According to Land Registry figures, the average cost of a London House has been over half a million pounds since the autumn of 2015.
To put this into context:
- The average house price for the whole of the UK is much less – about £185,000
- The average annual wage in the UK is about £26,500
- The average annual wage in London is about £40,000
This means the average person or couple would find it almost impossible to afford to purchase a house in London based upon their income alone. Even if they had a large deposit, they would not be able to secure a large enough mortgage to afford a London House.
Owner occupier with a mortgage
A typical mortgage in the UK for an owner occupied property requires that a deposit of between 10%-25% is put down as an absolute minimum. On a property worth £500,000 that would equate to a deposit of at least £50,000 and quite likely something around the £100,000 mark!
Such a huge deposit is out of the question for the majority of young people and first time buyers. Even if you had a £100,000 deposit, you would need to earn over £100,000 if you were to buy that average house on your own with a deposit of at £100,000 (based on being able to borrow 4 times your annual income). Couples are often allowed to borrow 3 times their joint income, so they would require to earn about £135,000 combined.
Those income levels are way above average wages. Therefore, to be able to purchase an average London property you need to earn more – either through your job or to make sure your investments earn more.
Furthermore, a £400,000 mortgage with a 3% interest rate equates to £1000 a month in mortgage interest costs only. A repayment mortgage over 25 years would result in a cost of around £2000 a month. A lot of money indeed.
Investor with a mortgage
An investor would normally have to put down a 25% deposit to secure a buy-to-let mortgage. This means they would have to put down a whopping £125,000 deposit. The remaining £375,000 would need to be secured via a mortgage. At an interest rate of say 4% per annum, that would equate to a payment of £1250 interest every month. Most lenders insist that the rental income covers 100% to 140% of the interest cost. So an investor would need to secure about £1500 in rental income.
Renting in London
Given that landlords who rent out properties worth £500,000 need to secure £1500 a month in rental income, then the implication is that tenants would need to pay at least that in rent. Most renters are young people or those who cannot afford to buy a house. But £1500 a month in rent is £18000 a year – and that is a very large chunk of a typical wage.
If you already own a house a London and its fully paid off then good for you – as you are sitting on a substantial asset.
If you own such an average property with a mortgage and are comfortable with the monthly costs then also good for you.
For everybody else, an average price of £500,000 for an average London property is a problem. But its not an insurmountable problem for successful investors. They are able to build up large deposits to purchase such properties by being successful investors. Listen to what we teach at the Gym Of Wealth if you want to be amongst those that can afford to purchase relatively expensive properties such as those found in London or any other great city around the world.