The ultimate guide to buying your first home - for first time buyers

A Guide For First Time Buyers

Buying your first home can seem like a daunting task, however, with a little guidance, the process can be made simple and straightforward.

One of the most important aspects to consider is your personal finances – high mortgage repayments can quickly turn into a disastrous situation.

Your finances, along with tips, advice and other aspects will be highlighted in this comprehensive guide for first time home buyers.

Content

• Initial advice for first time buyers
• Saving a deposit
• Budgeting
• Costs
• Appointing parties
• Search
• Mortgages for first time buyers
• Offer, exchange, complete
• Other schemes
• Innovative thinking
• Tips along the way
• Infographic

Initial Advice For First Time Buyers

Prior to starting on your journey into purchasing your first home, have you considered the financial implications of doing so?

While we are not trying to put you off from buying a home, there may be other options available to you which will increase your monthly cashflow.

For example, purchasing your first home will tie you up in a mortgage for around 25-50 years. Whereas if you invest in the property market, your investment property will be tied in with a mortgage, however will also be generating a monthly income.

This income can then be used to supplement your own rent costs, providing you more free money to enjoy your life with.

Another option would be to purchase a shared property. This way, your initial deposit and monthly mortgage repayments will not be as large as buying alone. We’ll discuss more on shared ownership later on.

However, to clarify, really consider whether purchasing a house is the best route to take.

If you’re more inclined to rent a property, check out our guide to renting property.

Saving a Deposit

So you’re certain that you are going to be purchasing a house – whether your own house, or an investment property. Either way, you will require a deposit.

A deposit is used to secure a mortgage on the property – i.e. In order to purchase a £100,000 house, you are able to obtain a mortgage (loan) of around 70-90% of the property value.

In simpler terms, this means that you will pay £10,000-£30,000 and a lender will pay the remainder.

As the lender has contributed to the purchase of the property, you will be required to repay them each month until a pre-agreed date. More information on mortgages and types can be found later on in this guide.

As a general rule of thumb, the lower the deposit paid, the higher the monthly repayments will be.

Budgeting

Following on from saving a deposit, budgeting is a crucial stage in determining the type and cost of property you are able to afford.

For first time buyers, there are 95% mortgages available – i.e. you will only be required to pay a 5% deposit. However, monthly repayments can be lower if you are able to come up with a 15-25% deposit.

Consider the cost of your potential mortgage. For example, if your mortgage is going to cost £1000 per month, and you take home £1500, then it is likely that the mortgage is going to be a burden. In general, you should spend no more than 50% of your monthly income on a mortgage.

Another point to note when budgeting – Consider whether you will be able to keep up with mortgage payments if your rate increases.

Further to this, many mortgages will have 1-2 years with a low rate and you’ll then be on the “normal” rate until the end of the mortgage term. A 1% rate increase doesn’t sound like much, however can add up to a substantially larger outgoing each month.

It is vital to ensure that you are completely sure that you want to purchase a house – a mortgage is a long and fairly expensive commitment.

Costs of Buying Your First Home

A deposit and monthly mortgage repayments are not the only costs to consider when budgeting for a new house, there are various other costs and fees including:

1. Mortgage Fees

When applying for a mortgage, there are fees which vary on a case-by-case basis, however they will generally consist of a valuation survey and arrangement fees which will cost around £1,000-£2,000. See more about mortgage costs.

2. Solicitor Fees

A solicitor (or conveyancer) is required when purchasing a property. Fees will range from around £650 – £1500, depending on the total value of the property.

3. Removal Costs

If you have a large amount of belongings, you will of course require a removal and moving company to assist you with your belongings. This could cost anywhere from £50 to a few hundred Pounds.

4. Insurance

When owning your own home, you will need to be protected from the worst case scenarios, such as a house fire, flooding etc. House insurance isn’t too expensive – A policy may cost from £170+ per year. This is dependent on the value of the property and its location.

5. Buyers Agents

In order to assist you in finding the best deals, areas or property types which you would like to purchase, it may be a logical idea to appoint a buyer’s agent. These people work to assist you during purchasing and will also take care of aspects such as price negotiations.

Fees are similar to selling agents, at around 1.5-3% of the total purchase price.

