Part 2: Mortgages glossary and tips

Mortgages are typically the biggest financial decision that people will make in their lifetime. One of the most common situations is when people will determine what they can afford to spend each month, pick a very expensive house and then pay for that house over the longest duration they can in order to achieve that monthly payment and get the lowest interest rate possible. This is not often the best way to go and can often leave you stuck in your job and “house poor” where you no longer have savings each month just to repay your mortgage.

This will go through some features of a standard mortgage for a home and tips afterwards and next chapter will go through mortgage types and an affordability calculator.

Check out Part 1 if you haven’t already where I discuss budgeting and share a budget template you can use for yourself.

Features of a mortgage

Feature	Description
Down payment / Deposit	Your down payment, or deposit, is the amount you put up front to secure the mortgage loan from a bank or building society. The lowest amount for a standard mortgage in the UK would be a 5% down payment meaning 5% of the property value for example a £200,000 home would have a 5% deposit of £10,000 (200,000*5% or 200,000*0.05). A 0% down payment is only available under a guarantor mortgage in the UK which relies on someone becoming liable for you should you fail to pay your monthly payments.
Principle	The principle is the amount you borrow from the bank or building society. Using a £200,000 home with the 5% down payment again would mean the principle would be £190,000. This £190,000 is what you borrow from the bank and this will vary depending on the property value and your down payment.
Interest	Of course banks do not lend for free (as nice as that would be). The interest is the additional charge that the bank adds to your principle amount and is calculated monthly. However, the value that will be on your mortgage will be a yearly value. For example, a 3% interest rate would be a 0.25% monthly rate (3/12 months in a year). In the £200,000 example this would mean you pay £500 in the first month in interest. You may think this would mean you pay less each month after the first as if you pay £1000 in the first month on a £200,000 house with 5% down payment then you only owe £189,500 (£190,000 principle minus £500 due to the other £500 paying the interest). Surely next month you should only pay 0.25% interest on the 189,500 (£473.75 in interest)? Well not exactly… Mortgage payments are fixed each month because of something called Amortisation which will be explained next.
Amortisation	This is what causes your monthly payment to be consistent over the life of a mortgage (assuming no changes in interest rate occur). Simply put, the principal and mortgage interest payments are divided in each monthly payment as a ratio that declines over time. As a rough example, your first monthly payment may be £1000. 40% of this value (£400) will pay off your principal and the other £600 will pay only the interest. Over time this ratio changes as you pay off the principal amount so that near the end of the mortgage you pay more of the principal than the interest ie. 90% principal payment and 10% interest payment at year 28 of a 30 year mortgage. In short most of the early mortgage payments you make are just paying off the interest on your loan and not the loan principal itself which is why overpayments are critical.
Term	This is the duration of the mortgage. Typically people get a 25 year mortgage however these can be longer or shorter. With the increasing house prices longer terms are seen with a rise in 30-40 year term loans.
Arrangement Fee	Can be zero fee or over £2000. This is the fee to complete a mortgage application and can be paid separately or added onto the mortgage. See below for some further tips.
Booking Fee	An application fee that some mortgage providers will charge just to apply for a mortgage with them. This can be a few hundred pounds though sometimes this is included in the arrangement fee.
Valuation Fee	You may choose to do your own survey to assess the property (there are a few options depending on how extensive you wish the survey to be) however, the bank will do their own survey to confirm the value of the property is equal to the loan. They will only look at the value of the property and not the problems that may be included with it. This can be free on some mortgages or they can charge up to £1500 on average for this. This can be added onto the mortgage cost so is worth confirming.
CHAPS (Clearing house automated payment system)	This is the fee that your mortgage lender charges to transfer the mortgage funds to your solicitor and is usually a maximum of £50
Early repayment fee	For most people this is not something that is considered but is important. This is the fee to repay your mortgage early either in full or in part. This is worth checking if you ever plan to overpay on your mortgage on a monthly basis. Some lenders will allow a certain percentage of the mortgage principal to be paid each year without a fee but some will charge up to 5% of the amount you pay extra. It is recommended to avoid mortgage providers that do this as you will be locked in to pay the interest for the full mortgage term and repaying will cost you the same, if not more, than just making the normal payments each month.

