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First Time Buyers Guide: Buying Your First Home
In our first time buyer mortgage guide, you’ll learn about each of the steps involved in the purchasing process. Our first time buyers guide covers all aspects of buying a property, such as what is a first time buyer? And what sort of fees can you expect to pay when applying for a mortgage.
In the first section of our first time buyer guide, we explain the considerations you need to make when buying a property for the first time.
Buying a property is challenging at any time, but especially if you’re just getting on the property ladder. In this section of our first time buyers guide to buying a house, we highlight some of the ways you can get help with your purchase.
If you’re considering buying a house with a partner, there are legal considerations to make. We highlight what you need to know if you’re buying property with someone else.
Getting a mortgage involves several steps and it can be daunting for a first time buyer. We will take you through the steps you can expect when applying for a mortgage and how best to prepare.
When you take on any financial commitment, you need to draw up a budget to make sure you can comfortably afford it. In this section of our first time buyer guide, we’ll outline the basics of budgeting and how to plan for costs related to your new home.
Your monthly repayments are just one aspect of getting a mortgage – there are also mortgage fees and additional costs to plan for. We’ll explain the most common charges and what to budget for.
What is a decision in principle and why do you need one? We’ll explain how to obtain a DiP and what the benefits are.
You’ve found your dream home and you’re ready to make an offer. In this section, we’ll explain how to find a property and how to make an offer when you’ve found ‘the one’.
First time buyers can be daunted by the process of applying for a mortgage – we’ll explain what you need to have prepared and how to make the process easier.
Once you’ve completed, you can finally move in. But there are still financial factors to keep in mind, which we’ll outline in the final section of the first time buyers guide.
1: Are you ready to buy a property?
There are many advantages of buying a home, but it’s important that you consider this type of investment carefully before diving in. There are several pros and cons of buying a house, if you’re in a comfortable financial position and can make the monthly repayments. While there are benefits of buying a house, it’s a complex and lengthy process. There are a number of things to check before starting this process:
- Are you financially stable?
- Are you ready to settle down?
- Do you have enough saved for a deposit?
- How does the property market look? Is now a good time to buy?
2: Get help buying your first home
While buying a property at any time is expensive, it can be especially hard for first time buyers to get on the property ladder. Luckily, there is plenty of help for first time buyers to take advantage of to help with the purchase of a first home, including:
Help to Buy Government Scheme
If you have a smaller deposit, buyers in England could be eligible for the Help to Buy equity loan scheme. The purchase price for a new build property must be less than £600,000 and under this scheme, first time buyers can borrow 20% of the purchase price, interest-free, for the first 5 years as long as they have a 5% deposit. For those buying in London, it’s 40%.
Shared Ownership Schemes
Shared ownership means you buy a share of a property from the landlord (usually the council or housing association) and then rent the remaining share. You’ll need a mortgage to pay for your share of the property, which can be between a quarter and three-quarters of the overall value. You can increase this share at a later date.
Right to Buy Scheme
The Right to Buy scheme is for tenants in England and Northern Ireland who rent their property from the local council. The scheme enables them to buy at a discount, if they’re eligible – the size of the discount depends on the location and the type of property you want to buy.
Forces Help to Buy Scheme
Regular armed forces personnel can benefit from the Forces Help to Buy scheme, which enables them to borrow up to 50% of their salary, up to £25,000, interest-free, to buy their first home or move to another property on assignment.
To be eligible for this Help to Buy scheme, regular personnel need to:
- Have completed the prerequisite length of service
- Have more than 6 months left to serve at the time when they apply
- Meet the necessary medical categories
A gifted deposit is a sum of money given to you by someone else, usually a family member, which can be used either towards your deposit or as the deposit itself, depending on how much has been gifted to you. It is specifically a gift, without any agreement for the buyer to repay the money.
3: Buying a house with a partner
When it comes to buying a house, joint ownership can make the process easier. Buying a house with a partner can help you both raise a bigger deposit which will help you to get on the housing ladder. However, there are things to consider when you sign on to a mortgage with someone else, including if one of the owners wants to sell, the other owner will have to give their consent.
