Buying your first home
If you're a tenant, you are spending an estimated 27% of your gross salary before tax on rent, according to the Office for National Statistics. If you are in London then it is more like 49%. Add into the equation messy housemates, restricted control over your living space and the feeling that you're throwing your hard earned money down the drain, it is no surprise that I get more and more calls from young professionals growing frustrated about their situation and wanting to get their foot onto the property ladder.
The outlook can seem bleak as tenants struggle to put money aside on top of their rent and bills and pay off student debt, credit cards and other commitments. For the majority, it will be parents who come to the rescue with a deposit, while for many others it will be combining resources with a partner that will put you in a position to buy your first home.
Regardless of circumstance, the most common questions I am asked by potential First-Timer buyers are; How do I get a mortgage? Where do I get a mortgage? and How do I go about buying a house, what is the process?
Here are my answers.
How do I get a mortgage?
The following are what I believe to be the 3 most important factors to consider when thinking about getting a mortgage:
1. Deposit - You will need at least a 5% deposit in today's market. Have a look at property prices for the area and type of property you want to buy. You will also need to factor in other costs such as solicitor and mortgage fees, cost of moving into and furnishing your new property and possibly stamp duty. Remember, the smaller the deposit the higher the mortgage payments will be and this can impact on affordability.
2. Income - Lenders will calculate how much they are willing to lend based on a multiple of your income. For most lenders this is 4.5x, this means if you and your partner have a combined income of £40,000 then X 4.5 = a possible loan of £180,000.
3. Affordability - The amount the lender will be willing to lend will mainly be determined by your commitments and spending habits. Taking the example above of a loan of £180,000, if you have credit cards, loans or children then these are likely to reduce the maximum loan you can get. The lender will want to see that each month your income is exceeding your expenditure and you can afford the mortgage even if interest rates increase.
There will be other important individual factors and circumstances to consider, but as minimum the above three factors should be in place. If you do not meet the above criteria then you will want to turn your focus on how to achieve each of the above, for example finding ways to put aside some money each month until you have the deposit you need.
There are also schemes in place to help you attain home ownership. These include Help to Buy which allows you to buy a new build property with a 5% deposit or Right to Buy which allows you to buy your council house at a discount if you have been there for at least three years.
You can also use shared ownership as a stepping stone to full home ownership by purchasing a % of a property and paying rent on the rest. Shared Ownership is helpful if you have a smaller deposit but a good level of disposable income.
If you lack a deposit but have very understanding parents, you may even be able to get a guarantor loan of 100%.
Use this calculator to find out a general idea of how much you may be able to borrow. If you're not where you need to be, feel free play around the figures so you know what to aim for.
Where do I get a mortgage?
Once you feel happy you have satisfied the general criteria for a mortgage as shown above, you will probably start to think where do you get a mortgage from and what do you need to do to get the ball rolling. You broadly have 3 options:
1. Go to a bank - You can walk into any bank and ask to talk to them about getting a mortgage, they won't charge a fee to arrange this for you however, they will only offer their own mortgages, this means there are probably much more suitable and less expensive mortgages available in the wider market.
2. DIY - You can shop around for mortgages on the high street or price comparison websites. Although a great idea in theory, mortgages are complex products with complex criteria and the most common problem we see is that you spend a lot of time researching and applying for mortgages that you aren't eligible for and get declined. This can show as a red flag on your credit file to lenders who see that you have already been turned down. If you subsequently find that you took out a mortgage that wasn't suitable for you, you will have no protection as it was you who chose the mortgage and therefore your responsibility.
3. Mortgage Adviser - A mortgage adviser will guide you through the entire process of purchasing your first home from start to finish. There is often a charge for this however the advice is regulated which means you are protected if you are given an unsuitable mortgage. For example at Domus Financial Services the fee for providing mortgage advice ranges from £0-£400 depending on the loan required.
The fee for advice is comparatively small compared to solicitor and other fees but can prove much more valuable. Mortgage advisers are not normally restricted by whose products they can offer like banks are meaning they can find the best rates and the most suitable mortgage for your individual circumstances. They also will handle the paperwork and their expertise means you normally stand a much better chance of being accepted first time.
Things can go wrong when buying a property and is more common than we like to think. This is a result of the numerous parties involved and the tight timescales that people may have, especially if there is a long chain. A mortgage adviser is there to fight your corner if things go wrong and ensure that any issues are dealt with swiftly.
How do I buy a house?
Buying a home can be daunting for First Time Buyers given the amount of money and responsibility involved. I have broken down the process into key stages so you know what to expect, when and the costs involved. These apply to England, Wales and Northern Ireland, the process is considerably different if you are in Scotland.
