Money: A User’s Guide

What fees you have to pay up front, and questions to ask before you part with them

When you have found a property you want to rent you will generally need to go through a credit-check process (if you are worried about your credit history see chapter 2 on how to improve it), which is where you are rated on how likely you are to pay your rent on time. You may also need to show bank statements and provide references, such as your old landlord or employer, or failing that, to offer a guarantor, such as a parent, who will agree to cover your rent if you cannot meet it. You then have to cough up a lot of money for a deposit.

Some agents or landlords require a holding deposit, which is a sum of rent paid to secure the property you want while the letting agent checks your references. When the new law comes into force in 2019 a holding deposit can be no more than a week’s rent. Do not pay until you are sure you want the property, because you may not be able to get this deposit back if you don’t. Usually it will be taken off your tenancy deposit. Get the holding-deposit details in writing, including what will happen to it if your landlord changes their mind and you can’t move in.

You usually also have to pay your first month’s rent in advance. You then need to add on the tenancy deposit. From 2019 tenancy deposits will be capped at a maximum of six weeks’ rent.

Always get receipts whenever you pay anything, in case there are any issues further down the line. Before you pay or sign, see if you can negotiate on any fees or the cost of the rent. These things are not fixed and agents or landlords may be trying it on.

You also need to ask a few questions: how and when you will be paying rent, and whether the rent includes any bills; how long you can rent for – the length of your tenancy – and whether you are entitled to end it early. Are there any rules on what you can and can’t do in the flat – for example, have parties, keep a dog, smoke?

Ask to see the property’s Energy Performance Certificate (EPC). Legally a property you rent must have an energy-efficiency rating of at least E, unless it is exempt, in which case there is a register for exempt properties on gov.uk. If the property is an F or G your landlord is breaking the law and can be fined.

If you are moving into a shared house with several flatmates your home should be licensed with the local council as a house in multiple occupation (HMO) to make sure it is safe and not at risk of overcrowding. This is worth checking.

Also, it may sound obvious, but do actually view the property you want to rent in situ, rather than just online, before parting with any cash. There are lots of online rental scams out there, particularly targeting students, where you pay upfront fees to secure properties that either do not actually exist or have already been rented out, sometimes multiple times.

Need to know: what are tenancies?

Most private renters will sign an assured shorthold tenancy. Have a good read of the tenancy agreement before you sign it, which lays out what responsibilities your landlord has and how to end or renew your tenancy. Make sure you are given a written tenancy agreement, one in five millennial renters told consumer group Which? that they did not get one when moving. Most shorthold tenancies last six or twelve months, and you have to pay the agreed rent for this whole period. After this fixed period you can agree a new contract, or allow the tenancy to continue. If you want to leave at the end of the fixed term you probably need to give written notice in advance; your agreement should tell you how much notice you need to give. A landlord can end your tenancy without reason – outside of the fixed period – but needs to give you at least two months’ written notice, and provided that your leaving date falls at least six months after your original tenancy began.

If you are living with other people you may sign a joint tenancy agreement. This means that you are all responsible for rent, and for sticking to the terms of your agreement. If your flatmate moves out and refuses to pay rent, you will be lumbered with it instead, so pick your roomies carefully.

How your deposit is protected

Landlords have to keep your deposit safe by putting it into a deposit-protection scheme within thirty days of you paying it, or will ask a letting agent to protect your deposit for them. The deposit has to be in a government scheme, and your landlord needs to tell you which one. There are three: Deposit Protection Service (DPS), Tenancy Deposit Scheme (TDS) and My Deposits. They are also allowed to use an insurance scheme to protect it, instead.

You may be given a ‘repayment ID’ from the scheme. Keep it safe: you need it to get your deposit back at the end of your tenancy.

How do I get my deposit back?

Landlords can only deduct money from your deposit for damage, cleaning costs if you have left the place in a worse state than when you moved in, and any missing items. Their right to do this needs to be detailed in your tenancy agreement. They cannot deduct money for normal wear and tear – for example, scuffs on the walls or faded carpets. Damage needs to be things like a massive iron burn in the middle of the floor.

Check your agreement to see whether you are supposed to have the property professionally cleaned before you move out.

You will agree an inventory when you first move in: a document detailing what is in the property and its condition. Take lots of photos, inside and out, to make a record of any existing issues. You might also want to take photos of the property to show what it is like as you move out, and do a check-out inventory, getting your landlord to sign it, as your back-up if there is any dispute.

