Buying Your First House

Buying a house can be an exciting time especially if you’ve waited for a long time beforehand. However, the process of buying could be stressful depending on the various circumstances. What steps would you take? Where would you start? Are you scared that you can make a costly mistake? Don’t worry, we’ve decided to have this episode just for you and by the end of it I promise you won’t think it’s that bad.

1. Property type

First consider the type of property you’re looking to buy, whether you’d like a flat or a house. Usually flats are sold as leasehold properties where you don’t own the land underneath but you only lease it e.g. for 99 years or in some cases much more. You would have to pay a regular service charge and you might have to renew the lease at some point. Houses on the other hand are normally sold as a freehold which means that you own the building as well as the land on which it has been built. But not all houses are freehold. That’s why you should please check with the vendor whether the house you’re interested is a freehold or leasehold property.

If you’d like to buy a house, would you want it to be a terraced house, semi-detached, detached or a bungalow? You would need to decide on whether you’d like a newly built property (more expensive on average) or an older one. Usually the price is lower for a terraced house while bungalows are much more expensive. And this leads us to our second point…

2. How much?

How much are you willing to spend or how much can you afford to spend on a property? You’ll need to have a look on sites like Rightmove or Zoopla and find out what are the prices which you’d be comfortable with. The price will vary between the different types of properties as well as the area in which these are located. If they are in a well sought area then the chances are that you’ll need to pay a premium to buy the property.

3. Deposit

You’ll also need to have at least 10% cash deposit. The larger your deposit the better choice you’ll have and you’d be able to get a better deal on the mortgage that you’d be requiring from the bank (the interest rate is lower the higher the deposit you’re prepared to pay). If you don’t have sufficient deposit to pay for your first home you are eligible to get help from the government via a Lifetime ISA, but you must be minimum 18 and under 40 years old to open that account. You can pay up to £4K per annum until you’re 50 and the government will add 25% on top of what you pay with a maximum of £1000 per annum. This means that if you save for 10 years the maximum per year £4K you would get £50K with £10K of that being free money.

Depending on how much deposit you need it might take you a few years before you’re ready to buy. This would require you to be saving monthly and be prepared to have a good financial discipline. Currently the average price for a house is £310K so I would suggest to try to find a house below that price e.g £250K with a deposit of £25K. Don’t try to buy the dream house with your first purchase. If you buy just a nice house and live in it for 5 years the price should generally go up and you would have paid off a small chunk of it which would allow you to have more equity if you sell it and then buy another one.

A rule of thumb here is the 35 rule: your mortgage monthly payments should be no more than 35% of your gross monthly income. But if you want to be more prudent and go with a more cautious approach, maybe there’s another rule for you, which is the 25 rule or the mortgage monthly payment should be no more than 25% of your gross monthly income. You decide of course the law, the mortgage payments the better for you because you’re gonna have more disposable income.

4. Credit score

It would be good to check your credit score as soon as you can to ensure that you have a good score as the higher the score the better the chance that the bank will approve your mortgage application. You need to be aware of any potential issues like missed payments, returned direct debits or in some cases CCJs which might prevent you from getting a mortgage.

5. Speak to an adviser

Once you have clarified all of the above and you’re ready to start looking you can go to a mortgage adviser and have a chat with them. They would be able to run an application for you and advise of the next steps with an indicative amount of how much you would be able to borrow (for a fee). Alternativelyi, if you feel more confident, you can go online to any of the major banks and get a decision in principle, which if approved will confirm approximately how much the bank can lend you so you can go ahead and start looking (this is usually free).

The decision in principle won’t leave a mark on your credit profile as it’s only a soft search, meaning this is only what this particular bank knows about you. The final application would include the full search on your profile. If you’ve done your homework and you’ve checked your credit record you should have no surprises here.

6. Consider your income

Another thing to consider is your income. If you’d be applying together with a partner you would be able to add up both incomes and increase your chances of getting a bigger mortgage. Banks are usually ready to provide a mortgage amount from 4x to 4.5x or even 5x your total income. If you’re employed you’ll ideally be on a permanent contract or at least have a job offer. If you’re self-employed you’ll need to present the last two years’ accounts from your accountant or HMRC self assessment tax return.

Now it would be good to consider the following: the higher the amount you borrow the longer it would take you to pay off your mortgage and the more interest you’d be paying. Is it wise to borrow 5x your income vs 4.5x or even 4x your income? The less you need to borrow the better, don’t push yourself too hard.

Also the shorter the term the less interest you’d be paying if you can afford this of course. You need to strike the right balance and try different options. Maybe for the first purchase you can borrow for a longer term e.g. 30 years but then if you’re remortgaging try to reduce the remaining term by a few years as long as it’s affordable.

7. Stamp duty

Consider whether you’ll need to pay Stamp Duty. This is the tax on the purchase price of the property. Currently if your property is under £425K you won’t need to pay stamp duty as a first time buyer.

8. Legal fees

As a first time buyer you would still be liable to legal fees for the purchase. In some cases banks are able to cover most of those fees with certain mortgage deals they have.

9. Valuation

The basic valuation of the property, which the bank requires to ensure that the property is worth the amount that it’s being sold for. Some banks cover this cost as part of the mortgage offer but unless that’s the case you would need to add roughly £300-£500 to the total cost of buying the property.

10. Make an offer!

Once you decide on a house you would be able to make an offer and if accepted go to your bank or your mortgage advisor and complete a full application. Hopefully you would get approved and start the process, which might be quite lengthy in some cases as the solicitors usually take a long time to complete the various checks on the property followed by the exchange of contracts and then finally the completion, which is the day on which you’d be able to obtain the keys for your property and start moving.

Conclusion

I hope this has been helpful and you enjoyed our session. As always if you have any questions, feedback or suggestions for future episodes please email us at finance@proclaimers.com. Thank you!