4: Mortgage basics for first time buyers
These are the steps you can expect when applying for a mortgage for the first time.
What is a mortgage?
Firstly, what is a mortgage and who uses them? A simple definition of a mortgage is a form of loan that you can use to buy or refinance a property. Mortgages can be referred to as mortgage loans and they’re a way of buying property without needing all of the money upfront.
There are certain eligibility requirements you need to meet, such as:
- a stable and regular income
- a low debt to income ratio
- a positive credit score
- a deposit.
What is a first time buyer?
What is a first time buyer? You may think the answer is easy, but there are some instances in which you would think of yourself as a first time buyer but where lenders would disagree.
The instances in which someone can be considered a first time buyer are:
- If you’re a single person who has never owned a home before, anywhere in the world
- If you’re a couple and both partners have never bought a home before
- If you own, or have previously owned, commercial property (which doesn’t have living quarters attached to it) but never owned a home before
You won’t qualify as a first time buyer if:
- If you’ve owned a home before, whether you purchased it yourself or not
- If you’re a couple and one of you has owned a home before
- If someone has purchased a home for you, such as your parents
- If you’re a prospective buy to let buyer and you’ve owned a home before
Types of mortgages available
When choosing a mortgage, there’s more to consider than just the interest rate and associated fees. There are several types of mortgage to choose from, depending on your circumstances and needs. Speaking to a mortgage broker can help you determine the best option for your needs.
Fixed Rate Mortgages
One of the most common types of mortgage is a fixed rate deal – but what is a fixed rate mortgage? With this mortgage product, the interest rate you pay stays the same for the length of the deal. They may be advertised as ‘2 year fixed’ or ‘5 year fixed’ mortgages.
- The advantage of a fixed rate mortgage is that you have peace of mind that your monthly repayments won’t change for that amount of time
- The disadvantage to consider is that fixed rate deals are usually slightly higher than a variable rate mortgage. Plus, if interest rates fall, you won’t be able to benefit
What is a tracker mortgage and what are the benefits? A tracker mortgage moves in line with another interest rate, which is usually the Bank of England’s base rate, plus a few percent. Whether it goes up or down, your mortgage interest rate will do the same.
Tracker mortgages are usually for a shorter period, usually between 2 or 5 years, but some lenders will offer tracker mortgages that last the length of your mortgage or until you switch to a different deal.
- The advantage is that if the rate your mortgage is tracking drops, your mortgage payments will be smaller
- The downside is that if the tracking rate increases, your mortgage payments go up
Mortgage repayment options
In addition to different types of mortgage, there are also different ways you can repay your mortgage back.
Interest Only Mortgages
What is an interest only mortgage? With this type of mortgage, your monthly repayments cover the interest due on the amount you borrowed. The interest can be fixed over time or it can be paid at a variable rate.
While these types of mortgage offer lower monthly payments, compared to a repayment mortgage, you will not be paying back any of the capital which means you need to be able to pay back a lump sum at the end of your mortgage term.
As the most popular mortgage repayment option, what is a repayment mortgage? With this mortgage, you make monthly payments for an agreed amount of time, also referred to as the term of your mortgage, during which you pay back both the capital and the interest.
With a repayment mortgage, the mortgage balance will get smaller every month and the amount you borrowed will be paid back in full, plus interest, at the end of the term.
5: Budgeting and costs for buying a home
The costs of buying a house can soon mount up, so it’s important to budget early on to check that you can afford the repayments and associated costs involved with buying a home.
Budgeting for monthly mortgage repayments
The first step to budgeting for buying your first home is to work out your monthly mortgage repayments. If you’re wondering ‘how much will my mortgage be?’, using a mortgage repayment calculator can help you gauge what you can expect to pay each month, depending on your financial circumstances, deposit and property price.