You have to contact your landlord or letting agent to request your deposit back. Best do it by email or in writing, so that you have evidence of the date. You should get it back within ten days. If they refuse, or take longer, or if you don’t agree with any deductions they make, you can contact the deposit-protection scheme where your money is kept and go through their free dispute-resolution process. If your landlord has made any deductions they should write to you to explain how much and why.

Shelter has a useful template letter on its site to help you challenge any deductions that you think are unfair. As a last resort you could go to the small claims court if you still cannot get back your deposit.

How you can avoid paying an upfront deposit

If you can’t afford to pay a large deposit up front there are some new products available to help you get around it. Companies like the Zero Deposit Scheme (ZDS) and Reposit offer what is basically an insurance policy for the landlord instead. With both you pay the equivalent of one week’s rent (rather than the normal six required for most security deposits); with ZDS you also pay a £26 annual admin fee for each additional year you are in the same property, and it guarantees to cover your landlord for the same sum as a traditional security deposit.

You will end up paying more with these schemes, however, because most tenants do get their full security deposit back at the end of a tenancy, whereas the money you are paying to the schemes is non-refundable. You are also still liable to pay your landlord directly for any damage that might otherwise have come out of the security deposit. Such schemes are only to be used if you are desperate to move into a rental but really not able to scrape together the cash up front.

Increasingly there are housing developers creating build-to-rent schemes that do not require a security deposit. Two of my friends live in one of the first, by Get Living London, in the old athletes’ village in the Olympic Park, London. They also have a longer-term tenancy, of a guaranteed minimum three years. Look out for similar developments.

Who is responsible for repairs in my rental?

Your landlord is legally responsible for keeping your property in decent shape and carrying out timely repairs to its structure – things like pipes and wiring, and heating and hot water – as well as clearing anything that will damage your health, such as mice or mould. You need to do a few basics yourself – change lightbulbs or replace smoke-alarm batteries.

If you are without heating or hot water your landlord should sort it out very quickly. Under section 11 of the Landlord and Tenant Act 1985 a landlord has to supply adequate space, heating and water. The minimum heating standard is at least 18°C in sleeping rooms, and 21°C in living rooms, when the temperature outside is as cold as minus 1°C, and it should be available at all times, according to The Tenants’ Voice, which has template letters you can send to your landlord to get them to recognize their responsibilities if they refuse to do so. Always send requests for repairs on email so that you have a record.

Failing that, you can contact the environmental health department at your local council, which can force your landlord to sort the issue, or even authorize repairs and send your landlord a bill.

Who pays household bills in my rental?

Who looks after the energy or broadband can vary, so check with your landlord when you sign your tenancy. If it is the tenant’s responsibility then don’t make the common mistake of assuming that you have to be on the energy tariff that is already in place. You can switch your provider to whoever you want, and in fact you should do this, because it could save you several hundred pounds.

When you move in, ask previous tenants or the landlord who is the current supplier. If no one knows, you can call a meter number helpline to find out who supplies gas on 0870 608 1524, and one of several numbers, depending on where you live, for electricity; the energy-uk.org.uk website has details. Take a meter reading at your new property as soon as you arrive. Tell the existing supplier that you’ve moved in and give the meter reading, so that you are not held liable for previous tenants’ bills. You are responsible for any energy used when you take over the property, not just when you actually move in.

You will probably be put on the supplier’s most expensive standard variable rate (more about this in the bills chapter 9), so you want to move off that as soon as possible. If you find a company that is cheaper just sign up and they will take care of contacting the old one and moving your supply. Do not forget to let them know, and take meter readings, when you move out.

I will start off the tips in this chapter by saying that there is no magic solution to how difficult it is to afford a home where you want one. Apologies: you need more money. The options are limited: get a better-paid job, or a job somewhere with cheaper housing; beg and borrow from rich enough parents, friends, partners, perhaps with a boost from a family mortgage or a government scheme – read on for more; or start saving harder for longer (I hope that this book will help a bit with that).

Understanding the process of buying a home can, however, contribute towards working out whether you want or can stretch yourself to get on the ladder, and it can save you a lot of money on the stressful journey if or when the time eventually comes. The experts suggest you get started thinking about how to make yourself a model homebuyer at least six months before you start engaging estate agents and banks. Don’t panic if you do not have six months, it is possible to put yourself in a better position within weeks.

Of those I know who have bought their first homes, many because the bank of Mum and Dad has chipped in, all have told a similar story: ‘I had no idea what I was doing, so I felt like I was being totally shafted.’

