Buying a home for the first time is a daunting task. To make it easier this post will explain everything you need to know. From understanding a mortgage, to what lease to get to how much you should budget for and common mistakes first time buyers make. A first-time buyer is someone who is purchasing their main residence and has never owned a freehold or leasehold on any house or apartment (we will get into what they are later), or any part of a residential property in the UK or overseas. This guide will cover the following home buying tips:
- Mortgage and deposit home buying tips
- What Are The Different Types of Mortgages
- Budget for the Initial Costs of Buying a Home
- Mortgage repayment planning
- Help to buy scheme
- Freehold vs. Leasehold
- Common Mistakes When Preparing to Buy a Home for the First Time
Mortgage and deposit home buying tips
To buy a home you need to make sure you have enough money not only for your mortgage repayments and deposit costs, but also all associated fees including costs of stamp duty, valuation, legal fees, and removal. To do this you will need to accurately calculate the cost of buying the home, and save enough for the upfront costs at least. In order to do this make sure you are managing your spending in the run up to buying your home and budgeting effectively. If you want some guidance on how to budget we have written a guide here.
If you are buying through the help to buy scheme please see our section on the help to buy scheme below.
How Much Deposit Do I Need for a Mortgage?
The general guidance on how much deposit you will need is 5-10% of the cost of your home, but as the credit market has tightened, more and more lenders are asking for at least 10%. There are two types of deposit you will have to save up for: a mortgage deposit and an exchange deposit. A mortgage deposit is the amount of money you will pay upfront for your new home. You may buy 5% of the property upfront and borrow the remaining 95% you can borrow from one or multiple lenders. You must declare this amount on your mortgage application. However, to finalise the purchase of a home, the buyer needs to pay another 5% of the cost of the home upfront as an exchange deposit. This extra 5% is exchanged by the lawyers of the seller and buyer and makes the sale legally binding.
What Are The Different Types of Mortgages
There are two main types of mortgages: a fixed rate and a variable rate mortgage. A fixed rate mortgage means that the interest rate you are changed on your mortgage stays the same for a number of years. The exact time can vary, but typically a fixed rate lasts for 2-5 years. A variable rate mortgage means that the interest rate you pay changes.
What type of mortgage is best?
Both a fixed rate mortgage and variable rate mortgage have pros and cons. We have summarised this below.
|Fixed rate mortgage|
|Your monthly payments will be the same for a set period. This makes budgeting for, and repaying, easier. If interest rates rise, your rate won’t change.||The interest rate on fixed rate mortgages can be higher than on variable mortgagesIf interest rates fall you won’t benefit. You may be charged if you want you to leave the deal early.|
|Variable rate mortgage|
|You can repay more than the set amount when convenient for you. You can leave your deal at any time and move to a fixed rate mortgage.||Your rate can change at any time. This makes it harder to budget for repayments.|
Budget for the Initial Costs of Buying a Home
As mentioned above, there are additional costs associated with buying your first home. This next section will run through what costs you will need to budget for when buying your first home.
- Survey costs
A survey is an inspection of the property itself. It will highlight any problems with the property so you know about it before you buy. A survey is typically done after an offer has been accepted by the seller. There are three main types of survey:
- A condition report
- Homebuyer report
- Building Survey
Each survey has a different degree of analysis and the costs for each vary. A guide to surveys can be found here.
- Solicitor’s fee
The Money Advice service estimates that for buying a house solicitors fees can range from £850-1,500. There is also the additional charge of VAT at 20%. Your solicitor may also suggest conducting local searches which will incur additional costs. Local searches check if there are any local plans or problems in the area and cost around £200-300 per search.
- Removal costs
There is no estimate as to how much removal costs will be for a first time buyer! It depends on how much you have to move, what you are willing to do yourself and when you want things moved. Removal services will charge more if you would like to move in on a weekend. Additionally if you want movers to pack up all your belongings and deliver them, this will cost more than having a removal firm pick up ready-packed boxes.
Insuring your new home comes in two parts: buildings and content insurance. Buildings insurance covers exactly that – the shell of the house. If your home is damaged in a fire, storm or flood – buildings insurance should cover the costs of repairing it. However the coverage varies from policy to policy so make sure to check what your policy covers. Contents insurance covers everything inside the property. Most policies cover damage and theft, but again policies vary so shop around.
