Tips for ‘first time buyers’
If you’re planning to buy a house for the first time you’ll come across a whole range of terminology and procedures which you’re unlikely to be familiar with. So we’ve provided here a simple birds-eye view of the house buying process and the terminology used, which we hope will give you a clearer basic understanding on what to expect.
What’s the definition of a first time buyer?
A first-time buyer is someone who:
- is buying their first home
- hasn’t previously owned a residential property in the UK or any other country
- excludes any previously inherited or gifted property
As an exception If you’ve owned a property some years ago, some lenders may consider you for their first-time buyer products although it’s unlikely you can qualify for government schemes for first-time buyers. Individual providers will be able to advise on this.
What exactly is a mortgage?
In simple terms a mortgage is another word for a loan which will help you buy property or land.
- This means that if for example you hope to buy a house priced at £275,000 and you can pay a deposit of £15,000, you’ll need to get a loan (a mortgage) for £260,000 to pay the remaining cost.
Mortgages are issued by banks or building societies and are often referred to as lenders.
Types of mortgage
When it comes to repaying your loan there are two different types of mortgage:
- Repayment – where you make monthly payments to clear the mortgage and the interest.
- Interest-only – where the repayments pay off the interest and you repay the loan as a lump sum at the end of the term.
- You’ll make monthly repayments whichever type you choose.
It’s important to note that your new home is used as ‘security’ against the mortgage and if you don’t keep up repayments, your mortgage lender can take back your home (known as repossession) but this usually happens only as a last resort.
What is a mortgage term?
The period you have to repay your loan and interest is known as the mortgage term. This is a condition you agree to when you accept the mortgage and typically can last from between 2 and 40 years.
The longer you have to repay the loan, the lower your monthly payments will be but you’re likely to pay more in interest over time.
Interest rates
In order to borrow money to buy a house, your mortgage lender will charge you interest and this is added to the amount you borrow.
You can opt for
- a mortgage with an interest rate that stays the same each month (fixed rate) giving you peace of mind, since you know exactly what you’ll pay each month, but you won’t benefit from any drop in interest rates until you move onto a new deal – or –
- a mortgage that changes with the Bank of England base rate (variable or tracker rate) which can mean your repayments go down if interest rates fall and will vary month to month.
What does LTV (Loan to Value) mean?
The ‘Loan to Value’ ratio or LTV Is commonly discussed when applying for a mortgage.
This represents the amount you want to borrow to buy your home (the mortgage loan) compared to the value of the property.
So for example
- If you’re buying a house for £210,000
- And you pay a deposit of £21,000 (10%)
- Your mortgage will be for £189,000
- Your LTV is 10%, representing 10% of the property value.
The lower the LTV, the lower your interest rate is likely to be. This is because the lender takes less risk with a smaller loan. The cheapest interest rates are typically available with a 40% deposit, which is a 60% LTV.
What deposit will I need to pay?
The deposit is the cash you’ll put towards buying the property and for a first time buyer this is likely to come from your savings.
Your deposit should be at least 5% or 10% of the price of the home you’d like to buy. The bigger your deposit, the less you’ll need to borrow. Larger deposits can also give you access to a wider range of mortgage deals or lower interest rates to save you money in the long term.
Affording your monthly repayments
If you’re planning to buy any house with a mortgage, it’s important to be sure it’s a step you’ll be able to afford.
It’s useful to put together a budget before you start looking for a property, factoring in how much you can afford to pay every month, and not forgetting that alongside your mortgage repayments, you’ll still have to cover everyday other costs such as food, household bills, motoring costs, insurance and other regular expenditure.
Be prepared for the other costs of buying a home
Apart from your monthly mortgage payments, buying a home will incur other one-off costs. These can include:
- survey costs
- solicitor or conveyancer fees
- mortgage fees
- insurance and tax
Getting a first time mortgage
When you apply for a mortgage you’ll be required to complete a long and sometimes complex list of forms. If you’re using a financial adviser they’ll be able to guide you through this to make it a less stressful experience.
You can apply for a mortgage either:
- directly from a bank or building society, or
- using a financial adviser or a regulated mortgage broker.
Lenders know a lot about the mortgage market and can help you find the mortgage that best suits your needs.
This is especially useful if:
- you can only pay a small deposit
- you’re self-employed
- there are other circumstances, such as you need a mortgage for a shared ownership scheme.
You’ll be asked to provide proof of your income, debts and spending, and if self employed you’ll need business accounts or tax returns covering the last two or three years.
What’s the meaning of freehold and leasehold?
When you buy a home, the property is either ‘freehold’ or ‘leasehold’.
Freehold
- If you buy a freehold property, you own both the house and the land it’s on.
Leasehold
- If you buy a leasehold, you own the home but not the land. This means you have ownership for a set number of years.
- With a leasehold property, you have to pay rent to the landowner, called the freeholder. There are usually service charges too, so it’s an extra cost to budget for.
- If you’re buying a flat or shared ownership, you’re likely to be buying a leasehold or a share of the freehold.
- The longer the lease, the better for both the buyer and seller. Anything under 90 years is considered short. 80 years is key to remember. If the lease goes under 80 years after you buy the property it may be hard to sell, remortgage, or extend the lease.
- Always check before making an offer as most lenders won’t consider a mortgage if the lease is less than 70 years.
Do first-time buyers pay Stamp Duty or Land Tax?
- Rules vary depending on where your property is in the UK and the value of your new home.
- First-time buyers typically get a special deal called ‘First-time buyer relief’ where you’ll pay either zero or a reduced rate tax on your house purchase.
In England & Northern Ireland
- First-time buyers in England and Northern Ireland pay no Stamp Duty (SDLT) on homes up to £425,000.
- For properties between £425,001 and £625,000, you’ll pay a reduced rate.
Scotland and Wales
- Different stamp duty rules currently apply
Schemes to help first-time buyers
It’s worth exploring the range of schemes which are on offer to help first time buyers to get onto the housing ladder. Often these are provided by the government, housing associations, or new build developers and will be aimed especially at helping those who only have a small deposit.
An experienced financial adviser can give help and guidance on how to secure the mortgage which best suits your circumstances, especially if you’re a first time buyer.
How we can help
Buying your first property is a huge step and with so much to think about you may feel it’s hard to know just where to start. As professional financial advisers with many years experience of helping all sorts of people to secure a mortgage, we’re here to help you. We can take you through every step of the process and help to ensure that it’s a smooth and stress free experience. So whether you’ve already got your deposit, found the house you want to buy and are ready to go, or are still very much at the planning stage, why not get in touch with us so we can help you take the next steps. Start the ball rolling by calling us on 0808 123 4321. Your meeting will be at our expense and without obligation.
Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.