1. Decide what you can afford and find a mortgage
You will typically need between 5%-20% as a deposit for the home you want to buy. Therefore for a property of £150,000 you will need to put down at least £7,500. It is important not to overstretch yourself financially so you will need to consider how you'll cope if your financial situation changes or interest rates rise.
You will also need to be able to cover other expenses such as:
Lender fees which can be anything from £0-£2,000
*Stamp Duty - (Land and buildings Transaction Tax in Scotland, or Land Transaction Tax in Wales).
Mortgage Advice Fees
Initial furnishing and decorating costs
*First-time-buyers will pay no Stamp Duty on the first £300,000 for properties worth up to £500,000.
If you are using a mortgage adviser, they will be able to help you work out these costs in advance. In terms of arranging a mortgage. As mentioned in the above section, you can go to your bank, find a mortgage yourself online or use a mortgage adviser. You may wish to try a combination, for example searching online to get a general idea of what is available and then use an adviser who can provide a more in-depth search and handle all the paperwork.
Once you have found a mortgage that you like, you will want to obtain an 'Agreement in Principle' from the lender which is a rough indication of how much the lender is willing to lend and the associated interest rate.
2. Make an offer
Now that you have found the mortgage, you can start to look for property. When you have found one you like then make an offer. It is common practice in England to offer below the asking price, in Scotland it is the opposite. The offer is normally made through the Estate Agent. Having your agreement in principle already in place means that your offer is more likely to be accepted.
3. Find a Solicitor
You will need to appoint a licensed conveyancer or solicitor to handle the legal process of purchasing your new home. They will also check for any local or planning issues that may impact on the properties value. You will need to ensure that the solicitor is on the panel of your chosen lender.
You can ask your mortgage adviser to help you find a solicitor or alternatively you can appoint one yourself, in which case get as many quotes as possible. You do not need to meet your solicitor face to face so their location in the UK is largely irrelevant, for example my clients in Bristol often use a solicitor in Stoke due to the fast service.
At this stage you will only need to pay for the solicitor to carry out their searches and for other small disbursements which are typically £300. The remainder of the solicitor fees typically £700 will be paid at the completion of the sale or just before.
4. Apply for the mortgage and arrange a survey
You will now want to 'upgrade' your Agreement in Principle to a Mortgage Offer. This is done by submitting your mortgage application, sending in the required paperwork and having a satisfactory survey carried out.
A survey assesses the property for any potential problems such as damp or subsidence. Your lender will insist on a valuation survey to ensure it is worth what you are paying for it and typically costs between £150-£1,500 depending on the value of the property. Some lenders may offer a free valuation as an incentive. You may also wish to instruct your own survey for greater peace of mind. The types of survey available are:
Condition report - The cheapest and most basic survey, it tends to be used on conventional homes or new builds. It doesn't include a valuation or investigate possible future repairs.
Homebuyer report - More expensive and thorough, this examines both the inside and outside of the property and includes additional valuation.
Building or structural survey - The most comprehensive option, this is more suited to older or unusual properties like converted barns.
Where the survey identifies any problems, the survey report will give you an idea of how much it will be to fix the issue which can be helpful for renegotiating the price or pulling out of the purchase altogether.
5. Exchange Contracts and arrange insurance
Your mortgage is in place, you and the lender are happy with the survey and the condition of the property and your solicitor has carried out their legal searches, enquiries and paperwork. As long as the seller is in the same position then you can proceed to exchanging contracts. This involves a deposit of 10% and is a significant commitment to completing the purchase as pulling out means you are likely to lose the deposit.
You will also want to arrange Buildings insurance at this stage. This is because you have made a legal commitment to the property by exchanging contracts and your lender will want it properly insured, as will you.
The property now becomes yours and the sale is registered with Land Registry. The lender transfers the loan to your solicitor who passes this onto the seller. At this stage you will need to pay any remaining solicitor fees and Stamp Duty will need to be paid within 30 days of completion.
If you're using a removal company, moving on a weekday is cheaper. Typical cost is £300-£600+. In most cases exchange of contracts will occur the same day as completion.
For more answers to other common questions and concerns, take a look at my Mortgage FAQ.
If you have found this post helpful then please share it and take some time to look through the website for more helpful information.
Your home may be repossessed if you do not keep up your repayments.
About the Author: Alex Johnston DipFA MLIBF is an FCA authorised financial adviser at Domus Financial Services and advises clients all across the UK.
This material is for general information only and does not constitute legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.