Even with deflated prices, getting a foot onto the first rung of the property ladder will always be challenging. Not only do you need to save for a deposit, but you also need to convince the bank that you can afford both the mortgage and all the other costs of home ownership. This is where a phantom mortgage can help.
What is a Phantom Mortgage
Nothing to do with buying haunted houses, a phantom mortgage is simply a way of working out the monthly repayment costs of a mortgage, along with other home ownership expenses and seeing if you can afford the total figure each month.
By saving that total into a high interest savings account each month, you will not only improve your financial discipline, but also quickly begin building up a nice big deposit.
Creating a Phantom Mortgage
Step One – Work out your estimated mortgage cost
Using a mortgage calculator work out the potential monthly mortgage cost, based on the type of property you want to buy.
Step Two – Work out your homeownership costs
Here are some examples based on the purchase of a one-bedroom flat:
- Utilities (gas, water, electricity) – £80 to £110
- Telephone & broadband – £25 to £35
- Council Tax – £100 – £120
- Home and contents insurance – £12 to £20
- Life insurance – £15 to £25
- Ground rent and management fees (for leasehold properties) – £50 to £60
- Food shopping – £200 to £250
- Television licence – £12
Step Three – Determine you current financial position
Using this free budget template, work out your:
- Monthly income (after tax is deducted)
- Monthly outgoings (beyond the home ownership costs, e.g. commuting, socialising, hobbies, clothes, etc)
Then work out:
- Value of your current debts (loans, hire purchase agreements, credit cards and store cards)
- Value of your current savings (bank or building society savings, stocks and shares)
Step Four – Assess the affordability of buying a home
Compare the monthly mortgage and homeownership costs against your current financial position to see if you can afford to buy a property.
If you have lots of debts, then you should focus on clearing those before committing to something as major as a mortgage, as being debt-free should improve the likelihood of you being given a mortgage and getting it at a lower rate of interest. More advice on clearing debt can be found in this post – Three Step Approach to Clear Your Debt.
You may find you need to opt for something cheaper to make things fit or that you are not yet in a position to get onto the property ladder, but that should not stop you from following Step Five.
Step Five – Set up a high interest savings account
Set up your high interest account and at the start of every month pay in the total sum of your phantom mortgage and home ownership costs.
If you have found you cannot fully afford homeownership at this point, just pay in what you can and begin looking for ways to earn more money, such as asking for a pay rise, finding a better paid job or cutting back on your spending, so that you continue to build a deposit and improve your financial management skills.
For Existing Homeowners
Phantom mortgages are not just for first-time-buyers; as existing homeowners can also use the same principle for trading up to a bigger home or to buy investment property.