Here at Green Spinnaker we understand that entering the property market is harder than ever for first time buyers nowadays, especially with housing prices reaching an all-time high. With that in mind we decided to look into some of the essential information that first time buyers need to know to help you on your way to becoming home owners.
Yes the amount of money that you will need to save and invest will be considerable and quite scary, but we are here to help and make sure you understand any financial and other implications you will have before taking this big step. As this is a big financial undertaking it is crucial that right at the beginning of the process you work out exactly what you can afford so that you won’t slip up or find any problems further into the process.
Before you even think about starting the house hunt you need start to save for your deposit. In general you will need to save between 5% and 20% of the cost of the home that you would like to buy. Therefore if you want to buy a home that costs £150,000 you will need to save a minimum of £7,500.
Whether you are already renting or still living at home, you will have a certain amount of monthly outgoings so you need to work out how much you can afford to put away into savings every month. Dependent on how much you can afford to put away will determine the time scale of how long you will have to wait until you can afford to buy a house. So if you are looking to buy your first home then make sure you start planning a long time in advance.
Probably one of the biggest concerns on the mind of first time buyer is applying for and being granted a mortgage. Strict checks are in place when you apply for a mortgage and of course you will need to make sure that you can afford the monthly repayments before you even think about starting to search for a house. Mortgage lenders won’t only check you current financial situation but also conduct ‘stress tests’ which will look at whether you would be able to afford repayments if interest rates increased, or a number of other changes to your circumstances such as redundancy from a job or having children.
To help work out whether you can afford to pay for a mortgage make good use of an affordability calculator.
When it comes to finding and applying for a mortgage the market is saturated with a number of mortgages from hundreds of different companies so it can be a scary start to a mortgage search. We would recommend first of all doing some research into the market as it is currently to work out what are the best rates available at the moment. In addition to doing your own research this could also be a good time to seek professional advice, there are a number of expert mortgage brokers and independent financial advisors that can help you fully understand the process of getting a mortgage and help find the right mortgage for you, if this is something you’re interested then we would happily point you in the direction of someone who can help.
Types of mortgages:
There are four main types of mortgage that you may wish to apply for:
Fixed rate – this mortgage has an interest rate that stays the same throughout your deal which on average is 1 – 5 years. This is a good option for first time buyers because you will know exactly what you will have to pay each month and the rates aren’t subject to increases in interest rates. But obviously the disadvantage is if interest rates do fall then you can’t take advantage of them.
Tracker – the interest rate on a tracker mortgage is linked to the Bank of England base rate. The current base rate is 0.5% so if you mortgage interest rate is 2% then you will pay 2.5% interest in total. But unlike a fixed rate is the Bank of England base rate increased to 0.75% then your interest rate would increase to 2.75%. Obviously this can be a concern for first time buyers as if the base rate does increase considerably it may affect whether or not you can afford your mortgage repayments. But as an advantage you may pay less if the base rate does fall.
Discount – This is another type of variable mortgage like the Tracker. But this mortgage is linked to the Standard Variable Rate (SVR) this is something to really pay attention to because lenders can increase there SVR even if the Bank of England base rate doesn’t increase. Again this has the same advantages of the Tracker mortgage but unlike the Tracker because the lender has control over the SVR you could suddenly find that you have an unexpected increase which could mean that you can’t keep up with repayments.
Offset – This mortgage is linked to your savings and instead of earning interest on them it is used to offset your mortgage. If you have a mortgage of £150,000 and savings of £10,000 then you will only be charged interest on £140,000, but your mortgage repayments are still worked out as if the debt were £150,000. Yes you will end up repaying more of your mortgage each month than necessarily required but you will pay less interest and pay off your mortgage quicker. Offset mortgages have both fixed and variable rates to choose from if this does become an option.
For many first time buyers it can be difficult to get a mortgage. If this becomes the case for you then don’t despair; one type of mortgage you can consider in this case is a guarantor mortgage. This basically means that a parent, guardian or close relative will agree to be responsible for the mortgage payments if there ever becomes a circumstance where you can’t repay them. Please not though you shouldn’t hasten to enter into a guarantor mortgage as you also have to ensure that your guarantor will be able to afford to pay your mortgage if you ever come across this problem
Before you start looking for a house remember to do these two things:
- Work out how much you can afford to borrow
- Can you continue to make payments even if you circumstances change
What is the Difference between Freehold and Leasehold?
