When contemplating a first home purchase it is wise to be armed with as much relevant knowledge as possible. First-time buyers can make a careful examination of the property market and mortgage options to put themselves in the strongest position when choices have to be made. The following points may be useful to consider:
Firstly, a would-be buyer should consider their finances to assess whether they are in a position to commit to repaying a mortgage for years to come; this will depend on matters including job security and how long they imagine wanting to stay in one place for.
While schemes to help first-time buyers exist, (see point 6) a deposit of 10% is required to obtain a reasonable mortgage interest rate; to access the best rates a 20% deposit or more is required. Of course, larger deposits will attract better interest rates and therefore lower monthly payments. It is also prudent to have an emergency fund available and not overstretch finances.
Mortgage approval. It is common for first-time buyers to obtain pre-application approval for a mortgage prior to their search for a property; while this allows them a realistic budget, it is not the final offer and a lender will carry out a credit report when a sale price is agreed. Too many credit checks of income may affect a credit rating and some lenders offer a `soft’ check initially which is not visible on a credit file.
Improve credit score. A lender will check an applicant’s credit score to enable them to assess future behaviour and therefore their risk. Checking an individual’s credit score can be done by contacting the three credit reference agencies. Improving a poor score takes time; it may help to make regular purchases on a credit card, ensuring a full repayment every month. It is also important to be registered on the electoral roll.
Investigate suitable properties. To enable useful comparisons between houses, it is important to make an assessment in terms of price, condition and potential repair costs, as well as location regarding proximity to work, schools and shops.
Closer inspection. An in-depth viewing should involve looking at structural issues such as signs of damp, major cracking and any repairs needed. It is also prudent to think about noise levels, and visiting the property at different times of the day and night may be revealing.
Consider the various first-time buyer assistance schemes. These include:
- The government’s Mortgage Guarantee Scheme which was launched in April 2021. Designed to encourage lenders to offer 95% loan to value mortgages on homes worth up to £600,000, it allows homebuyers with just a 5% deposit to buy a house: the government covers the proportion of the mortgage over 80%. Applicants must pass the usual affordability checks. The scheme is a temporary measure and will operate until 31st December 2022.
- Lifetime Isa (LISA). This scheme was launched by the government in 2017 to help people save for a house. Participants can invest up to £4,000 in each tax year and receive a 25% bonus from the government.
- Help to Buy ISA. This scheme is now closed to new applicants, but it can be used by those first-time buyers who joined before the deadline.
- Shared Ownership Schemes. Here, a house buyer buys a share of the property, not the whole, and pays rent on the remainder. Such schemes are usually administered by housing associations. Participants typically purchase a share of the property between 10% and 75% and have the opportunity to buy more of the remaining share over time. Eligibility varies according to the housing authority, earnings and local variations.
- Key workers. There are opportunities for special help which vary according to area; a specialist mortgage is required.
- Help to Buy. This is an equity loan scheme available to first-time buyers of new build homes in England. Similar schemes operate in Wales, Scotland and Northern Ireland. Qualifying participants can obtain a mortgage and an interest free loan: applicants need a 5% deposit and must satisfy other criteria. The government provides the interest free loan for the first five years of the agreement of 20% of the purchase price, and the applicant arranges a mortgage of 75% for the remainder which enables access to attractive rates. The loan is paid back on sale of the property: the government receiving 20% of the sale price at the time.
- Family/parents act as guarantor. Mortgages are available which can take parental income into account to help a first-time buyer. A parent guarantees to cover the mortgage and becomes liable for arrears.
- Friends buy together. Some lenders will allow up to four people to join together to obtain a joint mortgage.
Identify the right type of mortgage to suit requirements. Consider using a broker who may be able to source the best deals to suit circumstances but be aware that some brokers are tied to lenders while others can search the whole market. Confident first-time buyers may also search the market themselves.
While the options for a mortgage are repayment or interest-only, there are currently far fewer options for interest-only mortgages. Although signing up to a repayment mortgage may cost more, the overall debt is being paid off each month rather than purely the interest. Options with repayment mortgages include fixed or variable interest rates.
Consider the mortgage term; for first-time buyers this is usually 25 years, but it is important to think about the age of the mortgage holder at the time of the term expiry as some lenders do not allow the mortgage to be taken into retirement. Borrowers should also remember that the longer the term, more is being paid in interest; while a long term reduces the monthly payments, shortening the term is a financially better choice. If permitted, making mortgage overpayments is another option which has the benefit of giving flexibility over savings.
Calculate the fees payable on the whole transaction which will include:
- an arrangement fee for the mortgage
- possibly a reservation fee for the mortgage
- a valuation fee for the home inspection
- legal fees
- Stamp Duty depending on the price of the property