Mortgages for First Time Buyers
Despite the rise in interest rates and the cost of living in recent years, first time buyers still account for almost a quarter of our mortgage business. This can be attributed to purchasing schemes, such as shared ownership, help-to-buy on new build properties and adapted lender support, such as higher loan-to-value (LTV) products. Longer mortgage terms (how long you have your mortgage until it is paid off) has meant monthly mortgage payments can be more affordable, helping individuals get on the property ladder. However, we understand first-time buyers may be unaware of the buying process and what can positively or negatively affect their ability to purchase their first home and as a brokerage, we want to help our current and potential clients have a clear understanding of how to prepare, apply and complete on purchasing their first property!
- Affordability
Whether you are purchasing on your own, with a partner, friend or family member, you will have maximum affordability amount which is accumulated by taking into consideration your earned income such as salary and investments against your current and expected commitments such as children and debts. A basic generalisation is that lenders will allow you to borrow around 4.5x the buyer(s) net income, however some lenders have special schemes to help first-time-buyers and differentiating criteria’s, which is where we come in, to research and advise on who will lend you the most affordable amount based on your specific circumstances.
- Deposit
You will require a deposit with most lenders in order to purchase. For first time buyers this is generally 5-10% of the property value, it is worth noting that interest rates are typically lower when a 10% deposit is available and will mean your monthly payments are reduced and less interest is paid overall. Deposits can be accumulated by savings from your income, investments such as bonds or gifts from family or friends, any of these will need to be evidenced to the broker and lender.
We highly recommend the Moneybox Lifetime ISA (LISA) as this allows for a FCA regulated tax-fee savings account where you accumulate daily interest as well as a government bonus of up to £1000 a year. It is worth noting that this can only be used for a first-time-buyer aged between 18-40, the maximum purchase price is £450,000 and this account must be opened for a year before it can be withdrawn to purchase a property, any other withdrawal requests will incur a penalty. For more information, please visit https://www.moneyboxapp.com/isa/lifetime/?
- Finding your first home and making an offer
Once you are in the position to purchase your first home, it is time to begin finding that perfect property. Whether you are looking to find a home that needs minimal work, or a home that you wish to do renovations on, it will need to be within your affordability based on your loan amount and deposit. Estate agents will often request a lender Decision in Principle (DIP) certificate that proves you are in the position to put in an offer on a property, this documents remains valid for 3 months, so there is less pressure to find a property. Once an offer is accepted on a property, it will be time for your broker to go to full application with the proposed lender.
- Mortgage offer
Upon submission, the lender will request information and documentation to prove the mortgage amount requested is affordable, these will likely be pay slips for the employed, Tax overviews and calculations for the self-employed and bank statements to track your spending. When the lender is satisfied with the information, they will produce an offer, on average this document remains valid for up to 6 months to allow for your instructed solicitor to complete their legal proceedings. We recommend using a local conveyancing branch where you can visit your solicitor for face-to-face appointments. Whilst online conveyancing can be attractive due to its low initial costs, these can be easily driven up by hidden costs, along with delays in communication. We have several solicitors that we can recommend across the South-East region, please do not hesitate to enquire.
As a broker we pride ourselves by remaining with you from an initial enquiry, through to completion and helping you with any hurdles you may face to make the process as smooth sailing as possible. This includes remaining in contact with your instructed solicitors throughout, checking the proposed lenders rates until exchange to ensure you complete on the best rate and providing services for a number of required insurances; Life, Critical illness, Income protection and Buildings & Contents.
What documentation will you need:
Documentation is requested by both the broker and the lender to check that that your mortgage is affordable and that you are a reliable lender, this will most commonly be:
- Proof of income (Pay slips & P60’s for the employed applicants and 2/3 years Tax overviews, Calculations and business accounts for self-employed applicants)
- Proof of deposit (Bank account statements and/or Identification if from giftors)
- Bank statements for current and credit card accounts
- Proof of address for your current residential (HMRC bills, bank statements, in-date driving license)
- Identification (in-date passport or driver’s license)
To-do’s and Not-to-do’s for first time buyers
To do:
- Ensure you are on the electoral roll at your current home
- Boost your credit score (evidence that you are a reliable borrower: such as having a credit card and paying off the minimum amount each month) You can check your credit score via Check my file, Experian and Equifax
- Make sure your driving license and bank statements state your current address as both the brokers and the lenders will need to see this as proof of current address.
Not to do:
- Take out any additional debts such as loans and car finance the months before you are going to apply for a mortgage
- Negatively affect your credit score (don’t miss any payments on debts or direct debits and avoid using your overdraft. Going over 60% of your maximum limit on overdrafts and credit cards can decrease your score as it may lead lenders to believe you rely heavily on borrowing) You can check your credit score via Check my file, Experian and Equifax
- Have severe gambling habits showing on bank transactions
Expected and potential costs when buying your first home:
Your mortgage payments will not be the only costs you incur when you purchase your first home. You will often have one off cost’s such as:
- Broker/Adviser fees: Charged by your advisor if you chose to instruct one to help you, for sourcing and arranging your mortgage (we charge £395 at completion)
- Arrangement/ Product fee: Charged by lenders, often for a slightly lower rate on a product. This can be paid upfront or often added to the overall loan. (Usually around £1,000)
- Valuation fee: Charged by the lender for valuing the security property to make sure they will lend against the property based on its habitability, we also recommend you get an independent surveyor to ensure the property does not have any hidden issues (£300-£500)
- Legal fees: You will require legal help from a solicitor when purchasing your first home, this will likely cost between £1000-£2500.
- Stamp duty: At current first-time-buyers do not have to pay stamp duty when purchasing a property under £300,001, anything above this is 5% of the property value.
Continuing costs will be:
- Building & Contents (Home) insurance: This is to cover the property and its contents against any possible risks such as fire, water damage and theft. The price of this depends on the property price and area but it is usually between £40-£60 a month.
- Life, Critical Illness cover: These policies are advised based on your purchasing circumstances. Both may not be required, but they are monthly premiums paid to protect your mortgage payments should you pass away or suffer a critical illness. In the case that this is required, a lump sum or monthly income will be payable to support you and your family.
- Income protection: Should you be unable to work, this cover protects your income until you are able to return to work or the policy ends and is ideal for homeowners with only one source of income.