First-time buyer guide: how to get a mortgage and buy a house

First-time buyer guide: how to get a mortgage and buy a house

Whether you’re still saving a deposit or have started viewing, here’s everything you need to know about getting on to the property ladder, says Ruth Jackson-Kirby

The Sunday Times, January 26 2020, 12:01am

If you’re finding it hard to get onto the property ladder, you are not alone. Government stats show that the average first-time buyer is 33 years old and the biggest hurdle is saving for a deposit — which on average now exceeds £50,000, according to Moneysupermarket.com. While that is a lot of money, don’t abandon hope: there is a lot of help available if you know where to look.
From parental help to government schemes to buying with friends, this guide outlines the ways you can finance your first home, as well as giving you some helpful tips for viewings and conveyancing.

I need help saving for a deposit

Nearly a quarter of first-time buyers surveyed by the online broker Habito said a family member provided more than 80% of their deposit. The Bank of Mum and Dad, as it is dubbed, is expected to have provided £6bn this year to help with deposits, according to Legal & General.

“For many first-time buyers, parental help is crucial,” says David Hollingworth, from the broker L&C Mortgages. “In many cases that will be in the form of a cash gift to boost their deposit funds.” Be aware that lenders prefer it to be given as a gift rather than a loan. “If a lender accepts parental loans, it will factor any monthly repayments into the affordability assessment, which could put a dent in the amount you can borrow.”

Patrick Connolly, a financial planner at Chase de Vere, recommends using the government’s help to boost your deposit. “The Lifetime Isa can play a valuable role for those who are trying to get on the property ladder,” he says. “They can be opened by people aged between 18 and 39, who can save up to £4,000 each year, benefit from a 25% government bonus and access their money tax-free.”

You can use a Lifetime Isa towards a home as long as the property costs £450,000 or less, you have been saving into the account for at least 12 months and you are buying with a mortgage. A couple who saved up £20,000 each in Lifetime Isas would get a government bonus of £10,000. Save £330 a month and you’d have a £50,000 deposit between you in less than five years.

If your property’s total value is less than £300,000, remember that you won’t have to save up extra to pay stamp duty, as first-time buyers are exempt up to this amount.

Myth buster: You can’t buy a home unless you have a huge deposit. Several lenders offer 95% mortgages meaning you only need a 5% deposit – that’s £9,888 for the average first home.
By numbers
£197,760
The average cost of a first home, according to HM Treasury
£50,174
The average deposit buyers put down on their first home. (Moneysupermarket.com)
33
The average age of a first-time buyer. (Government figures)

I only have a small deposit and I can’t borrow much

If this is the case, there are a number of government schemes that could work for you, of which Help to Buy is the best known. This is where the government lends you up to 20% of the value of the home you want to buy (40% if you are buying in London). You need to have a 5% deposit, you cannot own another property and the house must be worth less than £600,000.

The loan is interest-free for the first five years, but after that you’ll pay 1.75% interest that increases with RPI plus 1% every year. You only repay the interest on the loan – the equity is repaid when you sell your home or after 25 years. “It’s important that those using the scheme consider whether or not they can afford the loan repayments on top of their mortgage when the interest-free period comes to an end,” says Rob Houghton from Reallymoving.com.

Help to Buy can only be used on new-build homes, which are usually more expensive than buying a resale. Reallymoving.com says Help to Buy properties tend to sell at a 10% premium.
Another option is shared ownership. This is where you buy a portion of a property and rent the rest from your local authority or a housing association. You buy a stake in the property — usually 25% to 75% — then pay a reduced rent on the rest.

For example, £56,000 will buy you a 40% share in a two-bedroom penthouse in central Newcastle, according to Sharetobuy.com. It calculates that you would need a £2,800 deposit, then your monthly costs would be £618: £270 for your mortgage, £219 rent and a £129 service charge to maintain the communal areas.

“For many, it makes financial sense as it reduces the size of a deposit, purchasers own a share of their home and they can build up equity if they wish, while the monthly cost can be cheaper than an equivalent privately rented home,” says Matt Bartle, director of products at Leeds Building Society.

Each housing association has different eligibility criteria for shared ownership. They are usually restricted to people with a household income of less than £80,000 (£90,000 in London).

The drawback with shared ownership is the ongoing costs. While you may only own a share of the property, you are liable for the full maintenance and repair costs. You can gradually buy more of the property until you eventually own it outright through a process called “staircasing”, but you will need to pay fees each time you increase your share for things such as conveyancing and valuations.

“First-time buyers need to go in with their eyes open,” says Paula Higgins, chief executive of the HomeOwners Alliance. “For example, selling a shared ownership property is not straightforward and subletting is usually forbidden, even if you just want to let out the spare room.”

Alternatively, you could opt for a Rent to Buy property. You pay a subsidised rent (typically about 80% of the market rate) for up to five years with the option to buy the property, but you are meant to use the cut-price rent as an opportunity to save for a deposit.
“None of the government schemes is perfect,” says Angela Kerr, director of the HomeOwners Alliance. “Buying on the open market is always the preferred option if you can.”

