You’ve made the decision that it is time to buy your first home. This might be because you are leaving your parent’s house, or you don’t want to rent any more. Whatever the reason is, this is a big step and it can be a complicated journey for those who have never bought a property before. In this article we aim to walk you through the financial side of the house buying process.
The first step before you even consider looking at potential new homes is to understand what you can afford and who is likely to lend to you. Without the finances in place you’ll never get that dream first home.
Working out what you can afford
It is highly recommended to employ the services of an independent financial advisor (IFA) or Mortgage Broker. They will be able to work with you to help you understand what you can afford and give you options as to what mortgages are available. Typically, there will be no charge to you for this service. The IFA or broker will ask you to fill out a detailed questionnaire and they will then search lenders to see what you might be able to borrow and what the monthly repayments will be. You might want to get them to apply for a decision in principle (DIP). This is not a mortgage offer but a statement that, if you can prove what you say about your financial situation, they are likely to lend you the money you need. A DIP can help you in the negotiations and will make your offer more attractive as you are halfway to obtaining your mortgage. The length of the mortgage will make a big difference to your repayments. Typically, a mortgage term is 25 years, but this can be extended if you are younger. If you are older, the term might be less as different mortgage lenders have different age limits. If you have concerns regarding your mortgage term make sure you discuss this with your IFA or Mortgage Broker.
One of the biggest hurdles in purchasing a new home is gathering a deposit together. Most mortgage lenders require a deposit of 10 - 25% of the value of the home you want to buy. For example: If you want to purchase a £200,000 house then you’ll need a deposit of £50,000 at 25%! As part of anti-money laundering regulations your conveyancer will need to see evidence of where the deposit came from before they can complete your purchase. In addition, most mortgage providers apply very strict rules around where the money for a deposit comes from, for example, most will not accept a deposit from a credit card or another loan. There are, however, a few ways to collect the funds for a deposit:
A gifted deposit is where someone gives you the money for the deposit. This could be your parents or another family member or friend. The important thing to understand is that this is a gift and not a loan. The person giving you the money will have to sign a declaration that it is a gift, that it will not need to be re-paid and that they have no financial stake in your home.
With the government help-to-buy equity loan scheme you have to provide a 5% deposit and the government will lend you 20% if you live outside of London or 40% inside London on a house costing up to £600,000. You won’t be charged any loan fees for the first 5 years of the loan, other than a small admin fee each month. To be eligible you need to get through the Help-to-Buy affordability check, which is different to your mortgage lenders’ affordibility check, be buying a new build home for £600,000 or less, have a 5% deposit and not own another home at the time you exchange contracts. Your IFA or Mortgage Broker will be able to help you with the help-to-buy checks.
You can save the deposit money yourself and your conveyancer will need to see the evidence of the savings so be prepared to share your bank statements with them. Ways to save include moving back home to save rent money or get a lodger if you have a spare room. You can cut out the luxuries such as splurging on new clothes, holidays or expensive phone plans while you save.
To boost your savings consider the government help-to-buy ISA which will boost your savings by 25% up to a maximum of £3,000 but with a minimum of £400 boost, so you need to have saved £1,600 before you can claim the government bonus. The bonus is per saver so if there are two of you, you can get your savings boosted by up to £6,000 that’s a bonus of £1,500!
Now you have your plan
So, you’ve got a plan together to ensure you can get a mortgage and the deposit. Before you go any further check the other fees that you are likely to have to pay when buying the house. The additional fees can be expensive so you need to factor these in to your savings plan. The additional fees include things like:
· Stamp duty – first time buyers will pay no stamp duty on houses up to £300,000. For houses up to £500,000 you will pay stamp duty on £200,000 and for houses over £500,000 there is no stamp duty relief so you will pay the full amount at standard rates. You can calculate the potential stamp duty liability here
· Solicitors fees
· Survey costs
· Moving costs
· Mortgage arrangement fees which can often be added on to the mortgage
· Initial furniture and decorating costs
· Council tax banding
Buying a new home can be very costly and can take time to save for but it is also one of the most rewarding things you will ever do. Ensuring you have the financial details sorted will help smooth the journey for you.
This article is intended to be used as an example only and should not be relied upon as a substitute for professional advice. It is always advisable to seek specialist advice from a qualified person especially when it comes to financial matters.