The nature of the buying and selling process, which is a game of holding your nerve and outguessing who is trying to outmanoeuvre who, plus dealing with estate agents (a profession on equal pegging with journalists for the most able to put a creative spin on the truth), means that some shafting is hard to avoid. Steel yourself. But getting your head round the following should at least keep it to a minimum.

I will start by explaining the basics of how you can borrow money to buy a house, and then move on to the finer details of what mortgage to choose, plus all the other costs of the process, if by that point you reckon you can indeed raise the funds required.

First – what actually is a mortgage?

How to borrow enough to buy a property

Whether or not you can afford to buy the house you want boils down to two things: can you raise a big enough deposit, and can you borrow enough, given your earnings, outgoings and spending habits, to get a big enough mortgage to top up that deposit? We are going on the assumption here that you are not buying a house with a suitcase of cash: if you are under forty and do not need a mortgage you do not need this book.

When working out the size of the deposit you can save, don’t forget that there are lots of other expenses involved in buying a house that you need to budget for – for example, stamp duty, which can be tens of thousands of pounds on expensive properties, and solicitors’ fees. Skip to later in the chapter for an estimation of how much these will cost you.

How your deposit influences the mortgage you can get

The bigger your deposit, that is the lump sum of cash you are bringing to the party, the smaller the amount you have to borrow from a bank, the more of your property you actually ‘own’ from the start, and, naturally, the cheaper your monthly mortgage repayments.

Your monthly mortgage repayments will depend on the type of mortgage product you go for (read on for a detailed explanation of this), but will mostly likely consist of some capital repayment, that is an amount you pay to chip away at the fundamental sum that you are borrowing, and interest, which is, to put it most simply, the fee or the penalty you pay to borrow the money from the bank. Interest is charged as a percentage of the size of your mortgage, so if you borrowed £100,000 and your interest rate was 2 per cent, you would owe £2,000 interest a year, paid in monthly chunks.

The size of your mortgage is the size of the proportion of your property that the bank still technically ‘owns’. If you can’t pay your mortgage back your property will be repossessed, which means that the bank sells it to recover the value in cash of this proportion. If it is repossessed at a time when property prices are depressed and your home sells for less than you bought it at, you could end up owing the bank more money than you started with.

The aim is to pay down your mortgage over time and start to own more of your property. If house prices rise your house is worth more, so the amount of loan you have outstanding on it has shrunk relative to its value, though you will not feel the cash benefits of this unless you sell, or remortgage.

If house prices tumble, as happened after the financial crash, you could end up in ‘negative equity’, that is where you owe the bank more in a mortgage than your house is actually worth, and you will not be able to move, becoming what is known as a ‘mortgage prisoner’. Falling into negative equity is less likely than it was, because since the credit crunch banks are much more cautious about how much money they will lend to you.

What is LTV?

The amount you can borrow in a mortgage is measured in a ‘loan-to-value’ rate, or LTV, as you will see on mortgage adverts. This is just the percentage mix of deposit and loan. If you had £20,000 cash and wanted to buy a £200,000 house, you would have a 10 per cent deposit, and need to borrow the remaining £180,000 to get your hands on it. That is you need to borrow 90 per cent of the property’s value, or 90 per cent LTV. If you had £180,000 cash and needed to borrow only £20,000 you would have a 90 per cent deposit, and would apply for a 10 per cent LTV mortgage.

Before the Crash it was common to see 100 per cent LTV mortgages. Northern Rock used to have 125 per cent LTV mortgages, which it scrapped in 2008. These existed because there was such general confidence that house prices were on a permanent climb. Banks are no longer so sanguine, though higher LTV loans have been creeping back onto the market aimed at first-time buyers.

There is a common rule in money matters that the higher the risk the higher the reward (see chapter on the stock market for more on this). If banks are taking a greater risk on you, stumping up £180,000 to lend to you rather than just £20,000, they want more of a reward, so you’ll pay more on top of the sum you want to borrow, generally in the form of interest.

The greater your deposit, the cheaper your mortgage will be

This leads us on to another cruelty for first-time buyers struggling with the cost of housing: all the cheapest mortgage deals with the lowest interest rates are available to the borrowers that banks want the most: those who can save the biggest deposits. All the record-breaking low-interest-rate deals plastered over billboards are generally only given to those borrowing with an LTV of 65 per cent or less, or put the other way, who can contribute a deposit of at least 35 per cent of the cost of the property they want to buy.

