FOR first-time buyers starting out on their home purchase journey there is loads to think about, from the deposit to securing a mortgage.
Yesterday, the Government launched its mortgage guarantee scheme for wannabe homeowners with just a 5% deposit.
First-time buyers can get on the property ladder with just a 5% depositCredit: Getty
Scores of new low-deposit mortgages returned to the market from lenders who’ve signed up to the scheme.
It’s a promising sign for those who are hoping to get on the property ladder but struggling with rising house prices.
If it’s got you thinking about owning your own home, below we’ve put together a guide of all the things you’ll need to think about before taking the plunge.
1. You need at least a 5% deposit
At the start of 2020, there were hundreds of low deposit deals available for first-time buyers to help them on the property ladder.
Lenders then pulled almost all of these types of mortgage deals when the coronavirus crisis hit last year as they were seen as too risky.
Following the Chancellor’s Budget in March, mortgages have started to bring these products back to the market as confidence rises.
It means first-time buyers can borrow as much as 95% of the value of the property – this is called loan-to-value or LTV.
For example, Yorkshire Building Society launched a 5% deposit loan for first-time buyers at a rate of 3.99%, fixed for five years.
We’ve put together a round up of deals available for those with a small deposit.
2. How much you can borrow is capped
The amount you can borrow to buy a home is capped.
Limits vary depending on the lender but typically you can expect to borrow up to four and a half times your salary.
That means someone with an annual salary of £30,000 a year can apply to borrow up to £135,000.
However, some lenders may let you borrow more. For example, Nationwide’s Helping Hand mortgage will let you borrow up to five and a half times their annual wage.
To work out what your maximum budget is, you’ll need to add the amount you can borrow to your deposit.
But you’re not guaranteed to be able to borrow that much as it all depends on how well you do on the affordability checks.
Your credit history, outgoings and outstanding debt can all impact how much you can borrow.
3. Not everyone will get the best mortgage rates
Sadly, not everyone will get the best rates available when they’re offered a deal.
These are only offered to the least risky applicants, such as those with the strongest credit history.
You can check your credit score and report for free. It’s worth doing as you may find there are mistakes on yours that could affect your chances of getting accepted.
How to improve your credit score
WE explain how to improve your credit score.
- Don’t make too many credit applications – Making lots of requests in a short period of time can be seen as a sign of financial distress – and each application will be recorded on your file. Use a “soft-search” eligibility calculator to show how likely you are to be accepted.
- Always pay your bills – Late payments are also recorded in your file so make sure you pay your monthly bills on time including utility and credit cards.
- Pay down your debt – Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.
- Use a credit-builder credit card – These cards tend to have high interest rates compared to normal cards but if you can show you’re a responsible spender with them, it can improve your chances in the eyes of lenders.
For example, one Sun reporter recently boosted their score by 131 points after spotting a mistake on their report and getting it fixed.
We’ve put together a guide on how to improve your credit rating, from signing up to the electoral roll to using a credit-builder credit card.
Some specialists lenders will even consider those with a poor credit score for a mortgage, although you should be aware you could end up paying higher rates.
A young couple managed to get on the housing ladder despite being refused a mortgage at first due to a bad credit history.
4. You’ll have to undergo a stress test
Don’t worry, this isn’t an exam first-time buyers have to sit to get a mortgage.
To assess whether you can afford to take out a mortgage, lenders must work out if you would still be able to make the repayments if interest rates suddenly jumped.
This is called a stress test. It was introduced in 2014 in the wake of the 2008 sup-prime mortgage crash.
Currently, the rate is set at 3% above the mortgage deal’s reversion rate – the interest rate borrowers will have to pay when the fixed-term is up.
For example, you may pay 3% for a two-year fixed deal but charges may rise to 4% when the term ends.
So a borrower applying for the deal will have to prove they can afford the repayments at a rate of 7% – 4% reversion rate plus 3%.
Only if the lender finds you would still be able to make the higher costs alongside your other outgoings will you be accepted.
5. You can get help finding a mortgage
Often when you apply for a mortgage you’ll need three months’ worth of bank statements and a good credit score in order to pass the affordability checks.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Shop around for the right deal by checking offers for first-time buyers on Money.co.uk or on the Money Advice Service.