TIPS Section

There are some recommendations to be made for the terms above and mortgage in general.

Down payment	I would advise getting as much of a deposit as possible but 10% should be an initial goal. Understandably this is a large amount to many people however the benefits of 10% is that this is often an optimum down payment for the lowest interest rate. Below 10% the interest rate gets much larger but above 10% the drop in interest rate becomes less significant unless you reach the big whole numbers such as 20%, 30% and 40%.
Interest	When thinking about interest it is important to think about this only being valid for a few years. UK mortgages are limited in terms of fixed interest with 3-5 years being most available however recently some providers are increasing this to have a fixed interest for 10-15 years now. You may have a low interest rate that looks very affordable initially but this can quickly change especially in todays environment. 3 years may seem like a long time however in 3 years time you will be, most likely, switched to a variable rate which is controlled by the mortgage lender and influenced by the Bank of England interest rate. Your fixed rate 3% mortgage may very quickly double to 6%, or even higher, anytime after those 3 years depending on the economic environment. It is important to remember that interest rates can increase when considering fixed interest mortgages when the fixed year rate runs out.
Amortisation	This is important when thinking about overpayments which can be checked online here https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/ . This can greatly reduce your interest payments and bring your loan to a shorter term saving you both money and ensuring you will have a home in your name.
Term	The term is an interesting one. The duration is always up to you with a maximum 40 year term possible however most go for a 30-35 year mortgage. This is affected by your age and how far you are from retirement age. In my experience a longer term works out better in almost all cases. A shorter term mortgage will increase your monthly payments but you can reduce monthly payments with a longer term and make overpayments to repay the loan faster. This way the additional payment is optional, allowing for more flexibility in your finances. It is important to consider early repayment charges in your mortgage as mentioned above!
Arrangement fee	These can be a bit tricky but a mortgage advisor can help point out the best deals. To get to the top of the recommended list, when doing an online mortgage comparison search, a lot of lenders will have this as a separate fee in order to keep the interest rate lower. When the fee is added onto the mortgage it typically will raise the interest so by taking this off it looks like the deal is better than it is and should you add this arrangement fee to the mortgage you may find the interest rate is higher than other mortgage lenders.

Hope this helps you a little bit to understand some terms while you search for mortgages. My next post will be a mortgage affordability calculator which will give you a good idea of what size of house you should be looking at and whether or not you can afford a change to your interest rate.

Stay tuned and check out some of our other posts in the blog!

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Part 1: Start Saving Small – How to plan your finances

With inflation reaching all time highs not seen for decades, it is now more important than ever to plan out your finances. As a result I have put together this to help those that are struggling to get visibility on their income and outgoings by sharing how I manage my own. I know for many this a huge task and causes a lot of stress so I have tried to make this as clear and easy for many. I will also be posting a video for those that prefer to follow along visually without reading. This can be a great way to check your payslips so you can be share you aren’t overpaying when you shouldn’t be.

All of the below is focussed on UK tax laws but the principals apply everywhere. None of this can be considered financial advice but this is how I manage my own budgets. If you want to make this a joint budget calculator with your partner you can copy the first 2 columns in the table below and enter each persons salary and tax bands though I find keeping separate budgets makes life easier overall.

The spreadsheet, explained below, is available here: https://docs.google.com/spreadsheets/d/159qN5FkvDbbBFEXynNjwZcta8ifzyIrT/edit?usp=sharing&ouid=100841825636158668949&rtpof=true&sd=true

You can download this by going to File -> Download. There are multiple options for file formats if you do not have Excel to use. OpenOffice is a free alternative to Microsoft Excel.

