30 May 2018

Financial Checklist for First Time Home Buyers

Regularly Asked Questions By First Time Home Buyers

Buying your first home is an exciting prospect for many people, getting your own space and making your first step onto the property ladder. A mortgage is one of the largest financial commitments you’ll most likely make in your life.

Apart from your monthly mortgage payments, there are others costs to consider when buying your first home:

These include:

  • Survey costs
  • Solicitor’s fee
  • Removal costs
  • Insurance
  • Initial furnishing and decorating costs
  • Mortgage arrangement and valuation fees; and
  • Stamp Duty

Luckily First-time-buyers do not have to pay Stamp Duty on the first £300,000 for properties up to the value of £500,000.

Here at Homes Independent, we are regularly asked questions from First Time buyers concerned about taking their first steps onto the property ladder. Our useful tips should help guide you through the sometimes-overwhelming process.

Q. How much can I borrow?

  1. When you begin to investigate how much you can borrow for your mortgage it all comes down to affordability. Mortgage lenders look at your income compared to your outgoings (bills and other debts) and work out how much spare cash you have each month. They may see you as a higher risk if you’re using more than half the credit available to you, as well as factoring in all your credit card and loan repayments.

It is also wise to have a cushion behind you so you’re not “living on the breadline” each month. Mortgage lenders will take this into consideration too as mortgage repayments rates can increase and they need to be sure can you afford the repayments. They will ‘stress test’ you on a higher repayment rate of 6-7%, to be sure you can afford the monthly repayments.

Q. How big of a deposit will I need to get a mortgage?

A. To get a mortgage you usually need a minimum deposit of 5%. Yet to get a good mortgage interest rate, currently you’ll often need 10% of the home’s value as a deposit. This can be quite a struggle for many first-time buyers, even if they do have help from family.

Golden Rule: Bigger the deposit = Better the Interest Rate = Lower your monthly repayments = The cheaper the mortgage.

The effect of having a bigger deposit

The difference between a 5% and 10% deposit is huge; the next big jump is at 20%, then 40%. The table below gives a typical example of your monthly repayments based, on your deposit.                  

Deposit

5%

10%

20%

25%

40%

Interest Rate

3.29%

1.82%

1.35%

1.24%

1.19%

Loan Amount

£142,500

£135,000

£120,000

£112,500

£90,000

Monthly Cost

£697

 £560

£472

£436

£347

Total cost over 2 years

£16,728

£13,440

£11,328

£10,464

£8,238

 

Based on the best value 2-year fixed rates for a first-time buyer with a house purchase price of £150,000 on a capital repayment basis over a 25-year term.

Q. How does the mortgage application process work?

A. Whichever mortgage you apply for, your lender will want to know you can continue to make your repayments.

You’ll need to provide evidence of your income, and provide information of your outgoings, including:

  • Debts
  • Household bills, and
  • Other costs, such as clothing, childcare and travel
  • To prove your income, you might have to produce payslips and bank statements over the last three months before you apply.

If you’re self-employed, you could be asked for tax returns and business accounts prepared by an accountant going back two tax years.

Q. What are help to buy ISA’s?

A. If you’re a first-time buyer saving for a mortgage deposit, the Help to Buy ISA set up by the Government in 2015 is worth considering.

Those aged 16+ can earn interest of up to 2.27% and then get 25% added on top when they use it for a mortgage deposit. Here are the basics:

- You can save up to £1,200 in your first month, then up to £200 each month after. When you use it for a deposit, a 25% bonus is added on top. E.g. for every £200 you save, receive a government bonus of £50- The minimum you need saved to get a bonus is £1,600 (the bonus would be £400).

- The biggest bonus possible is £3,000 – were you would need to have £12,000 saved.

- If you’re buying with someone who’s owned before, you can use the Help to Buy ISA, however they can’t. If two first time buyers buy together, you both can use the help to buy incentive.

- You need to use it on a property costing £250,000 or less.

- You don’t have to use it for a house deposit. You can make partial (or full) withdrawals. You’d still get the interest just not the bonus.

- Help to Buy ISAs can be used with ANY residential mortgage (normal mortgage, new build, shared ownership, Help to Buy), just not buy-to-let.

- If you get a good interest rate with a Help to Buy ISA from a particular lender, you don’t have to take that lenders mortgage. You’re free to get a mortgage from anyone so you should ALWAYS check across the market and find the best mortgage for you.

When you are close to buying your first home, you will need to instruct your solicitor or conveyancer to apply for your Government bonus. Once they receive the Government bonus, it will be added to the money you are putting towards your first home. The bonus must be included with the funds consolidated at the completion of the property transaction. The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitor’s, estate agent’s fees or any other indirect costs associated with buying a home.

Check here for a list of providers for the Help to Buy scheme

For full info on how Help to Buy ISAs work see:

https://www.helptobuy.gov.uk/help-to-buy-isa/how-does-it-work/

Boost your chances of getting a mortgage

Getting your deposit together is only the starting point of buying your first home. Each lender has its own bespoke criteria. You will need to make yourself attractive as possible to lenders in the hope they’ll offer you a down payment.

Not everyone will view you the same way, but there are many things you can do to stand out, that are likely to make a significant difference.

  • Check you credit score with Experian or Equifax
  • Pay your bills/debts on time such as utility bills and phone contracts
  • Avoid dipping into your overdraft
  • Stay in the same job
  • Get on the electoral roll
  • Be strict with your spending
  • Save the biggest deposit you can

If you need any further advice on any of the above, our mortgage adviser Rob Adams has over 15 years’ experience helping people buy their home. We can help advise you on what you’ll be able to afford before you start looking at properties.