We were all first time buyers once, and you will probably feel like you have to ask some of the most stupid questions that probably have obvious answers, but as first time buyers you can admit it when you simply don’t have a clue! And ask as many questions as you like.
One question of which may be what is the difference between freehold and leasehold?
If you are buying a house then it is likely that you will be buying a freehold. This basically is that you will own the property and the land it is sat on.
Alternatively if you are buying a flat then you will either be buying a leasehold, or buying into a share of the freehold. When you buy a leasehold you take ownership of the lease from the previous owner.
Additional Costs to Take Into Consideration
The deposit and the mortgage are the two big financial obligations that anyone would first think about when purchasing a house but there are a number of other additional costs that you shouldn’t forget
Let’s start with stamp duty which simply is a duty levied on the legal recognition of certain documents, and use to be labelled as the ‘slab tax’ before changes to stamp duty were implemented in December 2014. Thanks to the changes to stamp duty the following new rates will apply:
Up to £125,000: 0%
£125,001 – £250,000: 2%
£250,001 – £925,000: 5%
£925,001 – £1.5 million: 10%
Above £1.5 million: 12%
At first the interest rate increases may seem higher than they used to be but the new interest rate will only apply to the amount of the purchase that falls within the particular brand of duty. This means that if you fall in the £125,001 to £250,000 band you will only pay 2% on £75,000.
When you buy a house you will need a solicitor or licenced conveyancer to carry out all the legal work. Usually this includes local searches at £250 – £300 and anything additional to this will be between £500 – £1,500 including VAT.
When you have found the house you really like you should always get a property survey complete which will seek out and highlight any problems with the property you can’t initially see and can save you a lot of money in the future. There are varying property surveys which will go into more and more detail which are:
Home condition report – around £250
Home buyers report – this will cost on average £400 and if any problems are found can be used to renegotiate the price of the house against the cost you will have to pay to conduct any required work.
Building or full structural survey – cost upwards of £600
New-build snagging survey – This can cost from £200 and depends on the size of the property, any faults found should be corrected by the developer before you move in
And then when you do finally find your dream home don’t forget about removal costs, furnishings, decorating costs and of course building insurance.
For any home buyer there are a number of schemes on the market that can help you with the buying process.
Help to buy
Help to Buy is a government scheme for those who have small deposit when buying a home. This could be particularly useful for first time buyers, if you have at least 5% of the deposit then you can use this scheme.
There are two types of ‘Help to Buy’ scheme, equity loans and mortgage guarantees. An equity loan is only available if you are going to buy a newly built home but under this scheme you can borrow 20% of the purchase price interest-free for the first five years. Mortgage guarantees are available on any house, new or old, this scheme means that the government will undertake any of your mortgage lenders losses if you have any problems paying back your mortgage. For both of these schemes there are limits on the cost of the property you can buy.
In addition to these Help to Buy schemes, George Osborne announce the budget update a Help to Buy ISA for first time buyers. This new scheme was designed to help “tackle two of the biggest challenges facing first time buyers” low interest rates on savings and high deposits to secure a mortgage. With this new ISA for every £200 a young buyer saves for a deposit the Conservative Government with add £50. If the Conservative Government are still in power by Autumn 2015 this new scheme will be introduced.
The ‘NewBuy’ scheme allows you to buy a new home with a 5% deposit as the government guarantees the mortgage needed for the remaining 95%. This applies to newly built homes up to the price of £500,000 and for people who intend to use the property as their main home.
Shared Ownership Schemes
Shared Ownership is when you buy a share of a home either from a landlord who is usually a council or housing association and rent the remaining share.
You will need a mortgage to pay for your share which can be anything between a ¼ and ¾ and then you will pay a reduced rent rate on the share that you don’t own with the option to buy further shares in the future up to 100%.
These schemes are particularly aimed at helping first time buyers and are often reserved for people who want to buy new built homes.
You can find out plenty more information about these schemes right here.
Has that Helped?
Well first time buyers we hope that this information is of good use to you in your aim to buy your very first home and from the team here at Green Spinnaker we wish you luck in finding your dream home. If you need any further guidance on buying your first home, then do not hesitate to contact our team today on 0333 358 3558.