Snapshot of what a budget calculator would look like for someone who only needs to consider the lower tax bracket

The first block relates to salary. Where there are green boxes this just refers to an area to fill in yourself. As an example I put a salary of £26,000 annually before tax. The table below shows where your payslip information comes from and is important to understand where your money goes and how taxes work.

Salary / wage	Put your annual income before tax into this cell
Basic Monthly / Basic Pay	This is your salary divided by 12. What will appear on your monthly pay slips.
Hourly rate	This is important to understand exactly how much you get per hour. This can be a great way to budget yourself based on how many hours would I need to work to pay for something. This thinking really helps prevent wasting money by quickly working out if something is worth doing yourself rather than paying someone else (think DIY). I have this as = salary wage cell / 52 / Hours worked per week
Tax Allowance	Not every country will have tax allowances so you should check your own countries tax rules, but in the UK there is a tax allowance on earnings. In 2021/2022 this is currently £12,570. Meaning you pay no tax on the first £12,570 you make. Every £1 you make above this gets taxed at the tax rate (currently 20%) until the next bracket is hit which this year is at £37,700. Example: If you make £40,000 then you will not be taxed on the first £12,570; be taxed at 20% on the next £25,130 (taking you to £37,700 total); then taxed at 40% on the next £2300 (taking you to your £40k salary). The link is at the bottom of the page for the gov site to review each year as this changes.
Taxed on	This is the proportion of your salary a month that gets taxed by the income tax. In this case only the 20% tax on additional money over £12,570 applies. An additional formula applies here for anyone who makes over £37,700 a year which is included in a second link for a spreadsheet at the bottom of the page. = Basic monthly – (Tax allowance / 12 (months)) – (any extras that come out before tax ie pension, student loan, cycle 2 work schemes etc which are covered below)
Tax Paid	This is the taxed on cell multiplied by the tax you pay on that income. In this case 20%. =”Taxed on” cell value x 0.2
National insurance paid	This varies depending on tax year and in April 2022 will be increasing by another 1.25%. For 2021-2022 however this is similar to taxed on income. You do not get taxed on the first £797 per month but get taxed on additional income by 12% up to £4,189. Any additional income you make above £4,189 is taxed at 2% for National Insurance. Example: You make £2000 a month before tax. You pay no National Insurance on £797 of that £2000. You then pay 12% on the remaining £1203 (2000-797) leaving you with a national insurance contribution of £144.36 (1203 x 0.12 (12% in decimal form)) each month. Important: Using this method it really helps you understand the impact that government changes will have to your finances. If you take the 1.25% increase planned for April 2022 then in the example above your contribution would go from £144.36 a month to £159.40 a month. Leaving you short £180.45 over the next year.
Pension	Pension will of course depend on your workplace. I’ve estimated around 4% as this is quite typical for a base contribution. This comes out of pre tax salary so this is not taxed by income tax and as such can be a good place to store extra cash especially if you are moving into higher tax brackets. Speak with your employer to raise contribution amounts. =Basic monthly x 0.04
Student Loan	Student loan is more complex depending on when you studied. The spreadsheet has a Plan 1 student loan in place. This means any income over £1,657 a month has 9% taken off as a repayment fee. Plan 1 Example: If you make £2166.67 a month then you subtract (2166.67 – 1657) to give you 509.67. You then repay 9% of the 509.67 as your student loan giving you a repayment fee of £45.87 a month. For Plan 2: The same applies as plan 1 however the threshold is now £2,274. In this case if you made £2166.67 a month you would not pay anything back in student loans. For Plan 4: The threshold is now £2,083 however you now pay 15% back in student loans. So if you make £2166.67 a month then (2166.67 – 2083) gives you £83.67. So you then repay 15% of this leaving you with a student loan repayment of £12.55 a month. PLAN 1 =(Basic monthly – 1657)*0.09 PLAN 2 =(Basic monthly – 2274)*0.09 PLAN 4 =(Basic monthly – 2038)*0.15 There are links at the bottom of the page where this information comes from as well as how to know which plan you are on.

