How to find the ideal first-time buyer mortgage
If you are buying your first property, follow these commonsense rules for a successful purchase.
First-time buyers are back in business. The government is keen to help people buy their first home, interest rates are at an all-time low, and lenders are keen to lend.
Whether you’re planning to buy next month or next year, and regardless what’s going on in the economy or housing market, there are a number of things you should do now to prepare yourself for the first rung of the housing ladder.
1.Research your mortgage options
Your mortgage is likely to be the biggest financial commitment you ever make, so it’s important to understand your options and make the right choice. Our Mortgage Finder tool can help you find the best deal to suit your needs out of thousands on the market, but you need to know the type of mortgage you want first.
Fixed rate mortgages have historically have appealed to first-time buyers because you know exactly what your mortgage will cost each month.
“You can fix for two, five or 10 years but there are also three, four and seven-year fixes available. As a general rule, the shorter the fix the cheaper the rate but some people prefer longer-term security and are prepared to pay slightly more for it,” explains Mark Harris, chief executive of mortgage broker SPF Private Clients.
The other option is a variable rate deal. A Base Rate tracker follows the Bank of England Base Rate plus a margin, so if interest rates fall further so will your mortgage rate and if rates rise, again, so will your payments.
Discount variable rates follow individual lenders’ standard variable rates (SVR). This rate is set at the lender’s discretion so it may choose not to pass on the full, or any, reduction in the Bank Base Rate.
Our Mortgage Finder tool searches an up-to-the minute database including fixed, variable and discounted rate mortgages to identify the ideal mortgage for you. But before that, you need to…
2. Get saving
Before you start to look at properties, you need to save up a decent deposit. The minimum you need to save is five per cent of the purchase price, so £5,000 if you’re buying a £100,000 property.
But the more you save the better – mortgages lenders reserve their cheapest mortgages for buyers with the biggest deposits.
Make sure you open a Help To Buy ISA. For every £200 you save the government will give you £50, up to a maximum government contribution of £3,000.
Each first-time buyer can open a Help to Buy ISA so if you’re buying with someone else, you can get up to a £6,000 boost to your funds.
3. Budget for other costs
As well as saving for a deposit, you’ll need to pay mortgage arrangement and valuation fees. These costs vary from lender to lender and product to product.
You’ll also have to pay a surveyor to check the structure of your property and a solicitor to do the legal work. On top of that are removal costs and initial furnishing and decorating costs.
Stamp duty is payable on properties costing more than £125,000. Rates are calculated in bands at 2%, 5% and 10% of the purchase price in England and Wales. According to the Land Registry, the average UK property cost £220,713 in May 2017. This would result in a stamp duty bill of £1,914.
4. Check your credit report
Lenders will check your credit report before offering you a mortgage, so you should too. This should be done with all three credit reference agencies: Experian, Equifax and Call Credit.
If you check your credit records six months before you plan to apply for a mortgage, you’ll have time to correct any inaccuracies and omissions on the files.
If you have been ‘financially linked’ to someone in the past (such as an ex-partner) you can ask for a ‘notice of disassociation’ so their credit history no longer affects yours.
5. Cut down on spending
There are now strict affordability checks when you apply for a mortgage. Lenders want to check you can afford the mortgage both now and in the future if interest rates rise.
Lenders will want to see bank statements from the past three to six months to see what you’re spending your money on – so get your statements mortgage-approval ready. This means not straying into your overdraft and maintaining a healthy positive balance whenever possible.
Lenders will look both at essential expenditure and discretionary spending. They tend to take a dim view of extravagant spending on holidays and nights out, so you might need to rein in your social life for a few months. Other lender red flags include payday loans and online gambling – so avoid both.
6. Check out government schemes
There are a number of government-backed schemes which aim to give homebuyers a helping hand onto the property ladder.
Help to Buy equity loans are available to buyers purchasing a new build property. Buyers need to put down a deposit of at least five per cent, the government will contribute a further 20 per cent, and a mortgage is taken out for the remaining 75% of the property’s value. You won’t pay any interest on the government’s 20% slice of the loan for the first five years.
7. Go to a broker
Don’t go straight to your bank to ask for a mortgage – go to an independent mortgage broker instead. A whole-of-market broker can help you shop around and give you completely independent advice as they will have access to all the mortgage deals available rather than a limited selection.
Our Mortgage Finder tool also allows you to click through and ask an adviser for help at any stage in the process, once you have selected a deal you might be interested in, so you are not alone.
8. Do your homework
Ask your broker how much you’ll be able to borrow as a mortgage and roughly how much it will cost you a month. Once you have an idea of your finances, you can start looking at properties.
Visiting different estate agents and properties will give you an idea of how much a particular home is worth. You may have to compromise on location to get more space for your money.
You may want to pick an area with potential for growth. Redevelopment plans, infrastructure projects such as Crossrail, and increased employment opportunities could all indicate that property prices will rise in the near future.
9. Understand freehold and leasehold
Whether you buy freehold or leasehold will have financial implications for the future – so do your research. If you buy a house it’s likely to be freehold, meaning you own the property and the land it sits on.
If you buy a flat, it will either be leasehold, or include a share of the freehold. Either way, you will have to pay service charges for the upkeep of the communal parts of the building. You may also face ‘major works’ bills every few years for large maintenance projects.
It’s important you understand the implications of buying leasehold; properties can be cheaper but you could face eye-watering bills later on.
10. Find a solicitor
Start looking for a solicitor before you look at properties. You can ask your solicitor to do all your identity checks before you find a property, so they’re ready to roll as soon as you make an offer.
Once your solicitor is hired, you can include their details when you make an offer. This will demonstrate you’re a serious buyer and up the chances the vendor will choose to sell to you.
Article By Paula John for www.yourmortgage.co.uk