Sunday Times 17th May
First-time buyer guide: tips for how to get onto the property ladder
Your pub money is tucked away in a high-interest savings account and you’ve heard that house prices could fall. Are you gazing wistfully up at the property ladder wondering if now is the time to grab on to the first rung?
The Times has compiled the ultimate guide to buying your first home now, with up-to-date information on the post-Covid-19 market, the financial help available and how to go house hunting without leaving the sofa.
Is now a good time to buy?
It depends on what you’re looking for and, most importantly, how long you’re expecting to hold onto your property.
In the time of coronavirus, the biggest uncertainty is pricing. Lloyds Banking Group had the most pessimistic predictions earlier this month when it estimated a whopping 30.2% fall in house prices over the next three years. That’s more than after the 2008 financial crisis, when they tumbled 19.4% between 2008 and 2011.
Estate agencies Knight Frank and Savills, however, are more optimistic, forecasting a fall of between 7% and 10% this year and, potentially, some price growth late next year or in 2022.
Lucian Cook, head of residential research at Savills, thinks that first-time buyers who already have their deposit saved up will have less competition in the market in the coming months.
“Some buy-to-let investors, especially those who have experienced a build-up of arrears during the lockdown, will be looking to offload stock, while housebuilders will be keen to maintain their rates of sale, possibly through use of incentives,” Cook says. “With all of the uncertainty hanging over the market, [first-time buyers] should buy with a five- to seven-year view of future prices, rather than the expectation of making a quick buck.”
Tom Bill, residential research partner at Knight Frank, agrees. He argues that some people assume there will be a re-run in terms of house price falls but, unlike the last recession, this downturn has not been preceded by years of strong growth. Prices were already down.
“Whether now is a good time to buy depends on your time horizon,” Bill says. “In the next few months there will be discounts available. Over the course of 2020, we forecast prices will fall. Beyond that, we expect price growth will return.”
Ultimately, it’s unimportant if prices bounce back or not because it’s impossible to time the bottom of the market, says Camilla Dell, founder of buying agency Black Brick.
“If you find the right property at the right price and you’re going to be in that property for the next five years, it’s not a bad time to be buying,” she says. She adds that people shouldn’t worry too much whether prices go down after a purchase.
“Are you going to be selling at that moment and time?,” she asks. “Probably not, because the cost of moving, buying and selling is so high. Most people don’t sell six months later.”
Interest rates are another key factor: they are at an all-time low, so borrowing is cheap. Predicting severe economic distress, the Bank of England is keeping the base rate at 0.1%.
Simon Gammon, managing partner of Knight Frank Finance, says many first-time buyers opt for a fixed-rate mortgage. “If you know you’re going to be there for five years and you want the peace of mind of knowing exactly what your mortgage payments are, then it’s very attractive.”
The downside of a fixed-rate is that it often comes with early repayment or redemption penalties. In the long-term, a fixed-rate option might be cheaper than a tracker mortgage – knowing that the Bank will raise the base rate sooner or later – but it has less flexibility.
You can still apply for a mortgage if you’re on furlough, but you may have less borrowing power. “Some lenders will take into account total income, where an employer is ‘topping up’ the furloughed amount, and some will consider applications on a case-by-case basis,” Gammon says. “It’s worth getting in touch with your lender, or a whole-market broker, to see what’s possible.”
However, Gemma Godfrey, executive editor of the Times Money Mentor, warns that the number of mortgage products available in the UK has reduced by more than half.
“Tracker mortgages in particular have been cut by two thirds,” she says. “This means that despite these products seeming like a good option right now, as they followed interest rates lower, they’re also much harder to find.
“You should also be aware that lenders will be assessing your finances more closely, to make sure you would still be able to afford your mortgage payments in the future if interest rates rose.”
A general rule is: the bigger your deposit, the more choices you’ll have.
What can I afford to buy?
A deposit can be as little as 5% of the value of the property you would like to buy, but the average first-time buyer puts down 15% to reserve a home, according to advice site Bankrate. The latest government statistics show that the UK average house price is £230,332, so a 15% deposit is £34,550.
This can vary dramatically throughout the UK. In Northern Ireland, the cheapest region, the average house price is £140,000, so you would usually need £21,000. In London, the most expensive region, the average house price is £477,000, so a typical deposit is £71,550.
You can search for average asking prices and sold prices by postcode online using property portals such as Rightmove or Zoopla, or you can search the Land Registry, the government’s database for England and Wales, to get a better idea of how much you need.
If your salary has been mercifully untouched by the coronavirus downturn, then this lockdown period can be a good time to save.
Reducing your monthly outgoings will also make you look like less of a risk to lenders when you apply for a mortgage, as will improving your credit score. Outlandish or fluctuating expenses and bad credit will affect the amount you can borrow for your first home and could even mean you are rejected for a mortgage.
Find out what your credit score is by signing up for a free credit report online. There are simple things you can do to improve your credit score. You can register to vote, pay off any remaining debts, cancel unused phone contracts or store cards, and apply for a credit card, if you don’t already have one (but make sure you pay the amount owed in full every month, not just the minimum amount).
Many banks and brokers have online tools on their websites that calculate how much you can borrow. You can even apply for a mortgage in principle online. Be mindful that this is only a rough estimate and you will always get a more detailed assessment by talking to a mortgage adviser or a broker.