It is important to check in April if the values have changed. It is also good to understand the impact that government changes have to your finances by using this template to update values.

The table below is a good summary for the 2021/2 tax year. Be aware this changes every April.

Screenshot of the Gov income tax details for 2021/2

Bills and budgets

The next 3 tables I use for planning outgoings ie bills, loans, insurances etc. I filled it out with some examples but of course this varies depending on you for example you might not own a car or house therefore car payments and insurances relating to these do not apply to you (yet!).

Starting with the left table; I use this for my fixed bills that I cannot just cancel (mortage/rent) or get rid of without being very risky (insurances). Most explain themselves. Things like a TV license are in here if you watch Freeview TV (in the UK) or subscribe to a TV package as these are legal requirements. I will likely do topics in the future on each item where good advice is available on bringing some of these costs down.

The most important topic in this left table is insurance. This is one of the most important ways to manage risk and prevent bankruptcy.

The middle table is what I use for Non-fixed bills and services. These are either fixed recurring, or annual, payments such as Netflix, Amazon Prime and Microsoft Office for example or they may be credit card debt that may vary each month. The services I have added are mostly nice to haves but depending on your circumstances could be cut out of your bills.

A good tip is to pay the annual fee instead of subscriptions including annual car insurance rather than the monthly payment as this avoids any added interest. So you can take the annual one time fee and divide by 12 and budget this into your monthly payments that way on renewal you have the money saved already.

The third table is arguably the most important one. This is where I add the topics I plan on budgeting for as explained below.

Food	I put quite a large amount in here for one person (if you have kids this may seem low) per month as it includes going out a couple times a month. This varies a lot but my personal spend is quite accurate now as I have been recording each month how much I spend so I can be confident (excluding events like christmas) how much I need each month.
Petrol / Diesel	Unless you have an electric car then you will need to consider Petrol / Diesel budgets. This is usually quite predictable each month as filling your car is usually 2-3 times a month. In the future I may do a cost comparison of buying an electric car vs typical combustion engine car but this may take some time as there is a lot of variables to think about.
Investing	NOTE: If you do not have savings already it is a good idea to have 3 months salary saved up at an absolute minimum (or whatever you may need to survive 3 months) for emergencies before investing everything. The split between investing and saving is up to you but without good emergency savings you will be more at risk. This is one of the critical steps to building savings. Typically most will store their money in the bank for bank interest however this interest rarely comes close to inflation which increases the price of goods and services each year. This means every year you may gain 1% in interest from your bank but if inflation is 5% for that year then you lost 4% of the money in your bank account (Potentially a similar thing to annual pay increases in your job). Ideally 20% of your total monthly salary after tax, pensions and student loan should go into investments. This may be difficult for a lot of people but it is important to try to get as close as possible to this value. The example shows a 10% investment each month but even 10% a month will put you in the right direction to getting on top of your finances and building good habits even if it may be hard at first. The easiest for most people will be having a stocks and shares ISA. This allows you to put money in (up to a certain annual amount) without being taxed on any profits you make. The easiest way, for a beginner, in these ISA accounts is picking reliable and safe ETFs or Mutual Funds (which are bundles of stocks around a specific topic such as S&P 500, technology, growth stocks, dividends etc) to invest in. These have very low entry requirements as you buy portions of shares rather than whole numbers (so you don’t need to have £1000 to buy one share of Tesla). There are many investment types such as stocks, real estate, art, wine, classic cars etc so owning a wide range of these is preferred should big changes occur in certain investments (2008 real estate market crash for example). This is too big of a topic to cover in this post alone so hopefully I will be able to give more detail on these if there is demand for it.

The final cell in the bottom right just totals up these 3 columns to tell you how much of your salary each month will go to bills and services.