Most people get advice from a mortgage broker, which is a qualified middleman who has a duty of care to recommend a suitable mortgage for you.
But their services often come with a fee of around £500 – although there are free ones such as London and Country and Trussle.
You can wait to apply for one until you’ve found the house you want to buy or you can get in earlier to help you decide on homes that you can afford.
But it’s worth noting that mortgage offers often come with a time limit so you’ll need to complete on a property by the deadline or lose the offer.
Agreeing a mortgage “in principle” allows you to get an idea of how much the bank is likely to lend to you and how much interest you’ll pay.
They usually last between 30 and 90 days and put you in a position to make an offer when you find the property you like.
6. There are schemes to help with costs
There are a whole host of schemes out there to help first-time buyers get on the property ladder, from boosting your savings to splitting the cost of buying with a housing association.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan – The Government will lend you up to 20% of the home’s value – or 40% in London – after you’ve put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Mortgage guarantee scheme – The scheme opened to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it’s eligible for homes up to £600,000.
What is stamp duty?
STAMP duty land tax (SDLT) is a lump sum payment anyone buying a property or piece of land over a certain price has to pay.
Up until July 8 2020, most house-buyers in England and Northern Ireland had to pay stamp duty on properties over £125,000.
This was temporarily increased to £500,000 until March 31, 2021 in the government’s mini-Budget in July 2020.
The Chancellor extended the help until September 2021 in his Spring Budget.
The holiday has now been reduced to £250,000 as of the beginning of July 2021.
The rate a buyer has to fork out varies depending on the price and type of property.
Rates are different depending on whether it is residential, a second home or buy-to-let, or whether you’re a first-time buyer.
The usual system in England for residential properties means:
- First-time buyers pay nothing on properties below £300,000 (and relief available on properties of up to £500,000)
- You pay nothing if the property costs below £125,000
- You pay 2% if it is worth between £125,001 and £250,000
- You pay 5% if between £250,001 and up to £925,000
- You pay 10% if it is between £925,001 and £1.5million
- You pay 12% on anything over £1.5million
For second homes or buy to let properties:
- 3% on purchases up to 125,000
- 5% on purchases between £125,001 and £250,000
- 8% on purchases above £250,001 and £925,000
- 13% on purchases above £925,001 and £1.5 million
- 15% on purchases above £1.5 million
7. First-time buyers get a stamp duty tax break
First-time buyers are actually exempt from paying stamp duty on property worth up to £300,000.
They are then charged at a rate of 5% on the portion of the property value that’s between £300,001 but less than £500,000.
But the tax break stretches ever further for first-time buyers that complete on homes before June 2021.
The Chancellor recently extended a temporary tax holiday for all homebuyers on the first £500,000 of a property until June.
It means first time buyers won’t have to pay land duty tax on homes worth up to half a million pounds but from July, normal rates resume.
Currently, no deadline has been set for the first-time buyer scheme to end.
8. Extra moving costs can add up to thousands
Saving enough for a deposit on a property is only part of the costs of buying a home.
Research by online lender MYJAR found home buyers can expect to spend almost £4,000 on top of the cost of their new property – for legal fees, surveying costs and other removal bills.
The true cost of moving house
THIS is the true cost of moving home, according to MYJAR’s research:
- Legal fees – £1,614.27
- Removal companies – £272
- House removal insurance – £14.35
- Decorating previous home – £331.28
- Mortgage valuation – £209.44
- Property surveyors – £318.64
- Energy performance certificate – £25.09
- Storage per month – £12.71
- Cleaning previous home – £34.52
- New furniture – £991.58
In preparation to sell, homeowners spent on average £331.28 decorating their previous nest, with one in 10 spending over £1,000 and one in five forking out over £2,000.
Legal fees alone came to a grand total of £1,614.27, almost half of the total price of moving house.
New furniture cost on average £991.58, with a further 46% spending over £1,000 on furnishings from cushions to dishwashers.
You’ll need to factor in these costs when working out how much of your savings you can afford to put towards a down payment for a mortgage.
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