Comparing now to most times in recent history, it is clear to see that First Time Buyers don’t have it easy. House prices have risen significantly, with interest rates now following suit. Stricter lending criteria following the 2008 financial crisis mean borrowing the amount required is not straightforward.
Our job as mortgage advisors is to make your life easier, and that is what we love to do. Here are 5 important tips to follow for all first-time-buyers:
1 – Know your monthly budget
Especially with interest rates on the rise, one of the most important factors in your affordability will be the level of monthly repayments you can deal with. Before looking at any properties or considering how much to borrow, you should have an idea of the maximum you can pay each month towards your mortgage. Remember to factor in additional costs such as council tax, electric, water, gas and internet bills.
Once you have come to us with your budget, we can use that to see how much you could borrow based on these figures as well as your income and amount of deposit.
Unfortunately, budgets will be stretched in the next year or two as interest rates look to be increasing significantly. That is why the sooner you can get in the market and lock in a fixed rate, the better off you will be.
2 – Consider other costs you will face
You will no doubt be saving up for your deposit and have a figure in mind for how much you will need, but are you also saving for the other costs involved in your property purchase? Many people underestimate this and end up with far less deposit than they hoped for because they have had to spend thousands of pounds unexpectedly.
The breakdown below should give you an idea of all the potential costs you will face – but please note this does not include furniture for your new home!
- Arrangement fee – this is charged by the lender to setup your mortgage. The amounts vary depending on the lender but would usually be approximately £1,000. You can either pay this upfront or add it to your mortgage. Adding it onto your mortgage would mean paying slightly higher interest due to the additional loan amount.
- Booking / Application fee – another fee charged by the lender, generally used to hold your loan while the application is processed. This is not normally a significant amount, usually around £100 and is not refundable if you decide not to take the mortgage out after the application.
- Valuation fee – this is not to be confused with the survey that you will arrange in addition to the lender’s valuation. The lenders arrange this valuation and charge you for it, which can typically be around £300-£600 depending on the property value but is sometimes free of charge. They require this valuation to ensure that the property is worth roughly what you are paying so if you fail to repay the mortgage they will be able to recover their loan by selling the property for you.
- Our fee (broker fee) – this is to cover our costs of supporting you and our time in searching the market for the best deal and preparing all the paperwork. We believe our fee offers fantastic value as we aim to not only save you money but provide a comprehensive service that takes the strain off you during this difficult and long process. Our typical fee is £495 and £295 of that is paid on application with the remainder due once you complete. If the mortgage does not work out through no fault of your own, we would be happy to refund the £295. We may charge more than this for complex cases but this would be agreed with you prior to commencing work. We will also receive a small fee from the lender as a percentage of the loan, but this will be detailed on the illustration when we get to that stage.
- Conveyancing – this is charged by your solicitor or licensed conveyancer and covers the cost of their legal work. Conveyancing itself is the legal transfer of ownership, and there are also other aspects included in this fee such as the land searches and administration. The amount will depend on the value of the property but typically range from £500 – £1,500. Some lenders will include legal fees as part of a package, but only if you agree to use a solicitor that they choose.
- Land registry fees – this covers the cost of the ownership of the property being transferred to you on the official land register. Generally this will be linked to the property value and most likely in the region of £200-£300.
- Survey – this is not a requirement when you are buying a house, but is highly recommended. Costs range from £400 to £1,500 depending on the one you choose – further information can be found on our first time buyer FAQs page.
- Stamp Duty Land Tax – there is no stamp duty due on the first £425,000 for first time buyers, and between £425,001 and £625,000 the rate is 5%.
3 – Speak to us before looking at properties
The last thing we want is for you to find a property you love, only to discover you cannot afford it. That is why we offer a free initial meeting. Take full advantage of that free meeting so we can understand your situation and help you ascertain your specific budget. This is especially true at the moment because mortgage rates are changing very quickly, to the extent that you could check rates last week but this week those rates are now much higher.
Also, we can get a Decision in Principle for you (also known as Mortgage in Principle or Agreement in Principle). This important little document comes from a specific lender and will show the maximum they would let you borrow. It is not a guarantee, but many estate agents would like to see one before allowing you to view properties or make an offer. A Decision in Principle shows you can likely afford the property and therefore not wasting anyone’s time.
4 – Choose the maximum mortgage term
You may have mostly heard about mortgages with a 25 year term, but nowadays many lenders will offer up to a 40 year term. This is wise to do in the beginning because your monthly repayments will be spread over a longer period of time and therefore reduced. At a time when interest rates are increasing, this is especially valuable.
After your initial fixed period ends (whether it is 2, 3, 5 or 10 years), you can then remortgage and look at reducing the term because you will have more equity in your home following years of repayments.
For example, a £200,000 mortgage at interest rate of 6% on a 25-year term would cost £1,289 per month. Increase that term to 40 years, and the repayment drops to £1,100 per month.
5 – Keep an eye on your credit score
Sadly, we are not taught about these financial aspects of life whilst in school. As a result, many don’t understand about credit scores, credit cards and loans. However, your credit score could be very important when it comes to applying for your mortgage.
Your credit score is an indication to potential lenders of how reliable you are to loan to. Factors that affect your score are:
- Your address and frequency of changes
- Credit card history
- Regular payment of monthly bills eg. Phone bill
- Bank accounts
- Being on the electoral roll
You can get a free credit check done using Experian or Clearscore. It does not take long to sign up and then they will regularly update you with your latest score. On the reports you will see tips on how to improve your score.
One often overlooked aspect of this is that having a credit card will increase your score. If you have never taken out a loan or used a credit card, you obviously have a clear history. However, this also means there is no evidence that you DO pay off your debts when required. As long as you are responsible and pay off your credit card each month, this can have a positive effect on your score.
What should I do next as a first time buyer?
Having read these tips, you now have important knowledge under your belt. The next step would be to get in touch with us and book your free initial meeting. Even if you feel like you are a long way from being ready, we can help you understand what is required.
Times are very hard for first time buyers, which is why we will support you as best as we can. Not only will we find you the best mortgage deal, but will offer guidance and advice every step of the way. You can rely on us for quick responses and helpful information. We are your partners in the property purchase process.