The final table is the one off costs and the “total left” value. The “total left” value comes from the totals from the first 2 columns regarding salary minus the total of the 3 centre tables for bills and budget. So in the above example this is £1672.44 – £1,589.36. Giving us the £83.08 left each month. This is where one off costs get accounted for such as needing some new clothes. The main focus of this cell is save whatever is remaining each month. If I don’t have to use this remaining money I won’t. In this case I will transfer this to a savings account as backup savings for important occasions / travel / date nights etc.

I would like to end this hoping you all manage to get through any difficulties you may have ahead. If this did help you out I really encourage you to share the information and help someone else you know. Helping someone else will always make both of you stronger in the long run and we need each other more than ever.

Later on I will put a post focussing on how to get rid of debt and what to prioritise. This is something I feel many people get wrong and they try to pay off the wrong debt first which only makes their situation worse. As well as a post regarding the importance of insurance.

LINKS BELOW

For taxable allowance you can see this link for the government document https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past

To know what your student loan plan is see this link: https://www.gov.uk/repaying-your-student-loan/what-you-pay

To understand how much your student loan costs see this link: https://www.gov.uk/repaying-your-student-loan/what-you-pay

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The Real Estate Issue – A Profit or a Home?

I would firstly like to mention how housing has become more about making money than about being a home. Although I believe the term housing needs some differentiation between the house and the land it is built on. While I do agree it is financialised I also don’t believe this was an issue until the housing bubble of 2007 (and onwards). One of the biggest concerns over real estate I have is the ability of a house to be an asset or a liability. Which of these is the case is often decided by the household income which can be very fluid. One other issue is inheritance where properties can be passed down the family and, at least in the UK, this often is a benefit to those with greater wealth. As long as a house has no mortgage still remaining it can be inherited up to £325,000 with no tax and this can increase due to tax allowances for direct descendants. As of 2020/2021 in the UK a direct descendant couple can inherit a £1,000,000 home with no tax payments. Since the average UK home is around £230,000 this covers a huge percentage of property in the UK. You also pay no capital gains tax if you choose to move into the property as a main residence and sell it later, as well as stamp duty not being levied for the majority of inheritance. While the baby boom years are getting older this is taking more affect into the market. By doing this the inequality, as stated in the OHCHR, increases massively between the wealthy and the working classes. Source: [https://hoa.org.uk/advice/guides-for-homeowners/i-am-managing-2/inherit-a-house/] This is highlighted even further as a problem as many capitalist countries after the second world war introduced many new policies to boost home ownership as a way to build communities and morale which raised ownership to around 70% in both the USA and UK by 2000. [Source:The great mortgaging: Housing finance, crises and business cycles by Òscar Jordà, Alan Taylor and Moritz Schularick]. The housing bubble was partly a result of this huge boost to home ownership creating a speculative market that thought a never ending demand was possible. Of course as inheritance is so easily done without taxes this creates a further issue as the demand for homes for those not old enough to benefit from the 1940-2000 home ownership boom is not as required. Therefore property prices drop as the demand for new homes drops. In 2017 Market Financial Solutions did a survey of 2000 adults in the UK stated that 36% were set to inherit a home. If the population keeps ageing as it currently is then property will be held onto for longer and longer forcing more people into rental accommodation due to high deposit requirements from lenders.

Looking back at the global level it was around 1950 when property really started to show an increase in the global average house price in real terms [Source: No price like home: Global house prices 1870-2012, American economic review, Katharina Knoll et al; https://www.aeaweb.org/articles?id=10.1257/aer.20150501]. In the early 2000’s the largest boom happened and even after the housing bubble popped the average prices show a very miniscule drop compared to the previous climb. Although some countries felt the impact most with a large drop in prices on a global level you really don’t see the mean reversion that you do in countries such as the USA and UK however, as the market has returned it has been estimated that the average house price is still overvalued.