6.1 Land Transaction Tax (Wales)

If you live in, or are purchasing a property in Wales, you are required to pay a land transaction tax depending on the value of the property.

|Property value|Tax – % of total value| |--|--| |Up to £180,000|0%| |£180,001 – £250,001|3.5%| |£250,001 – £400,000|5%| |£400,001 – £750,000|7.5%| |£750,001 – £1,500,000|10%| |£1,500,000 +|12%|

6.2 Land and Building Transaction Tax (Scotland)

In Scotland, this added tax is a fairly similar structure to Wales:

|Property value|Tax – % of total value| |--|--| |Up to £140,000|0%| |£140,001 – £250,000|2%| |£250,001 – £325,000|5%| |£325,001 – £750,000|10%| |£750,000 +|12%|

7. Stamp Duty

Stamp duty is a governmental tax on the buying and selling of real estate in the UK. Stamp duty rates vary depending on which stage of the property ladder you are on.

Since you’re reading a first time home buyer guide, you’re in luck. As a first time buyer, you’re not required to pay any stamp duty tax, as long as the property is worth under £300,000.

8. Other Costs During Ownership

Unfortunately, even after all the fees listed above, once you’ve moved into your new home, there are two other primary costs which are applicable.

• Each year, you’ll be required to pay council tax. Rates of council tax vary depending on where in the UK you’re property is located. However, depending on your property value, you can expect to pay between £1200 – £4000 per year. For the exact amount payable, check the governments council tax calculator.

• Depending on your lifestyle, utility bills can accumulate to a fairly significant amount each year. If you have the opportunity, we would highly recommend that you purchase a purpose built eco-home. These properties have a significantly lower energy requirement and also contribute to an overall appreciation of the surrounding living environment.

Appointing Required Parties to Purchase a Home

An advisable step to take at this point is to find and appoint the various people/services you will require during the buying process. These include:

• Solicitor
• Mortgage broker (if applicable)
• Mortgage provider
• Buying agent (if required)
• Removals & moving company
• Surveyor (Usually handled by mortgage provider)
• Conveyancer
• Structural engineer if renovating a property

Sourcing and appointing these parties can provide useful early on in the process, as they may have some useful words of advice and can make the overall process much more straightforward.

Mortgages For First Time Buyers

As stated above, a mortgage is a loan secured against a property. You are required to pay from 5%+ of the total value as a deposit – gone are the days of 100% and 110% mortgages. There are various factors to consider when searching for a first time buyer mortgage.

We have a whole page discussing the different types of mortgages, which we would advise to check out in order to understand the types, rates and costs. However, we’ll briefly cover first time buyer mortgages below.

1. How Much Can You Afford Per Month?

This is one of the key elements to investigate prior to purchasing a property with a mortgage. The mortgage amount governs the value and in turn size of the property you are able to afford.

Mortgage repayment rates can vary depending on their term (length), amount borrowed and whether interest only. On the high end of the scale, a mortgage repayment may be 4.4% per month.

Calculate the maximum property value you can afford with a 15% deposit and 4.4% monthly repayments to determine your budget. – You are likely to be eligible for a higher mortgage amount and lower repayment rate as a first time buyer, but this is a good place to start as you will pass the mortgage stress tests during application.

2. Government Mortgage Schemes For First Time Buyers

Help to buy – This scheme is available to anyone who is intending to purchase their first property. You are able to obtain an interest-free loan for 5 years which will contribute to the purchase price, along with a 5% deposit from yourself.

3. Applying For a Mortgage

Mortgages applications have become stricter over the last few years. This is to ensure you are able to keep up with repayments if interest rates rise.

The application process will also ensure that you tick all affordability criteria, i.e. you are earning more than the mortgage repayment amount.

A word of caution here – When applying for mortgages, each quote you receive will appear on your credit report – too many on your report will come across as spam or fraudulent.

4. Guarantor Mortgage

In order to receive a potentially larger mortgage, or a lower interest rate, you are able to guarantee your mortgage repayments with the assistance of a relative.

However, this is a legal contract and if you cannot pay the mortgage, they are liable to pay – it is vital that they understand this, although the mortgage provider will make this clear during application.

Searching For a Property

Hopefully you’ll now have an idea of the total budget you’ll require upfront for a deposit and applicable fees and how much you can afford each month. If not, skim over the above content and write on some paper a rough estimate of a deposit and monthly repayments & utilities etc.

You can now search houses for sale. However, you may see some listings which are stated as “Freehold” or “Leasehold”. What do these mean?

