Buying your first proper home can be an exciting, but often confusing time. You will hear a lot of legal jargon, and be asked to jump through many hoops, and as the reality of the enormous financial commitment you are taking sets in, you may often find yourself feeling overwhelmed or out of your depth.
Although it may be daunting, there is plenty of support, advice and financial assistance available to first-time buyers, all of which can help make the seemingly impossible feel very possible indeed.
Buying your first home
In general, a person is considered a first-time buyer if they are purchasing their primary residence and have never held a freehold or had a leasehold interest in a residential property in the UK or overseas.
Taking out a mortgage is the most common way to finance purchasing land or property. This loan, which is often secured against the value of your home and can run for up to 30 years, provides you with financial flexibility during the building process – however it’s important to recognise that such long-term commitments require careful planning.
When taking out a mortgage, you should aim to save more than the minimum deposit of 5%, as this can open up your options when looking for lenders and offers access to better interest rates. If your repayments become unmanageable at any point, however, then it is important to be aware that the lender may possess legal authority over repossessing and selling off assets in order to secure their investment.
When considering a mortgage, it is important to take Loan-to-Value (LTV) into consideration. LTV involves comparing the amount you are borrowing for your home with its value according to the lender’s valuation. For instance, if you buy a property worth £200,000 and have put down a deposit of £20k and taken out loan of £180k – then your LVT stands at 90%. Generally speaking, smaller loans entail lower risks in the eyes of lenders making them more likely to grant competitive interest rates on such mortgages.
The lowest rates are usually offered to borrowers with a 40% deposit, which equals a 60% LTV.
Mortgage Types
Homeownership is a major milestone, but you don’t have to tackle the mortgage process alone. Banks and building societies are an option for those looking to apply for mortgages – however, considering using regulated mortgage advisers may be most beneficial. These advisers possess extensive knowledge of the market that can help find a tailored solution perfect for your situation, which is especially useful if you only have a small deposit, are self-employed, or are looking to utilise one of the Government’s first-time buyer assistance schemes.
Mortgage repayments are predominantly arranged so that a borrower will pay off their debt in full by the end of the mortgage term. However, an interest-only loan provides borrowers with more flexible repayment options – they only have to cover the cost of accrued interest each month and place money into investments which can (hopefully) provide enough funds to clear any remaining balance when it matures. Although this seems attractive, there is always some financial risk associated as investment plans may not generate sufficient capital needed for final settlement; thus lenders tend to favour traditional mortgages due to the greater certainty these bring.
Mortgage lenders, in the ever-changing landscape of today’s market, are vying for business by offering competitive interest rates. Depending on their needs and preferences, borrowers can choose from four options – variable rate mortgages that shift with Bank of England’s base rate changes; fixed rates which remain unchanged over a set period (typically two to five years); capped mortgages where variables won’t exceed an established limit or tracker loans following another benchmark such as the Base Rate plus 1%.
To apply for a mortgage, you’ll need to complete a lot of paperwork with regard to your financial position, such as income details, credit costs, and spending history. For self-employed applicants specifically, you must provide two or three years of tax returns and business accounts. Lenders then run an affordability assessment which helps them understand if this is a good long-term investment for both parties involved.
Help for First-time Buyers
Unfortunately, a standard mortgage does not always provide the gateway to getting on the property ladder that many would hope it does. Often, deposits are not achievable, or credit scores incompatible, but fortunately the government offers a variety of home buying schemes like Shared Ownership and First Homes designed specifically to help first-time buyers secure their first home;
Help to Buy: Mortgage Guarantee Scheme
In April 2021, the UK Government released their Mortgage Guarantee scheme to empower lenders in offering 95% Loan-to-Value (LTV) solutions – making 5% mortgages more attainable. Originally due to expire at the end of 2022, this programme has been extended until December 2023 and is designed with consumers’ needs in mind.
The scheme affords homebuyers an opportunity to purchase a property up to £600,000 with only a 5% deposit. However, it is important that potential homeowners do their research as not all lenders offering 95% mortgages are part of this programme and may have different requirements more suitable for the individual situation.
Shared Ownership
With shared ownership programmes, buyers can own a portion of a property (often between 10% and 75%) while paying the housing association or developer who owns the building rent for the remaining share at a discounted cost (about 2.75% of the property value yearly).
The programme decreases the cost of house ownership by allowing you to start by buying as little as a 10% share in a property, paying just 5% of that share’s price instead of the full purchase price.
Remember that a shared-ownership property is normally a leasehold when you buy it. You must pay a regular service fee and a part of major maintenance expenses; nevertheless, for the first 10 years, housing associations and landlords must still contribute to the cost of necessary repairs and maintenance. If you are able to, you can also try to lower your rent costs by buying more shares through “staircasing” or gradually raising your share in 1% increments.
Shared ownership programmes are run by housing groups or housing developers. When considering using such a programme, it is best to evaluate each provider on the basis of its own merits and the conditions of the lease because the specifics, charges, and limits involved vary depending on the provider.
First Homes
First Homes is a programme that provides newly constructed homes to first-time purchasers at a minimum 30% reduction off the market price of comparable properties.
Through the scheme, the government claims that homebuyers can save an average of £70,000, with a discount of up to 50% being provided in some places. Properties sold on the First Homes scheme will always qualify for this concession, meaning that each time the property is sold, the new purchaser will also benefit from the reduced price.
The scheme is open to first-time buyers in England only, and to qualify, purchasers must have a household income of less than £80,000 (or £90,000 in London).
First Homes is only available to first-time buyers in England buying a new property. It should be the buyer’s only home and a mortgage must be used for at least 50% of the purchase price.
