Buying your first home is a huge step to make and can be extremely daunting, after all it’s likely to be the biggest purchase you’ll ever make. There are clearly a lot of things you need to know, including where to start. Here is our advice to those setting out on the adventure of buying their very first home.
How Much Deposit Do I Need To Buy A House?
In general, mortgage companies require you to have saved at least 5% to 20% of the total cost of the home you want to buy. For example, if the purchase price of a property is £150,000, you will need to have saved at least £7,500 (5%). A mortgage lender would then lend you the remaining 95% of the property’s value. Saving more than 5% will mean you will probably be able to take advantage of a wider range of cheaper mortgages.
Lenders always conduct affordability checks to work out whether you can afford the mortgage repayments. Affordability is based on both your income and outgoings. Also, lenders tend to offer you up to three times your annual salary or under for a mortgage, so if your salary is low and you can’t borrow enough, you will need either a larger deposit just or to search for a cheaper property.
Other Costs Involved When Buying A Home
Aside from your deposit and mortgage payments, there are further additional costs you will when buying your first home.
- Survey costs.
- Valuation Fee.
- Mortgage arrangement fee.
- Solicitor’s fee.
- Removal costs.
- Buildings and contents insurance.
- Furnishing and decorating costs.
- Stamp Duty (Land and buildings Transaction Tax in Scotland, or Land Transaction Tax in /Wales).
First-time-buyers do not have to pay Stamp Duty on the first £300,000 for properties worth up to £500,000.
How Much Can I Borrow?
The amount you can borrow for a mortgage is again, about affordability. Lenders will examine your income along with your outgoings to see how much you can afford to pay back each month. Some lenders are so strict that even when you have paid off all your debts before applying, they factor in how the available credit you now have. This is because you are considered a risk if you use more than half the credit available to you.
Once the calculations have been made, the mortgage company will want you to be in credit in your bank accounts in case mortgage rates rise. They will ‘stress test’ you on a higher mortgage rate, typically 6-7%, to check if you could theoretically still afford to repay each month. Financial institutions have a responsibility not to lend people more than they can afford to pay back.
What Does LTV Mean?
LTV stands for ‘loan-to-value’. It refers to the ratio of property owned by you versus the portion owned by the mortgage company. In others words, it’s the proportion of the property value that you’re borrowing.
To calculate LTV you subtract your deposit as a percent of the property value. So if you pay a £20,000 deposit on a £100,000 home; you are putting down a 20% deposit, thus owing 80% making the LTV = 80%. LTV is not just dependent on the deposit you put down. It also varies when the value of your home fluctuates. By buying a property, you’re investing in an asset with a variable value which can in theory, and quite often in reality, make you lots of money or leave you owing more.
What Are Lifetime ISAs?
The Lifetime ISA (LISA) is a savings plan devised to help you either buy your first home or save for retirement. To open one, you must be aged 18 or over but under 40. Here are a few of the basics.
- You are able to deposit up to £4,000 every year. The Government will then add a 25% bonus.
- You can use it as cash savings which accrues interest, or as a stocks and shares investment, meaning you get share growth/loss.
- The maximum bonus is £33,000. So if you open it at 18 and save the maximum allowed every year, withdrawing it when you reach 50 you can achieve an extra £32,000 over all.
- You can use your LISA to help you buy your first home if it costs £450,000 or less.
- If you’re buying with someone who is also a first-time buyer you can both use your LISA savings and bonus.
What Is Conveyancing?
Conveyancing is the legal and administrative process that is carried out by a solicitor during house buying. Everybody needs to hire a solicitor when buying a house. They oversee the transfer of buildings or land from one person to another.
When you have had an offer accepted on your first home, you must instruct a conveyancing solicitor as soon as possible to get the ball rolling. They will ensure that all relevant contracts are signed and money transfers are completed, amongst other things.
Conveyancing is a considerable expense with huge ramifications if anything goes wrong. This is why we suggest that you get conveyance quotes from several firms and examine them closely. It is important not to just go for the cheapest house buying solicitor with unusually cheap conveyance quotes without examining the service and a breakdown of costs. You might find later on that some costs have been hidden though recent transparency laws are now in place to tackle this. If you are unsure about the exact service they offer, ask each house buying solicitor to explain conveyancing to you in their terms. The conveyancing process lasts until you get/hand over the keys to your home so it’s important to know what’s going on.
Your conveyance solicitor quotes will include basic fees, disbursements and expenses. Basic fees are the general house buying solicitor fees. Disbursements and expenses are costs that are incurred and passed onto you.
What Happens When I Complete?
When you complete on your property purchase, you become a homeowner. The property is yours! If you have a mortgage, your conveyancing solicitor will send your deeds to the lender who will arrange for any Stamp Duty (if necessary) to be paid to HMRC. They will also send the necessary documents to HM Land Registry where you will be registered as the rightful property owner. This must all be done within 30 days of completion or you will be liable for penalties.
HM Land Registry will send the title deeds to the solicitor who conducted your house buying who then passes them on to your mortgage lender. If you are a cash buyer, the title deeds will be sent to you.