This is especially important if your employer has placed you on furlough or if your income has been affected by the coronavirus lockdown. Many lenders have changed their products recently as a result, so shopping around with expert advice is the best way to get a good deal. Some brokers charge a fee that is based on a percentage of the value of the property you are buying. If they don’t, they may get a commission from the lender you apply for a mortgage with.
If you’re struggling to borrow the amount you need, you can apply for financial help through one of the government-backed schemes outlined in more detail in the next section, which also includes information on how to buy with family or friends.
Once you have a mortgage in principle, you can start looking at properties you might like to buy. If you have a rough idea how much you can borrow, this will make you more attractive to sellers who will know that you’re serious about purchasing their home. Mortgages in principle can expire — typically, they last between 60 and 90 days — and if you apply for too many, this could affect your credit score.
You can also apply for a mortgage offer once you’ve found a deal you can afford. The mortgage adviser or broker will give you a good idea whether you’re likely to receive an offer. Once one is accepted, these usually expire within three to six months, but some lenders have offered to make extensions for buyers who have been stymied by the coronavirus crisis.
What financial help is available?
Help to Buy (HTB) is a popular government equity loan scheme that helps first-time buyers purchase a property worth £600,000 or less. It’s a good option for buyers with less cash upfront — you need a deposit of at least 5% to get a loan of up to 20% of the purchase price (or 40% in London). This is interest-free for the first five years. After that, you’ll be charged 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.
If you use this scheme, you can only take out a repayment mortgage to purchase a new-build, which tends to be more expensive than buying a resale. The comparison website Reallymoving.com estimates average sale prices are 10% higher on HTB properties.
The government will be extending HTB from 2021 to 2023. From April 2021, there will also be new regional price caps, which could reduce the maximum value of homes that can be bought through the scheme.
Available to anyone aged between 18 and 39, a Lifetime ISA (Lisa) is a government-backed savings account that you can use to buy your first home costing £450,000 or less. For every £1 you put in, you get a 25p top-up from the government. You can pay in a maximum of £4,000 a year, so the biggest bonus you could get is £1,000 per year.
It’s a savings account, not a “get rich quick” scheme, so you must adhere to strict rules about withdrawals. You will face a hefty penalty to withdraw money for any reason other than buying your first home or for retirement. Before the coronavirus pandemic, savers would lose their 20% government bonus plus pay a withdrawal fee of 5%. The government is temporarily waiving this 5% fee until April 5, 2021. You have to wait until 12 months after opening a Lisa to buy a property, you must use a solicitor or conveyancer to make the purchase and you’ll need to buy with a mortgage.
If you’re buying as a couple, each person can have a Lisa to double up on the bonus. It would take less than five years to grow a £50,000 deposit between you if you both saved £330 a month. You also earn interest on whatever you save — the best-paying Lisa currently pays 1.25% — and the interest is tax-free.
Stamp Duty Land Tax (SDLT, or simply stamp duty) is paid on property sales above £125,000. First-time buyers don’t pay stamp duty on the first £300,000 of a property. If the property is worth between £300,000 and £500,000, first time buyers will pay stamp duty at 5% on the amount of the purchase price over £300,000.
If the property is worth £500,000 or more, you will pay the standard rates of stamp duty and will not qualify for first-time buyer’s relief.
Join forces with friends or siblings: up to four people can be legal co-owners of a home, either as joint tenants or tenants in common. Under joint tenancy, you all have equal rights and own the whole property together. Most married couples typically hold their property as joint tenants.
Tenants in common each own a separate share of the property as a percentage, which can be equal or unequal. This is usually the simplest way for siblings or friends to be joint owners, however, a declaration of trust should also be written up with a lawyer to set out how ownership is divided, what should happen if one party wants to sell or let out their share of the property and it can also protect parents who have gifted or loaned cash.
Another way for parents or guardians to help is to act as a guarantor on their child’s mortgage. A guarantor mortgage, sometimes called a family-assisted mortgage, uses someone else’s home as security and passes some or all of the liability for a home loan on to the parent or close relative.
What does the buying process involve?
This week, the government announced that estate agency offices could reopen, surveyors could visit homes, conveyancers and removals firms could go back to work and prospective buyers can view properties in person as long as they adhere to social distancing guidelines.
Meanwhile, estate agencies have adapted by allowing customers to do “virtual viewings”. The government recommends you do viewings virtually before you consider visiting a property in person. Ask the estate agent if there is a virtual viewing option for the property you’re interested in — they are widely available.
Some agencies have made video tours that you can watch online or request to see. Others have teamed up with virtual imaging software companies to make 3D virtual walkthroughs: again, these can be posted online or are available on request.
In the majority of cases, the agent will arrange a video call (using WhatsApp, Facetime etc) with the seller who will take you around their home and answer your questions. Usually, the agent is on the call, too.
If you’re happy with the property, you can submit an offer that is above, below or at asking price via the estate agent who will negotiate with the seller’s estate agent. If an offer is accepted, you can then tell your solicitor to begin the conveyancing process to prepare the legal documents that you will need to buy the home and transfer the title deeds.
Once everything is agreed, you exchange contracts with the vendor (whether that is the housebuilder, seller or housing association) agreeing legally to buy the property. At this point, you lose your deposit if you back away from the deal.
Solicitors representing both parties will set a completion date and arrange the final balance of payments with the lender before the ownership is passed onto the buyer. Then all that’s left is to book a removal van, pick up the keys (usually from the estate agent) and move in.