid things like forgetting to change their mobile phone bill address before moving. So they have a £20 outstanding bill with Vodafone. It’s a stupid reason to potentially lose the house of your dreams in the future.
So get your credit file, read through it, and maybe use it as part of your open and honest chat to talk through it.
Decide what kind of property you want
So home buying. This is a fun conversation to have, hopefully. You get to sit around the computer and go house hunting! Do you know where you want to live? Country or city? Near to parents or near the sea? A house with a big garden or a minimalist flat?
There are no right or wrong answers, but it helps if you both want the same thing, and if you can narrow down the criteria so when you do start looking, you know what it is you’re looking for.
Work out what you can afford to pay for your home
You know you’ve got that joint account for your Standing orders and direct debits? Well now is the time to review those, along with your own personal outgoings to figure out how much money you have over each month.
You can ignore the amount you currently pay for rent, cos when you buy a place you’ll probably stop renting a place as well.
This will give you a good idea of how much you can afford to pay for your mortgage. That’s helpful information for a good mortgage advisor, as we can reverse engineer how much money you can borrow using this number.
Create a house deposit saving fund
While you can get a mortgage for the vast majority of the cost of a house, you’ll likely still have to put some money in yourself. As a minimum 5%, but if you want better deals, then up to 40% of the purchase price.
Don’t forget about the other costs as well, stamp duty, legal fees, moving costs, etc.
So now is the time to start putting some of that money to one side each month. When it comes time to get a mortgage, the lender will ask for proof of your deposit. If it’s just appeared out of nowhere, they’ll want to know where it’s come from.
If it’s a gift from your parents, then that’s fine, but you may have to get your folks to sign a document to say it’s a gift and not a loan, and they don’t expect to get the money back.
Manage your debt levels (60% level)
This is a fairly specific one, but one of the things lenders will look at when assessing you for a mortgage is how well you manage any debt that you already have.
Let’s say you have a £5k credit card limit, but are consistently owing £4600 on it. This tells the lenders that you are struggling to live within your means. It sets off some alarm bells for them.
Weirdly, if you had the same level of outstanding debt, £4,600 but your credit limit was £10k then it wouldn’t flag up as an issue. Lenders like to see you using under 60% of the credit that is available to you.
Try and clear any outstanding debts
While it’s possible to consolidate your debts using a mortgage, this is usually only up to a certain limit. So if you’re looking for the maximum amount you can borrow for a home, AND pay off all your debts at the same time. The lender may not be OK with that.
Always start with paying off your most expensive debt first, and then moving onto the next one.
Look at your income and make sure it’ll all be accepted
This means having your tax calculations and tax year overviews for as long as you’ve been trading. Nobody really asks for more than 3 years worth of accounts, and you can get away with as little as 1 year with a very small number of lenders, but the more of a provable track record you can provide the better.
Find a good mortgage advisor to help you through the process
(Come on, you knew this was going to be in this list somewhere)
While you can go it alone, you won’t necessarily get access to as many deals as you would by using a mortgage advisor. If you know exactly what you want and why you want it, then by all means go to lenders yourself and apply for mortgages.
However if you aren’t sure what the difference between a fixed rate or a discounted variable rate are, or why you might want to go for a 5 year deal as opposed to a 2 year deal at the moment, then you might benefit from working with a mortgage advisor.