- Initial furnishing and decorating costs
Painting, decorating and furnishing a new house is a big undertaking. Depending on your tastes this can be a very expensive part of buying a house. Policy Expert found that a first time buyer spends over £5,000 fitting out a new property in London – so make sure to fit this into your budget.
- Mortgage arrangement and valuation fees
An arrangement fee is exactly what it sounds like: a fee you pay to arrange your mortgage. Charges for this service vary – some are a percentage of the mortgage loan and others are a one-off fee. Make sure to pay attention to this fee when comparing mortgages. A valuation fee is a fee for the survey your mortgage lender makes on the property you want to get a mortgage on. This survey is a necessary step for the loan provider.
- Stamp Duty (Land and buildings Transaction Tax in Scotland, or Land Transaction Tax in Wales).
Stamp duty is a tax you have to pay when buying a home that increases depending on the value of the property you want to buy. There is no Stamp Duty for first time buyers on the first £125,000. Here is a stamp duty calculator so you can find out how much you will be liable to pay.
Mortgage repayment planning
Make sure you plan and budget for monthly repayments on your mortgage. You have to pay back the mortgage and also the original capital that was lent to you. The most popular form of mortgage repayment called a ‘repayment mortgage’ means you repay some of the original capital owed and the interest on the loan every month, and your balance will get smaller over time.
An interest-only mortgage means that you only pay back the interest on the amount you borrowed. Depending on the type of mortgage rate you chose (fixed or variable) this amount can be fixed or subject to change. While your mortgage repayments will be less month on month in an interest-only mortgage you will still owe the original amount at the end of your mortgage term. To pay back your mortgage capital, your lender will have a repayment plan that means you pay regularly into savings or investments. It is your responsibility to track these investments.
Consult a Mortgage Calculator to Plan
There is a helpful mortgage calculator here that will show you what your monthly remortgage payment would be. Make sure that you plan ahead, as you’ll find your mortgage payments will decrease over time. The amount that you pay will depend on the mortgage that you have; variable or fixed. A fixed mortgage is easier to plan for as what you pay every month is the same but variable rates mean you can pay less or more interest depending on how the rates change.
Help to buy scheme
If you are buying a home through the government help to buy scheme the government will lend you 20% of the cost of your newly built home – so all you will need is 5% of the deposit to make up the 10% exchange deposit, and a further 75% of the mortgage. The government will not change you any fees on your loan within the first five years.
Freehold vs. Leasehold
A freehold and a leasehold both mean you have ownership of the property. However, a leasehold means that you own the property for a fixed term, and you do not own the land underneath. A freehold means that you own the property and the land underneath. A freehold has no time limit on its ownership, whereas a leasehold has a fixed time period. The most common leasehold periods are 99,125, 500 and 999 years. A lease may be extended at a cost by the freeholder.
Common Mistakes When Preparing to Buy a Home for the First Time
Some of the most common mistakes made when preparing to buy a house are:
- Not checking your credit score before you start looking for a mortgage. Your credit score will impact what interest rate you are offered on your mortgage. If your credit score is low and you want to improve it check out our guide here.
- Underestimating costs. There are far more costs associated with buying a house for the first time than people think. Make sure you understand everything that you are going to need to budget for.
- Not budgeting properly. Understand that buying a house for the first time is a marathon not a sprint. You will need a long term budget plan to buy your first home.
- Not getting a mortgage principle. A mortgage agreement principle is a letter from a lender saying how willing they are to let you borrow. This shows to estate agents and sellers that you are serious about buying a property.
- Not being registered on the electoral roll. Lenders and sellers need to check your identity – the electoral roll is the easiest way to do this. It will also help improve your credit score.
Portify – Build Healthy Credit
If you are looking for more ways to improve your credit score to get an overdraft look into using a credit building service like Portify. If you are new to the UK, have previous financial difficulties or, have a bad credit score, Portify can help. Portify offers a simple and easy way to build your credit score with Experian, Equifax and TransUnion. Join a community of 100,000+ members who have seen their scores improve by up to 100 points in just three months. We work with all major UK Credit Reference Agencies to build your credit score.