First Time Buyer Finance and Affordability

Buying a house can be an overwhelming experience, so a first time buyer can easily feel bamboozled by the house buying process: what first time buyer finance is available, what mortgage should they choose, how much deposit will they need, or is there any help out there?

The first question you should ask yourself is, can I afford to buy a property? You may have been saving for a long time or have been left a legacy in a will and have a sizeable deposit. The deposit depends on the type of property you want to buy. For example, if you are taking advantage of the Help to Buy Schemes, you may not need to have such a large lump sum to put down.

Generally, the bottom line with deposits is larger is best. Having a bigger deposit as a first time buyer allows you to get better mortgage deals, makes shorter term mortgages more affordable, or reduces your monthly repayments. Ideally, you should aim for around 20% of the sale price, but there are schemes out there (discussed below) designed to reduce the amount you have to save.

First Time Buyer Finance: Affordability

The condition of your finances, healthy or otherwise, will be what determines your mortgage. It is important to ensure you work hard to maintain healthy finance practices to build up a good case for your mortgage affordability. You should plan a budget carefully and stick to it and be wise with any spending and saving.

First Time Buyer Finance: Credit history

Your credit history is the main criteria lenders use to assess the likelihood that you will consistently pay off a mortgage. No credit history is just as bad as a poor credit rating and probably means you are not in a position to buy at the moment. To get a good credit rating, Martin Lewis suggests applying for a credit card, spending something each month and paying the balance off each month. This improves your credit score and shows you are a responsible borrower. Once you secure a mortgage, you should ensure the monthly repayments are affordable.

First Time Buyer Finance: Mortgages

It is easy to feel swamped by the many types of mortgage on the market, but it doesn’t have to be complicated. The trick is to choose what is right for you.

Fixed mortgage

Your monthly repayments are set at a particular rate, which makes it easier to budget. Fixed-rate mortgages are also not affected by changes in interest rates. These tend to be fixed for a certain period and then switched to a Standard Variable Rate (SVR).

Interest only mortgage

Your repayments go towards paying off the interest, not the actual loan itself. You will have to show how you plan to pay off the loan at the end of the mortgage term. These are not available to take out any longer, however some mortgage companies will agree to move you onto interest only payments for a period of time if you are experiencing financial problems.

Variable mortgage (Tracker)

The monthly mortgage repayments vary with fluctuating interest rates, as decided by the Bank of England. This means your monthly payment can go up as well as down.

Variable mortgage (SVR)

The mortgage repayments vary based on the mortgage providers’ own internal systems and rates they set.

Discount mortgage

A fixed or discounted rate is payable each month for a period of time, after which it then reverts to an SVR mortgage.

Overpaying and flexibility

You should check whether you can overpay and clear the debt sooner. Most mortgages have a cap imposed as to how much you can overpay. It may be worth putting this money into a high interest account and paying it off when you can. Additionally, you may have to move sooner than you originally thought. If you are still tied to your mortgage (the “tie-in” period), there will be a fee for this. Tie in periods tends to be around 2-3 years long.

Changing mortgage providers

After the expiry of your tie in period, you will be free to remortgage as you see fit. However, beware of extra costs, such as exit fees and remortgaging conveyancing costs.

Using a mortgage advisor/broker

Many first time buyers make use of a mortgage advisor or broker. They will match the deal that best suits your financial circumstances, taking into account your salary, lifestyle, outgoings and debts. Be aware of how much they will charge you for this service. Although advisors are supposed to be impartial, they do receive commissions from the lenders. It is also worth mentioning, they won’t have access to all deals and options, some are only available direct to borrowers, so you may find your own great deal.

Make sure you have your mortgage agreed in principle and are ready to go. This gives sellers confidence you are a serious buyer and can genuinely afford the property.

First Time Buyer Finance: Help available 

Here are some government schemes that will help first-time buyers get a foot on the property ladder:

Help to Buy ISA

This is a high interest account that for every £200 saved, the government gives you an extra £50, up to a total bonus of £3,000. You will only receive the bonus when the money is withdrawn to pay for your deposit. If you are buying with another person, they can have their own account, which allows you to double up. However, there is a property cap of £250,000 (£450,000 in London), and if your property is above the threshold, you can receive the interest on the account, but not the bonus.

Lifetime ISA

These do not necessarily have to be used by first time buyers, but are there to encourage those under the age of 40 to save for a deposit, or their retirement. You can hold a Help to Buy ISA and a Lifetime ISA at the same time.

Help to Buy Equity Scheme

This scheme helps buyers with low deposits of at least 5%, although it only applies to new builds. The government will provide a loan of 20%, which means you can get a lower mortgage of 75%. For the first 5 years, the government loan is interest free, and then you pay it back. The loan is repaid when you sell your home at 20% of the then value, so you may pay back more than you initially borrowed.

Shared Ownership

You pay rent on a part of the home and rent on the remaining portion. The idea behind it is so you can incrementally increase your ownership of the property. Although you can purchase with a small deposit, the scheme usually only applies to flats.

First Time Buyer Finance: Conveyancing

Once you have found your dream home and your offer has been accepted, you will need to find a online conveyancer. When choosing a conveyancer, you should obtain at least 4 quotes (making sure disbursements are listed separately to the conveyancing costs) and read online reviews as a bare minimum.

You conveyancer will:

• Conduct local searches
• Be the contact between you and the seller
• Liaise with your lender
• Pay all the related fees on your behalf
• Transfer the payment for the property
• Register your name on the deeds at the Land Registry

First Time Buyer Finance: Working out the costs

Here are the main things you should consider saving for:

• Stamp Duty Land Tax (SDLT) although you might be eligible for first-time buyer relief
• Conveyancing costs and disbursements, such as searches
• Survey costs
• Mortgage arrangement fees
• Mortgage booking fees
• Valuation fees (although this may be included in the mortgage)
• Transfer fees
• Buildings insurance. This is required from exchange of contracts.
• Contents insurance