How to buy your first home
For first time buyers the prospect of getting on the property ladder feels overwhelming and out of reach. Here we simplify the essential first steps and set out what you need to do and what help you can access to enable you to buy your first home.
1. Start building a deposit
In order to buy your first home you need to save a deposit. Your mortgage deposit will normally need to be for at least 5% of the value of the property you want to buy. So if you want to buy a home costing £250,000, you’ll need to save up a deposit of at least £12,500. Ideally though you would save more than 5%; the bigger the deposit the wider range of mortgages you’ll be able to access and at cheaper rates. This is because with a bigger deposit you’re perceived as lower risk by mortgage lenders.
As house prices have soared so has the amount you need to save – the average first-time buyer needs a £33,000 deposit, according to Halifax. The good news is the government can help you save if you choose the right account.
Help to Buy ISAs and Lifetime ISAs can both give your house savings a big boost. You can save up to £200 a month into a Help to Buy ISA and the money will grow tax-free. Plus, when you are ready to buy a home the government will add another 25% to your balance. With a Lifetime ISA you can save up to £4,000 a year with the government adding a 25% bonus annually.
2. Check your credit score
While you are saving to buy your first home you can start sprucing up your credit rating ready for when you make a mortgage application. Lenders want to see you are a reliable borrower when they are assessing your mortgage application, so it helps to have a good credit score.
3. Clean up your current account
How much you can borrow will be determined by your lender who will do an affordability test based on your income and monthly outgoings. It can be a really good idea therefore to go through your current account six months before you make a mortgage application and see for yourself where all your money is going. If you have an expensive gym membership, regular big nights out or expensive credit agreements try to cancel them and curtail your spending so that your finances look in better shape when the lender starts looking.
4. Understand the costs of buying and owning a home
When it is time to buy your first home you’ll find it involves a lot of additional costs that you need to factor in when working out what you can afford. This includes legal fees, taxes, surveys and removal costs.
Once you own your first home you’ll discover there are also a lot of costs involved in running it that you may never have had to deal with before. This includes ground rent, service charges, ongoing maintenance costs and lots more.
5. Speak to a mortgage broker
It’s amazing how many people think they are a mortgage expert and arrange the biggest loan of their lives without getting any advice or shopping around. But, with a six-figure loan a tiny difference in the interest rate can mean you end up paying tens of thousands of pounds more over the lifetime of your mortgage.
For example, a £200,000 mortgage at 3.5% will cost you almost £2,000 more over three years than the same mortgage at 3%. Similarly, the fees on your mortgage can make a big difference to the overall cost of buying your first home.
It’s not just the mortgage rate you need to consider but also the type of mortgage, whether fixed or variable and the term of the mortgage (usually 25 years but it could be 35 years so that repayments can be stretched over a longer period, making them more affordable month on month).
Use a mortgage broker and their expertise will mean you get the best possible mortgage for your circumstances at the lowest possible rate. They can also help you navigate the mortgage market for the first time, explore options and may introduce you to lenders who you’ve never even heard of but have the best product for you and your circumstances.
6. Talk to your family
You don’t have to go it alone when you want to buy your first home. Your family may be able to help you in a number of ways. The Bank of Mum and Dad is now considered the seventh biggest lender in the UK mortgage market because so many parents are helping their children stump up a deposit on their first home.
But, family can help without having to hand over their savings. Many mortgage lenders now offer products aimed at people whose family want to help them buy their first home. It could be a guarantor mortgage – where a family member agrees to meet repayments if you can’t – or a joint mortgage where you buy a place with your parents. Alternatively, you could get a family offset mortgages where a family member puts their savings into an account that is used to reduce your mortgage costs.
A mortgage broker can help explore the options available.
7. Consider shared ownership
One way to make buying your first home easier is to only buy part of it. Shared ownership schemes are offered by housing associations and private developers who allow you to buy a proportion of a property – say 60% – and then pay rent on the remainder. You then have the option to buy more of the property when you can afford to. But make sure you do your research and tread carefully with shared ownership properties. The properties are usually leasehold and you therefore have to pay a monthly service charge as well as contribute to major maintenance works. The process of buying more shares can also be quite complicated so make sure you understand the process and costs involved before you buy.
8. Check how the government can help
The government is keen for people to get on the housing ladder and realise saving for a deposit is one of the biggest hurdles. To address this, they offer the Help to Buy equity loan scheme and the Mortgage Guarantee Scheme to help you afford your first home From
With the Mortgage Guarantee Scheme, from April, 2021, you can get a mortgage with just a 5% deposit. The 95% mortgage scheme will run for 18 months until December 2022. The scheme applies to all types of properties (new build and old) that cost less than £600,000.
With the new Help to Buy scheme, if you are a first-time buyer and have a 5% deposit and want to buy a new build home, you can borrow up to 20% of the value of the property, which means that you could buy a home with just a 5% deposit, and a mortgage for the remaining 75%. You must now be a first-time buyer and the new build home you buy must be within the relevant regional price cap. See our Help to Buy equity loan scheme guide for more details.
In June 2021, the government launched the First Homes Scheme. The First Homes scheme works by offering newly built homes to first time buyers with a discount of at least 30% compared to the market value of equivalent properties. This discount stays on the First Home forever. This means that, every time the property is sold, the new buyer benefits from the discount. The scheme has limited availability at the moment, so competition will be high and the scheme is not as accessible to all first time buyers in all regions.