Understanding how much you can borrow
Once you have a guide for your monthly budget and mortgage repayments, the next question to ask is ‘how much can I borrow?’. Different mortgage providers will offer varying amounts, so it’s beneficial to speak to a mortgage broker who has access to the whole market and can help you find the best deal.
Your credit rating and how to improve it
Your credit rating plays a big role in any loan or mortgage application, and it provides an indication of how a lender may assess you and your affordability for a mortgage. When you apply for a mortgage, a lender will try to predict your future behaviour based on how you’ve handled your finances in the past.
There are several ways to positively impact your credit rating – here are a few options when it comes to how to improve credit rating for buying a house.
Check your credit report, as this dictates the products and rates available to you. Almost every credit provider will use your credit file to determine if your application will be accepted, but they’ll also use it to check what interest rate you’ll get.
Check your credit report at least once a month to make sure that all the information is up to date and correct. If you notice any mistakes, make sure you get them amended as soon as possible.
Registering to vote and getting on the Electoral Roll
The electoral roll is used to confirm your address, and this plays a big part in the identity checks lenders will carry out. It only takes five minutes to sort out online, but it could boost your score by as much as 50 points. You can get on the electoral roll register here.
Inactive current accounts and credit cards
Check for any inactive current accounts or credit cards on your credit report. There are two scoring factors when it comes to your credit score – your length of history using credit and the utilisation rate.
There’s no single answer when it comes to whether or not to cancel unused accounts and credit cards, and there are several factors to consider. Cancelling an unused card might:
- Reduce the risk of fraud, since accounts you rarely check on can make you more vulnerable to fraudsters
- Decrease your chances of getting credit, since it can be beneficial to show lenders you’ve been approved for credit in the past.
- Increase your credit utilisation which is the proportion you use of your available credit. This can lower your score.
Assess your individual circumstances to determine whether cancelling unused cards and accounts might benefit or be detrimental to your score.
Reduce your personal debt
High levels of existing debt might make lenders hesitant to lend you more money, so one way to improve your credit score is to reduce the amount of personal debt you have. Ideally, you should aim to pay off as many outstanding debts as possible before taking on a mortgage.
Save regularly so you’re ready to buy a home
Having savings in place is really beneficial when you’re about to buy a home, whether it’s to put towards décor and updating your home when you move in or to pay for mortgage fees and solicitor costs. Try to save regularly, so that you have funds in place to support you if you need them.
How much deposit will you need?
Before you can start looking for properties, you’ll need a deposit. As a first time buyer, deposit savings can be one of the most challenging hurdles to buying property, as it can be a lot to save for.
As a rule, you’ll need to have at least 10% of the cost of the home you want to buy – a home costing £150,000, for example, will require a deposit of £15,000. But the more you can save, the better your loan rate will be, resulting in lower monthly mortgage payments.
6: Mortgage fees and additional costs
There are various fees involved with buying a property, from mortgage fees to valuation costs and arrangement fees. Below we’ve answered some of the most common questions when it comes to additional costs, such as what are mortgage fees? And what are late payment charges?
Mortgage product fees
What are mortgage product fees? Also known as arrangement fees, mortgage product fees are sometimes added to your mortgage or they can be paid up front. Bear in mind that if you add them to your overall loan amount, you will pay interest on these fees.
Mortgage transfer fees
Most lenders charge mortgage transfer fees which is a charge of between £40 and £50 for transferring the mortgage money you’ve borrowed. This is transferred to your solicitor so that they can complete your purchase.
Mortgage legal fees
Legal fees for first time buyers can sometimes be a shock. But it’s important to plan for them as they will include conveyancing (which is the transfer of property ownership), checking documents and paperwork, and assessing factors such as planning permission issues.
For first time buyers, legal fees will either be charged as a flat fee or as a percentage of the value of the property. Depending on the location, the type of property and the complexity of the transaction, you can expect to pay between £500 and £1,500.
Late payment charges
Mortgage late payment fees may be charged when you miss the due date or miss the payment entirely for your monthly repayments. Mortgage late payment charges can also affect your credit score.
