With the Help-to-Buy ISA launching on 1 December, the government is hoping that by giving up to £3000 to those saving for a new home, they’ll be able to incentivise more young people to get onto the property ladder.
Although many of us may want to buy our first place, it can be difficult to know how much to save, where to find help and even how to apply for a mortgage. Knowing as much as possible about these processes can make buying a property a lot easier.
How much will I need for a deposit?
Before you can even set foot in an estate agent, you’ll need a deposit to put down on your house. Although most of us will pay for our properties with a mortgage, banks won’t lend you the full amount required to buy your chosen home anymore. Instead, you’ll need to save between 5% and 20% of the cost of the property you want to buy. So if you think you’ll be looking at places in the £150,000 range, you should save £7,500 at least. But if you save a higher percentage, you’ll have a better choice of mortgages and could end up with a cheaper rate.
Affording the monthly repayments
A mortgage functions in the same way as a loan, so you’ll be expected to make monthly repayments at a previously agreed rate. It’s a good idea to make sure you know how much you can realistically afford each month by creating a budget before you begin looking for a mortgage. But in addition to this, there are now strict affordability checks that all banks will carry out to ensure you’ll definitely be able to pay each month. As part of the application process, you’ll need to provide proof of income and evidence of your outgoings.
New rules mean that you’re only allowed to borrow up to 4.5 times your salary. If you and your partner are taking home £50,000 between you, you’ll be offered a mortgage of up to £225,000 at the absolute most – provided your monthly outgoings can support that.
The bank also has to look ahead and ‘stress test’ your ability to repay the mortgage against hypothetical circumstances such as interest rate rises and changes to your lifestyle, such as redundancy or having a baby. If they decide you won’t be able to afford your mortgage payments in these scenarios, they might limit how much you can borrow.
Buying a house is the most expensive purchase most of us will ever make, and the costs don’t stop once you’ve saved your deposit and been accepted for your mortgage! There are fees at almost every stage of the property purchasing process, and when saving you should take into account the extra amount you’ll need for stamp duty (a tax you pay when buying a property), valuation and solicitors’ fees, insurance, the cost of moving your possessions and even any decorating or furnishing you’ll need when you move in. The good news is that some of these costs are lower for first-time buyers. For example, stamp duty doesn’t kick in unless your property is worth over £125,000, so many first-time buyers could be exempt.
In addition to the new Help-to-Buy ISA, which boosts your savings if you’re working to build up a deposit, there other schemes that can assist with buying your first home. If you’ve got a deposit of at least 5%, the government can provide 20% of the purchase price interest free if you’re buying a new-build home, or alternatively will “guarantee” your mortgage (on both new and old properties). This promises to cover any losses the lender might incur if you have problem paying it back the home loan. However, in this case you’ll still be personally liable for your mortgage payments. Another option available is for local council or housing association tenants to buy the home they’re already living in for a discount, depending on where they live and how much the property is worth. You’ll have to have rented from the public sector for at least three years to be eligible for this scheme.
Some landlords and local authorities will also offer a shared-ownership scheme, where you get a mortgage for between one and three quarters of the properties, and rent the rest at a reduced rate with the option to increase your ownership up to 100% later on.
Finding and applying for a mortgage
Once you’ve saved your deposit and related fees, worked out how much you can afford to borrow and applied for any schemes available to help you, you’ll be ready to begin applying for a mortgage. The first thing to do is choose a provider and type of mortgage – usually fixed or variable rate.
As with any financial product, there are pros and cons to both and it could be worth consulting an independent mortgage advisor to see which would best suit your needs. However, you don’t have to go with the provider they suggest. Often if you’ve been a customer of your bank for a long time, and especially if you’ve been saving your deposit with them, they’ll give you a preferential rate.
As the affordability criteria for mortgages is now so strict, there’s the option to have a guarantor on your application. This means that a parent, guardian or close relative agrees to be responsible for your payments if you can’t meet them. Although this can take some of the hassle out of affordability and credit checks, it isn’t an option to be entered into lightly, as it’s a legally binding agreement and if you can’t afford the payments in the future, your guarantor will be liable for a large amount of money.
Whether you apply directly or using a guarantor, you’ll end up with a mortgage “agreed in principle”. This gives you an amount, depending on your deposit and predicted affordable monthly repayments, that the bank will be willing to lend you for a property. Once you have this, you can begin to find and make offers on properties in your price range – and if accepted, will have the mortgage officially agreed subject to final checks, so you can exchange contracts and buy your first home.