Step 4 - Property

Choosing to buy a property is the largest financial commitment that most of us will ever make. It can also mark the start of a new life stage, shifting from the transient world of renting to the long-term commitment of home ownership. That move might also be linked to other events – such as accommodating a growing family or a change in relationship.

From a financial point of view, buying property also equips employees with an asset that can be bought, sold and - over time - should increase in value. As such, owning property is a solid step on the road to financial wellness.

Buying a first property might take a little longer than it has in the past. The average age of a first-time buyer in the UK is now over 30, compared to 23 in 1960. Starting late can also mean finishing late - one in seven of the UK population expects to be making mortgage payments over the age of 70.

Once employees are in a position to buy, the benefits are significant. Monthly payments are predictable, helping staff to manage the rest of their finances more efficiently. It puts individuals in control of when and if they move in the future, also helping to stabilise their finances and personal circumstances. Typically, monthly mortgage payments will also be lower than renting costs, freeing up money for other uses.

There are other financial wellness benefits to home ownership as well. For example, it can improve an individual’s credit rating which in turn helps with access to better deals on other financial products.

Helping employees find the best rate

First-time buyers and those who have been with the same lender for years can both benefit from shopping around for the best mortgage deal.

The options can be overwhelming, so this is an area where employers can support staff.

There are online comparison sites which can be a great starting place for research, so signposting these as part of a financial wellness strategy can help employees. Providing access to mortgage broking services through the workplace is another way that employers can offer assistance.

Additional fees, extra interest and repayment charges can all put a sting in the tail of a good headline rate. Financial education can help with questions such as:

Are there any additional fees such as mortgage valuation costs or arrangement fees?

• Can these become part of the mortgage loan? This can be a good way of bringing down the cost at the start, but will result in extra interest over time.
• Are there early repayment charges? These can limit employees’ options for shopping around in the future.
• Is the mortgage portable? This means a buyer can keep the same deal when they move, without incurring repayment charges.

Affordability

Property ownership only becomes a step to financial wellness if employees can comfortably afford the repayments.

A rough rule of thumb is to make sure that these are not more than a third of their monthly income. That will ensure they’ve got sufficient money left to pay other day-to-day expenses, and can save for emergencies, unexpected expenses or unforeseen falls in income.

Mortgage lenders will also carry out their own assessments, but employees should have their own idea of what their monthly budget is. This is a good opportunity to support employees with financial education and advice.

Managing rate changes and house price fluctuations

Interest rate changes and house price fluctuations can introduce some uncertainty into home ownership, so it’s important that employees have a realistic outlook about both of these.

Interest rates have been at an all-time low over the last decade. The Monetary Policy Committee, which makes interest rate decisions, doesn’t anticipate making sudden rises in the near future. However, anyone taking out a mortgage should either find a product that will protect them against increases (such as a fixed rate mortgage), or be confident they can continue to afford payments, should interest rates increase.

Political uncertainty has made it difficult to predict how house prices will behave over the coming years. Deciding to buy should be based on factors that employees can control – such as living in a particular region for work reasons, or accommodating a growing family – rather than putting off ownership over circumstances that they can’t.

The bigger picture

Buying a property is an exciting event, but it can also be stressful. Employees will value additional support at work when dealing with solicitors, removal companies and
slow-moving property chains. That could be in the form of specialist mortgage support, or simply providing the time to enable employees to deal with practicalities.

Property decisions can also be triggered by a bigger life event – celebratory or otherwise. As such, taking out a mortgage could be an opportunity to encourage employees to look at their financial circumstances more broadly and to provide other wellbeing support as needed.

Property is step four in Close Brothers’ Seven Steps to Financial Wellness series. In our next article, we’ll explore step five, savings and investments.

If you would like to know more about financial education in the workplace please email financialeducation@closebrothers.com