Freehold or Leasehold?

A freehold property is one in which you own the property and the land in which it is situated.

A leasehold property is usually an apartment or flat – you own the apartment/flat however will usually pay a ground-rent on the land, or in some cases will own a share of the land. In these cases (owning a share of the land) you, along with other apartment owners, are liable to maintain the building and land.

Further to this, there are a variety of features which you should expect the property to include, such as double glazing and an efficient heating system.

Offer, Exchange & Completion

Offer Once you’ve found a property which you like and fits your budget, you can make an initial offer through the estate agent, which the seller may accept or reject – possibly requiring negotiations.

If the seller accepts the offer, your mortgage provider will conduct a survey on the property. This is to ensure that the property is worth the amount they are lending. As noted in the costs section above, you will be required to pay for the survey on the property.

Exchange & Completion This section is handled primarily by your solicitor, who will exchange preliminary contracts between you, the selling agent or private seller and your mortgage provider.

Within the preliminary contract, you will agree the terms of sale with the seller – the price, your personal details, the completion date and whether anything else is included in the sale.

At this stage, you will pay an initial deposit on the property – This deposit is used to secure the property, to signify that you are serious about purchasing the property and should not be confused with a mortgage deposit. If you back out of the deal, the seller keeps this deposit. Once all parties are ready, the exchange of final contracts is undertaken. An exchange of contracts is legally binding.

Once the exchange of contracts is completed, the mortgage lender will approve your loan and you will be required to pay the mortgage deposit* before a pre-arranged date.

*You pay the mortgage deposit to your solicitor, who will securely hold the funds whilst awaiting the loan payment from the mortgage provider. Once your solicitor has the total amount equalling the agreed selling price of the property, they will transfer all of the funds to the seller’s solicitor. The payment is handled this way as it is much more secure – you wouldn’t want to transfer the funds directly to the seller as they could run off with your money.

You will now have completed on the property transaction and are able to pick up your keys from the sellers agent on an agreed date – or specified completion date. Your solicitor will transfer and register you as the legal owner with the Land Registry and organise stamp duty.

Other Help to Buy Schemes

1. Right to Buy

If you live in a council house, you are eligible for the right to buy scheme, which allows you to purchase your home from the government at a reduced value. However, a point to note is that you must have been living at the address for 3+ years.

2. Right to Acquire

Similar to the right to buy scheme, the right to acquire scheme allows you to purchase your home if you have lived in the property for 3+ years, are a housing association tenant, or your landlord has been part of the housing association for 3+ years.

3. Shared Ownership

Another scheme which may be of interest to you is the shared ownership scheme. In this scenario, you will own a share of the property value – usually 25%. On the remaining 75% value, you will pay a monthly rent, however rent will be a lower value compared to if you did not own any share in the property.

Innovative Thinking

If you’re thinking about purchasing your first home, it is not set in stone that you must go down the usual route of a mortgaged property with a 15-20% deposit paid with savings – if you can find an innovative strategy to raise the deposit, then by all means, follow through.

Conversely, there is nothing stopping you from purchasing your first property as a “do-upper” (poor condition property with a well below market value selling price, which requires renovation.

Another strategy could be to group together with some friends/relatives who you would be happy to live with and all go in on the same purchase. This strategy can make a large property extremely affordable.

If you’ve found/worked out an innovative strategy to purchase a property, let us know and we’ll add it to this article for others to benefit from.

Tips Along The Way

• When viewing properties, be sure to ask the estate agent plenty of questions about the property. If possible, ask the neighbours about the neighborhood and surroundings – they may give you an insight which the agent or seller may not wish to divulge.

• Be prepared to move quickly – especially during the offers and contracts stage. The last thing you want is to delay the process and the seller become interested in an offer from another party. In some cases, you may be able to get a pre-qualified mortgage which could speed up the process.

• If taking the traditional route, start saving early. On average, a first time buyer requires around £45,000 for a deposit, although this figure does seem fairly high – you may live in an area with low house prices, meaning the deposit you need to save will be lower.

• Discuss with relatives or friends if they are able to assist you with your first deposit.

• Consider carrying on renting and purchasing a BTL (Buy to Let) property instead. Your monthly cashflow is the most important aspect to consider.

• As mentioned above, don’t be drawn in by an initially low mortgage deal. Just because you can afford the deposit and mortgage repayments now, doesn’t mean you will be able to in the future