Buying flat in London as SWE

Evgenii Ray

Disclaimer: This article is not financial advice and is just a description of my personal experience.

Telegram blog: https://t.me/frontend_engineer_blog

Linkedin: https://www.linkedin.com/in/evgenii-ray/

Intro

Hi everyone, just recently, I bought a 2-bedroom apartment in London. In this short article, I would like to share the economic feasibility of this decision, the details and my experience purchasing a property in London.

Personal profile

Let's start with my profile. My name is Evgenii Ray, and I work as a software developer at Meta in the London office.

At the time of writing:

My base salary: £106,500 (£66,224.40 after tax / £5518 per month)

Annual bonus: 15% - £15,975£ (£9,933.66 after tax)

Shares: 50,000 - 100,000£ per year, highly dependent on the current stock price

I provided the data so you can assess affordability based on my income profile.

Renting

During my first year in London, I rented a 1-bedroom apartment in Hampstead, a beautiful and affluent neighborhood in the second zone of the city. The apartment was 35 square meters and located about 15-20 minutes from the city center. I was very pleased to have lived in Hampstead for my first year in London. It was a safe, clean, and comfortable area that felt like a small village despite being in the second zone of the city.

My rental expenses were as follows (per month):

Rent: £1800

Consul tax: £290

Gas + Electricity: £80

Total: £2170

While it was pricey to rent a such flat, I don't regret paying for the location in Hampstead. The neighborhood was worth the cost.

Mortgage

I decided to stay in the UK for the next five years. As I looked for options for longer-term housing, I considered whether it would be worth it to purchase my own place.

Flat vs House

Before beginning the search for a home, it's important to decide whether to buy an apartment or a house. In my case, the decision was straightforward, but it's helpful to weigh the pros and cons of each type of property. Let's start by examining the benefits and drawbacks of owning a house.

Pros of buying the house:

You not only own the house, but also the land it sits on. In England, this is known as "freehold" ownership, which means you have legal ownership of everything on and under the land.
Houses tend to appreciate in value more quickly over time compared to apartments or condominiums.
As the owner of a house, you have the right to make any changes to the property as long if it doesn't negatively impact your neighbors.
Houses generally offer more space and amenities such as parking and a backyard, which may not be available in an apartment

Downsides of buying a house:

The cost of buying a house may be higher, with a minimum entry threshold of around £600,000 and minimum deposit requirements of about 20% (£120,000) from banks, especially for immigrants.
There are typically fewer government support programs, such as "Help to Buy," available for purchasing a house since most houses are not new construction.
Many houses are older and may require separate renovation budgets to address issues such as inefficient heating, damp, or mildew.
Any problems with the house, such as a leaky roof or sewage issues, will need to be addressed and paid for by the homeowner.

Ok, what about the flat?

Pros of buying the flat:

The cost of buying an apartment is generally lower, with a minimum entry threshold of around £600,000 and a 5% (£30,000) initial deposit requirement under the "Help to Buy" program.
New apartments do not typically have issues with energy efficiency, damp, or mold.
The apartment is ready to move in and furnish, with kitchen appliances and finishes already in place.
In the event of problems with the building, such as a leaky roof or sewage issues, the landlord is responsible for repairs and covers the costs through the service charge.

Downside of buying the flat:

All apartments are sold under the "leasehold" scheme, which means that technically, the landlord owns the land and the building with apartments belongs to them. Fro, the legal standpoint it represents a kind of long-term lease (200-999 years). There is a possibility that "leasehold" may be eliminated in the future, but for now, it means that serious alterations to the apartment may not be possible.
Every buyer of an apartment is required to pay a service charge, which covers cleaning and maintenance of common areas, and may also include amenities such as a gym or swimming pool.
Not all apartments have parking, and some new buildings within Zone 2 of London are built under the "Car Free Building" program and do not have designated parking.

In my case, I didn't have a large initial deposit and wanted to live within cycling distance of the city center, so I decided to buy an apartment.

Process of buying the flat

I will omit the details of the apartment search, I can only say that it is a full-time activity incompatible with the main job. Ideally, if your partner can take care of it full-time for 4 weeks, it's ideal.

My requirements for the flat were:

2-bedroom 75+ sqm.
Lots of light and "wide floor-to-ceiling windows".
Availability of parks and large grocery stores
Transportation accessibility (20-30 minutes to downtown, preferably by bike)
Safe neighborhood
Large balcony

The real estate market in London is competitive, which means that good apartments tend to get snapped up quickly. This means that decisions to reserve an apartment must be made promptly. One advantage of reserving an apartment is that it is not a final purchase and allows you to take the apartment off the market while you consider your options. If you decide not to go through with the purchase, you can simply refuse.

We were able to find an apartment within three weeks with the following details:

Price: £650,000
Purchase tax (Stamp Duty): £20,000
Size: 77 sqm + 9 sqm balcony
Solicitor's fees: £1400

During negotiations, I was able to reduce the cost of the apartment to £600,000 and the developer agreed to cover the full cost of the Stamp Duty.

Mortgage, Help to Buy and Insurance

I mentioned earlier that I used the "Help to Buy" government program to purchase my apartment. This program allows you to take out a loan of 40% of the value of the apartment (up to a maximum value of £600,000) from the government at a 0% interest rate for the first 5 years. The rest of the funds are obtained through a mortgage from a bank and a deposit.

My initial outlay for the apartment included:

Deposit: £30 000 (5%)
Solicitor's fees: £1400
Stamp Duty: £0 (covered by the developer)
Mortgage processing fee: £500

The total amount borrowed was:

Mortgage: £330,000 at a 2.69% interest rate for 25 years
Government loan: £240,000 at a 0% interest rate for the first 5 years, then 1.75% plus a small annual increase

My current monthly expenses include:

Mortgage payment: £1511
Life insurance: £89
Council tax: £169
Electricity and heating: £100
House maintenance fee (Service charge): £250

This totals £2119, which is actually £70 less than what I paid to rent a one-bedroom apartment in Hampstead. After 5 years, the debt payment will increase to £1511 + £350 = £1811, with a small annual increase every year. However, given the current rate of inflation in England and the trend of rising industry wages, this increase is not expected to be significant

Economic feasibility

Deciding between renting and buying can be difficult, as everyone's circumstances are different. However, if you plan to live in England for 5 years or more, I believe it is worth considering buying a property.

Here are some reasons why:

After 5 years of paying a mortgage, I would have paid around £41150 in interest to the bank, but would also have built up equity in the apartment worth around £79755. If I had chosen to rent instead, that money would have simply gone towards paying rent.
The cost of living in England is increasing due to high inflation, which affects the prices of both rent and consumer goods. By taking out a mortgage, you can lock in part of your housing costs for the term of the mortgage and potentially save money in the long run. For example, £600,000 now is worth less than £600,000 in 5 years due to inflation. If you factor in a 5% annual inflation rate, £600,000 would be worth about £464,000 in 5 years.
The demand for affordable housing in England is increasing due to rising immigration.

I hope my experience can help you make your own decision about whether to rent or buy. If you have any comments or suggestions for improving this article, please feel free to reach out to me on Telegram at @evgeniiray.

You can also subscribe to my blog on Telegram or connect with me on Linkedin.

Thanks for reading!