First time buyers valuation fees will be paid for by the purchaser, but the valuation itself will be arranged by the lender. But what is a valuation fee? A valuation is to check the home is worth what you’re planning to pay for it, and the fee is for the valuation to be carried out on your behalf.
Stamp Duty payments
You may have heard of stamp duty on properties and wondered ‘how much stamp duty will I pay?’. But good news – for a first time buyer stamp duty fees are ignored, providing the purchase price is less than £300,000.
If you’re a first time buyer purchasing a property over £300,000, the stamp duty fee will be 5% on the amount above £300,000 up to £500,000. For purchases over £500,000, first time buyers will not benefit from any stamp duty relief.
Additional costs for removals
In addition to buying your home, you’ll also need to factor in costs for removal firms – especially if you’re renting a property and have a lot of furniture and belongings.
Insurance cover and what you’ll need
You’ll need to budget for insurance on your property, not just for the property itself but also for mortgage protection, which will cover your mortgage payments if you become unwell for a long period or lose your job.
7: What is an Application in Principle (AiP)?
An application in principle (AiP) is a statement from your lender which confirms that they will lend you a certain amount before you’ve finalised your purchase.
But what is a decision in principle? And what is a mortgage application in principle? These are terms which can all be used interchangeably, but they mean the same as an AiP.
How to get an Application in Principle
You can get an AiP from your potential lender by providing information about your finances, so they can assess how much you can borrow. You can obtain an AiP by speaking to one of our mortgage brokers, alternatively you can also request one online or by visiting your local branch.
8: How to make an offer on a property
Knowing how to make an offer on a house can be daunting for first time buyers. There are a few factors to consider:
Leasehold vs Freehold
Is the property leasehold or freehold? This makes the difference between owning your home and having a landlord, even as a buyer. Leasehold properties are usually flats and are a method of owning a property for a fixed term, but not the land it is built on. In order to own the property, you have to pay ground rent and when the lease expires, the ownership of the property reverts back to the freeholder. The majority of flats are leasehold properties. Freehold means you have outright ownership of the property and the land it stands on.
How to find a property
You need to know how to find a property before you can know how to make an offer on a property. You can either contact estate agents directly or use property sites like Zoopla and Rightmove to find a home that’s in your budget and ideal location.
Conveyancing and surveys
Homebuyer surveys are useful in helping you avoid unexpected repair costs in the future, especially as a first time buyer. It will give you a better idea of how much you may need to invest in the property, if you buy it.
You should always check if a property is within your budget and if you can afford the repayments and associated costs that come with owning a home before you make an offer.
9: Applying for a first time buyer mortgage
As a first time buyer, there are a few things you’ll need to prepare for when applying for a mortgage.
What documents you’ll need for a mortgage application
One of the most common questions when it comes to how to apply for a mortgage is knowing which documents you need for the application process. Typically, you’ll need:
- Utility bills
- Last 3 months of payslips
- Passport or driving license
- Last 3 to 6 months of bank statements
- Proof of any benefits received
- Last 2 to 3 years of accounts and SA302 tax return form if you’re self-employed
Mortgage application timescales
A mortgage application can take in the region of 18-40 days to be processed, providing there are no complications.
10: Completion and moving into your new home!
After completion, you can officially move into your new home. But here are some mortgage management tips to consider.
Managing your mortgage
It’s important to stay in control of your mortgage payments – make sure you plan a budget each month and plan for any sudden changes to your income.
Mortgage overpayments and interest
Check the terms of your contract to see if you’re able to make overpayments. Most lenders will allow overpayments up to a certain percentage, but more than this will incur fees so double check what you’re able to pay.
Mortgage payment holidays
If you’re struggling to make repayments, you can contact your lender to discuss a mortgage payment holiday which enables you to pause your monthly payments for a temporary period.
What to do if you can’t make a payment?
You should contact your mortgage company straight away if you can’t make a payment. You may qualify for a temporary payment holiday or have the option to refinance to a lower payment.