Mortgage nightmare: how millennial freelancers can avoid one
- On average, mortgages cost £663 a month, with 16% of people paying over £1,000*.
- A Millennial buying the average house at the age of 30 today, with a 10% deposit, and a 6.07% mortgage would have a monthly payment of £1,706. Only 4% of homeowners pay this much*.
- Millennial homeowners tend to be geriatric millennials – in their late 30s and early 40
- Millennials with mortgages tend to have reasonable savings levels, and enough cash left at the end of the month to be resilient. However, rising rates will eat into their resources. **
- They’re already overstretched in other areas and score particularly poorly for their non-mortgage debts – from affordability to uncertainty and whether they think they’ve borrowed too much.**
Millennials are anyone born between 1981 and 1996, who are aged between 26 and 41. Those aged older are even called “geriatric millennials”. The difference in their earning and spending power and debt levels could vary considerably depending on their situation.
That said, collectively Millennials are about to face a mortgage crisis, so they are best to be prepared and see how they can improve their financial situation, according to Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.
Coles says that Millennials are facing a “mortgage nightmare”, particularly those in their late 20s and 30s.
“Runaway house prices and the hikes in mortgage rates mean a Millennial buying the average house at the age of 30 today could face a monthly mortgage payment of £1,706,” she says.
As a result, Millennial homeowners tend to be geriatric millennials – in their late 30s and early 40s, who bought when the average property cost closer to £150,000. They also include higher-earning younger Millennials. It’s this group who could be in trouble as rates rise.
Coles explains that a Millennial, aged 30 today, buying the average house with a 10% deposit would have a mortgage of around £263,000. If they re-mortgaged in December at 2.34%, they would have paid £1.159. If they re-mortgaged last week at 6.07%, they’d pay £1,706. In September.
Coles says this is a phenomenal sum, yet there is some good news and that is Millennial mortgage holders have some space in their budget. The bad news, however, is that it will be eroded by rising prices.
“A year into the cost-of-living crisis only 37% will have enough savings and 8% will have enough cash at the end of the month to be considered resilient. It means an awful lot will struggle to make ends meet,” says Coles.
Debt: it’s getting Millennials down
To make matters worse, Coles suggests that they already have weaknesses elsewhere in their budgets, most notably they may have overstretched themselves when it comes to debt. Fewer than one in ten are resilient when it comes to the affordability of debt, and two in five are when it comes to the uncertainty of future debts. This is a worse score than renters in any age group. They also score worse for their own view of how much debt they are carrying than any renters.
It means if you’re coming up for a re-mortgage you need to take stock of your options. This is especially true if a household includes a freelancer or small business owner. You have to start building up proof of not only past but future income to mortgage brokers.
Remortgaging: what to consider when switching to a PSC
Many umbrella IT contractors have been considered low-risk by certain mortgage lenders as they were often guaranteed some form of income between jobs and projects. But with many umbrella workers struggling to make ends meet because of higher income and national insurance obligations as an umbrella worker (30% decrease in their take-home pay) in addition to having to fork out umbrella company servicing fees, we could see more contractors setting up their own limited company next April, if the IR35 reform repeal is greenlighted.
But if they were also looking to remortgage at the same time, they could be in for a headache as their accounts could be seen as too complicated or uncertain to some lenders. That is, if work is not set up in advance. Freelancers should think much like a painter/decorator or thatcher who books in his clients for the year. Nothing of course is guaranteed, but your past earning power and experience should act as your track record for mortgage brokers who understand the self-employed marketplace. Have that at your disposal to show when applying for a new mortgage.
How to budget for higher mortgage rates when you’re a freelancer – Freelance Informer
Here are a few of Coles’ tips to hold off the mortgage nightmare:
1. Speak to a broker
If you’re worried or overwhelmed, or can’t find your way through, talk to a broker, The right broker will explain your options, know what’s available, and should give you a good idea of where you stand without charge.
2. Shop around
Rates vary significantly from one mortgage to another, so don’t assume the rate you’re quoted from your current provider is indicative of what’s out there. The more legwork you do, the better, and if you can’t face it, then this is where a good broker can be worth their weight in gold.
Some people will be able to budget their way out of this. If you haven’t needed to cut costs yet, you can start with the easier things: like giving up non-essentials and shopping around for everything else. If you’ve already done this, there may be larger lifestyle changes that can help.
4. Consider changes to the structure of your mortgage
Depending on your age, you may be able to re-mortgage over a longer term. You’ll end up paying more in interest because you’re spreading the payments further, but it will make the monthly costs more affordable. If you take this approach, you also need to consider the impact it will have on your future finances. If you’re paying a mortgage later in life, it may push your retirement plans back a few years, or it may mean compromises about your income in retirement. One option is to re-mortgage on a longer term now, and then when rates come back down, you can shorten the term again and get back on track.
5. Don’t put it off
It can be a horrible wrench, and it’s not the kind of decision you want to rush into, but it’s vital not to put it off either. The sooner you act, the fewer problems you will build up, and once the burden of an unaffordable mortgage has been lifted, it can open up so many more possibilities.”
*from a survey of 2,000 people by Opinium for HL in September 2022
** from the H: Savings & Resilience Barometer produced with Oxford Economics in July 2022.
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