Myth buster: Help to Buy is for first-time buyers only. Until April 2021 you can use a Help to Buy equity loan even if you have owned property before.
By numbers
£12,800
The average deposit paid for shared ownership (MHCLG)
221,405
The number of properties bought using Help to Buy equity loans up to March last year, with an average loan of £56,300 (MHCLG)
£2,360

The average amount first-time buyers save from avoiding stamp duty (AJ Bell)

Can I buy with a friend or family member?

If your family don’t want to hand their savings over, or can’t afford to, you could look at family mortgages. Offered by several lenders including Barclays, Lloyds and Halifax, these are linked with a family member’s savings account, which acts as a deposit so you can get a mortgage. The money is still theirs and they will get it back with interest as long as you make all your repayments on time over a few years.

You could also consider buying a home with a friend. Typically, mortgages can be taken out by up to two people, but more lenders are allowing mortgage applications from up to four people. By pooling your deposit and including more incomes on your application, you could borrow more to get a home.

Just make sure you consider the legal implications of buying a property with friends. During the buying process, ask your solicitor to draw up a Declaration of Trust. This will reflect how much you each put into the property and what you will each get back if and when it is sold.

How do I get a mortgage?

A mortgage, or home loan, is the biggest financial commitment you are ever likely to make and it typically lasts for 25 to 35 years. How do you make sure you are able to borrow the amount you need at the best possible rate?

This will depend on how much you earn. There are numerous online calculators that will give you an idea of the amount you can borrow. “A rule of thumb for borrowing amounts is likely to be around 4 to 4.5 times your income,” Hollingworth says.

Start thinking about your mortgage application at least six months before you apply. Check your credit score at Experian, Equifax or TransUnion. If it’s low, take some simple steps to improve it: check and correct any mistakes; reduce the amount of credit you have access to if you aren’t using it; and register to vote, as this can add 50 points to your credit score, according to Experian.

Lenders are looking to see that you have reliably repaid debt in the past. “If you don’t have a credit card, apply for one, make at least one purchase a month and set up a direct debit to pay the account in full each month,” says Raymond Boulger, senior mortgage technical manager at John Charcol.

Also, go through your statements and take an axe to your spending. When you apply for a mortgage your lender will assess how much you can afford to repay each month by studying your outgoings. Cancel that expensive gym membership, shop around for cheaper insurance and curb your shopping.

When it is time to apply, speak to a mortgage broker. Over a five-year period, a 2% mortgage rate on a £200,000 25-year mortgage would cost you £1,750 more than a 1.7% rate, so getting help finding the best deal will pay off. Some brokers are free and make a commission, but others will charge a fee, usually about 1% of the mortgage value.

Myth buster: LTV stands for long-term value
A survey by the Home Owners Alliance found that 76% of buyers thought LTV stood for long-term value, meaning the expected property value increase over time. It is actually an acronym for loan to value and represents the percentage of the home’s value that is borrowed. For example, an 80% LTV mortgage means you’ve put down a 20% deposit and the mortgage is covering the other 80% of the price.

By numbers
£145,702
The average amount borrowed by a first-time buyer (UK Finance)
80%
The average loan to value for a first-time buyer’s mortgage (UK Finance)
£723

The average monthly mortgage repayment (Santander)

How do I start the buying process?

It is finally time to start viewing properties. This is the fun part, but don’t get carried away. “Having waited so long to save a deposit, it’s important not to rush the final decision — take your time when viewing a house and try to resist the pressure to commit before you’re ready,” says Ben Leonard, chief executive of FirstHomeCoach.

“The more information you have on the property, the better equipped you are to make an offer. Don’t be shy: ask as many questions as you like, view the house more than once and at different times of the day, take pictures on your phone and make notes as you go.”

Before you make an offer, ask the agent whether they recommended the guide price or the vendor. “You might not get an answer, but their response will be a sure indication as to whether the agent has confidence in the price being asked,” says James Mackenzie, head of Strutt & Parker’s country department.

Once you’ve had an offer accepted, the legal process takes over. “Do not sit back and assume it will all be taken care of by your solicitor,” says Carol Peett, managing director of West Wales

Property Finders. Contact them once a week for an update; if they are waiting for anything from the vendor, urge the estate agent to chase them up. “Nearly a third of purchases fall through between an offer being accepted and exchange, and this will help ensure yours is not part of this statistic.”

Make sure you carefully read through all the documents your solicitor sends you. A lot of first-time buyers purchase leasehold properties, which adds an extra dimension to the legal work. “Don’t rely on your solicitor to check the length of the lease,” Kerr says. “Leases below 80 years are a problem and they can be costly to extend. You also need to have owned the property for two years before you are eligible to do so. Leases under 60 years are best avoided.”

Myth buster: You don’t need a survey if the mortgage company is doing one
When mortgage lenders carry out a survey on a property, it is simply a valuation survey. This means it is merely checking the property is worth what you are paying for it, and may not spot problems.

By numbers
6
The number of months it takes on average to buy your first home (Reallymoving.com)
£850–£1,500
The average legal fees for buying a property (Home Owners Alliance)
4%

The average amount below asking price that properties end up selling for (Zoopla)