After the discount, the price of First Home residences cannot exceed £250,000 (or £420,000 in London). In their local jurisdiction, local authorities have the authority to lower these caps but not to raise them.
Be mindful, however, that there are currently only a handful of developments that offer the First Homes scheme, with priority being given to local key workers, veterans, and those in the armed forces.
Help to Build
The government’s Help to Build scheme launched in June 2022, with the goal of making self and custom home building a realistic option for those looking to get onto the property ladder.
It is effectively an equity loan that is designed to help first-time homeowners cover the upfront costs of buying land and building their homes.
The equity loan amount might range from 5% to 20% of the total expected costs (up to 40% in London). Your new home can cost up to £600,000. If you don’t already own the land, you must include the price of the land in this as well as any construction costs that will not exceed £400,000. You can add more of your own money if the build costs more than the cap allows.
After you have your 5% down payment in place, you must obtain the remaining 95% of your mortgage through a Help to Build Mortgage, which can only be offered by lenders who have been authorised by Homes England, the government agency that oversees the programme.
There are few choices, however. BuildLoan and Darlington Building Society have collaborated to develop new products. Darlington’s Help to Build mortgage line consists of two packages, each with a three-year discounted rate that is either 5.39% or 5.99%.
Once you have secured a mortgage offer, applying for Help to Build through Homes England is the next step. Depending on your application’s success, an equity loan will be offered based off of the cost of purchasing and constructing a new home. As construction progresses steadily along, funds are released according to pre-agreed stages with your lender as progress updates become available.
When everything is done and dusted, Homes England pays out the whole equity loan amount directly into registered lenders’ accounts so that all you owe them afterwards is 15% of that original sum – interest-free for five years.
Lifetime ISA
A Lifetime ISA (or LISA) is a great way to save for both first-time home buyers and those looking ahead towards retirement. Individuals aged 18 – 39 can open this account, with the government offering up to £1,000 per year in bonuses on contributions of up £4,000 annually.
You can save into your LISA by putting in a lump sum, regular savings or just putting away money when you can.
Investing just £333.33 per month into a Lifetime ISA can see you on track to receive the government bonus of up to £33,000 by your 50th birthday – helping towards making that first house purchase or saving for retirement. It’s important not to view it as an easy-access savings account, however; if taken out early apart from in cases of terminal illness, a hefty penalty will be incurred.
Rent to Buy
Rent to Buy is a government-funded initiative designed to ease the pathway from renting to homeownership. Also known as Intermediate Rent, Rent to Save or Rent to Own; it offers individuals and families in England and Northern Ireland an opportunity for subsidised rental rates (generally, a reduced rate of 80% on local market rents) on newly built homes for up five years, with the option to buy the property or acquire part of the ownership through Shared Ownership at any point during this period. When time’s up you either have to buy part of your home, or move out.
The programme is known as Rent to Own in Wales and operates slightly differently. For up to five years, you pay the market cost to rent a property. You have the choice to purchase the property after two years. In the event that you want to purchase the property, you will get a deposit equal to 25% of the rent you have already paid and 50% of any gain in value since you moved in.
Affordability
As a first-time home buyer, financial stability is paramount. Before beginning the search for your dream house, take time to reflect on what your finances can realistically cover – from mortgage payments and utility bills all the way down to groceries.
There are many other costs associated with purchasing a house too, including;
- Arrangement fee – This is a cost associated with the mortgage package you choose, and it can be incorporated into the mortgage itself. The price can range from a few hundred pounds to almost two thousand, but while skipping the upfront payment may sound enticing, keep in mind that you’ll also be paying interest on the fee for the whole term of the mortgage, increasing your overall payments.
- Booking fee – The booking fee and arrangement fee may occasionally be combined by the lender, but if they are paid separately, they will typically range from £50 to £300. Many lenders impose the fee as part of the cost of submitting a mortgage application; this means that even if you later decide not to proceed with the application, you will still be required to pay the booking fee.
- Valuation fee – Naturally, the cost of having your property valued depends on the worth of the property. Most of the time, it is probably between £100 and £1,000. The valuation gives your mortgage lender the ability to assess the value of your home and determine whether it corresponds to the amount they are giving you.
- CHAPS – A non-refundable charge of about £50 is known as CHAPS, or Clearing House Automated Payment System, and it is used to defray the expense of your mortgage provider transmitting money to your solicitor.
- Mortgage account fee – You may occasionally be required to pay a fee to cover the administrative charges of the mortgage for your lender. This typically costs £300.
- Legal fees – For their assistance in assisting with the arrangement of a mortgage, your solicitor may need payment of legal fees directly, which typically vary between £500 and £1500. The legal fees incurred by the mortgage lender and the Land Registry fee may also be included in this amount.
- Survey fees – You will need to pay for a more thorough study, taking into account factors like the structural condition of the property and any planning difficulties, as the valuation performed by your lender will just cover the worth of your property.
- Stamp duty – Whether a first-time buyer has to pay stamp duty and how much depends on the value of the property they are looking to buy. Currently, first-time buyers do not have to pay any stamp duty if the property they are buying is less than £425,000, but they will need to consider the additional cost Stamp Duty adds on for any property worth over that amount.
For properties with a value between £425,001 to £925,000, Stamp Duty will be payable at 5%, it will be 10% for homes costing between £925,001 to £1,500,000, and 12% for those costing above £1.5m.
As you consider the life-altering decision of purchasing a new home, careful consideration is key. Do your due diligence beforehand – analyse every factor from location to council tax rates and seek advice if necessary – in order to spare yourself any undue financial stress or long-term consequences that could result without proper planning.
If you are a first-time buyer and in need of support with your conveyancing, please do not hesitate to get in touch.