As mentioned in previous lessons in this course the cost of building over the years has remained relatively stable in relation to house prices. One thing to consider is actually the value of land. Although the construction has remained rather stable the construction only contributes to the actual structures built. A great bit of research was done using the ONS site to gather this data [https://jamesjgleeson.wordpress.com/2017/04/03/historical-housing-and-land-values-in-the-uk/]. Although this only considers the UK you can see that the structures themselves didn’t actually increase and follows a similar trace to the construction costs mentioned in this course. However the rest of that house price could be attributed to the land it contains. In the UK especially, around the 1950’s, new laws came into play which protected certain areas of land (green belts) where building permission was extremely difficult if not impossible to obtain. By doing this you effectively raise the price of the remaining land available. As mentioned in the previous paragraph it was around the 1950’s where house prices in real terms started to increase. In addition to this many countries were now heavily rebuilding and developing their cities after most were bombed during the wars. This lead to a large amount of housing / industrial construction around cities. Ever since then people have increasingly flocked to large cities in search of work as the rural areas are often stripped of jobs or heavily specialised in one industry which attracts a smaller percentage of workers. 

Data taken from the UK HM land registry website for 1990-2020 for the north east region

An excellent example of which is the UK. Looking at the HM land registry [https://landregistry.data.gov.uk/app/ukhpi/browse?from=1990-01-01&location=http%3A%2F%2Flandregistry…] it can be shown the differences in regions for average house price and growth year on year. Taking the north east as an example although it suffered from the same growth during the 2000 – 2007 the drop from the 2007 bubble wasn’t as significant as other areas. I find it hard to believe that the price of land wasn’t a factor in this region as during the 1980’s the government started to rapidly deindustrialise regions in the UK with the coal mining of the north east being the biggest employer with employees coming from all across the UK. As such a lot of miners were out of a job and therefore left the region or required new work which now comes from the automotive industry. There are still few markets to work in outside of automotive in this region and a lot of “brown belts” which allow for construction but require some demolition of existing buildings to build on. Due to the massive deindustrialisation there was a lot of construction land now available to build on. This availability of land is one of the reasons why house prices are cheaper in these affected regions than in the south east as many flocked to the rapidly expanding cities like London and the surrounding areas where the government wanted to centralise the economy. Areas up north who were mostly affected and furthest from the new centralised economy city of London did not see the same increase in costs which is still increasing in London and the South East. 

London does also suffer from another problem. A tax haven for local and foreign investors. As an area which is in desperate need for cheap and good quality housing due to the huge population looking for work; it has an increasing problem with wealthy investors using the city to hide large sums of money. This report highlights the significance of the issue [https://www.transparency.org.uk/faulty-towers/#.WipwcbTQrBI]. Real estate in large city centres with high property prices have become an excellent way to hide wealth and avoid taxes by the global elite. The report states across 14 developments in London 80% were owned by overseas investors with 40% from high corruption countries or secrecy companies. In the UK it is perfectly acceptable to create a company name for little cost (around £12 at this time) and use this to tie up money as assets to that company. Due to the enormous wealth trying to be hidden, property developers have proceeded to build luxury homes to cater to that market inflating the supply over the demand at a time when affordable housing in London is at it’s worst. The report from the London government site shows the amount of affordable homes actually being built since 2008. [https://www.london.gov.uk/sites/default/files/affordable_housing_starts_and_completions_-_end_of_mar…]. It should be noted however that affordable for London is on average around £300,000 where the average salary is approximately £37,000 in 2020. Despite this property has become a profit target rather than a necessity for the huge amount of people who will simply never afford a home in this area and instead suffer from the increasing cost per square meter issue under rental markets.

As investment and economies continue to centralise around large developed cities the financialization of housing is likely to continue as the cost of land and the tax policies will proceed to allow developers to take advantage of profit margins of the extremely wealthy while the lower classes will continue to feel the effects of increasing rental costs and sub par living standards. 

I’ll leave you all with a question. Do you think this is likely to get better or worse and why? Let me know in the comments section.