Most first-time buyers, especially those buying a flat in an expensive city, will be looking at borrowing with a 5 per cent deposit, or 95 per cent LTV mortgage, or 10 per cent deposit and 90 per cent LTV mortgage.

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If you can push yourself to find a 10 per cent deposit, you should. There is a particularly large interest-rate jump between mortgages offered to those with a 5 per cent deposit and those available to those with 10 per cent deposit. This can work out as, for example, £1000 more a year on a mortgage of just £100,000 brokers tell me.

How your bank is judging you

The deposit is most of the battle, but once you have scraped it together you will need to persuade a bank to lend you the rest, and that is a harder and more mysterious process than it used to be. For our parents it was as simple as telling a bank how much they earned. You could borrow a multiple of this. Now, while earnings count, they are not conclusive. Outgoings count just as much. Remember that banks are worried about taking a risk on you, especially when you are a first-timer, so will make all sorts of judgements on your spending pattern to check how safe a bet they can make that you will continue to pay off your mortgage each month.

They do this through looking at your credit score (more on how this works shortly) and your spending patterns, based on analysing bank statements, any debt you are in, and any regular expensive commitments that look fixed, such as a child, dog, Camel Lights habit etc. Your prospective lender will probably want to see at least the last three months of bank statements, as well as payslips, so collect these well in advance and make sure that within this period you do not exceed your overdraft limit or have any bounced payments.

Ray Boulger, of mortgage brokers John Charcol, says you should also bear in mind that a lender will be able to see who you are paying money to, ‘so don’t spend on things you think a lender might disapprove of’ – bouts of online gambling, for example. Also he says give careful thought to signing up to Open Banking; this will allow a lender to see a longer spending history. (See budgeting chapter for more on open banking.)

You will also have to fill out an application form, detailing your outgoings. If this, or your bank statements, disclose lifestyle choices that make you look like a mega-spender, above-average numbers of holidays or meals out, say, that may reduce the amount you can borrow. The same goes if you have lots of financial debt commitments – such as car finance, personal loans or credit-card debt that you don’t repay in full each month. As long as the debt is not judged excessive, though, it is the amount you are paying in monthly payments, and so reducing what is left to spend, that influences the amount you can borrow, not the outstanding debt. Debt with less than six months to run is usually ignored.

Student loans count only in so far as repaying them means you have less disposable income left in your bank account, which feeds into how much you can afford to borrow. The fact that you have student-loan ‘debt’ does not count against you.

Banks will also look to see how your income or affordability levels may change in future. This is why a former colleague of mine went to the bank to apply for a mortgage with a very baggy top on, and took good care to pay for any Mothercare purchases with cash. If they had known she was going to have a baby, she guessed they would have judged her on balance a greater risk, likely to see both a dip in her earnings and a rise in her outgoings, even though she was pretty confident she could afford a big mortgage just fine.

SIDENOTE It is illegal for a bank to discriminate against an applicant because she is pregnant, so, like a job interviewer, you cannot be asked: ‘Are you pregnant or do you plan to get pregnant?’ But most will have questions on their application forms like: ‘Do you anticipate any changes to your financial circumstances in the next three months which might make it difficult for you to make your mortgage payments?’

You need to be honest. Lying on the application form is fraud, though you do not have to disclose your pregnancy. It should, however, make you think hard about whether you can actually afford the mortgage you want if your income or circumstances change once you have got it. A bank can only know so much about your ability to repay in the future; it is up to you to gauge how much you want to stretch yourself, knowing what life or job changes lie ahead.

Earnings matter, if only to work out whether you stand a chance of buying

Before you start browsing Zoopla it is a good idea to work out roughly how much you are realistically going to be able to borrow based on your earnings. This is only part of the picture as explained above, but a good place to begin. There are lots of mortgage calculators online that work on this basis. The rough rule of thumb at the moment, though it varies between banks, is that you can borrow about four to four and a half times your pre-tax salary. Some lenders will stretch to five times your salary, as long as it is affordable (if you are self-employed this might not apply – more below). Clydesdale bank this year launched a ‘professional mortgage’ with a maximum loan 5.5 times salaries if you are a newly qualified professional such as a doctor, vet, solicitor or architect. This is called an ‘income multiple’. That means if you earn £35,000 a year before tax you are unlikely to be able to borrow more than about £158,000 if you are buying alone. Now you can see why there’s a housing-affordability problem.