Buying Your First Home
Carol Morton, one of our expert mortgage advisers, explains everything you need to know about buying your first home.
0:44 – What Is the Definition of a First-Time Buyer?
0:58 – Why Does It Matter If You’re A First-Time Buyer?
1:20 – Reasons Why You May Not Qualify as A First-Time Buyer
2:17 – Taking Out a Mortgage
2:42 – Loan-To-Value
3:07 – Loan Security
3:31 – Monthly Payments
3:51 – Repayment Mortgage
4:17 – Interest-only Mortgage
4:48 – Interest
5:21 – Interest and Capital
5:53 – Term of Your Mortgage
6:18 – Deposits for First-Time Buyers
6:41 – Large Deposit
6:58 – First-Time Home Buyer Benefits
7:59 – Help in Raising a Deposit
9:07 – Help with Low Deposit
9:51 – Shared Ownership
10:12 – Additional Costs
13:23 – Steps to Buying a Home for the First Time
13:35 – 1. Talk to a Mortgage Broker or Adviser
13:57 – 2. Find a Property
14:09 – 3. Put in an Offer
14:32 – 4. Offer Acceptance
14:42 – 5. Make a Formal Mortgage Application
15:03 – 6. Conveyancing
15:28 – 7. Exchanging Contracts
15:53 – 8. Completion
16:19 – Insurance
17:12 – Summary
Taking out a mortgage is a big deal, but it's how most people buy their first home, it doesn't need to be overwhelming and it's actually pretty straightforward.
Buying your first property should be exciting, it's the place you’ll call home, that's why we've written this first-time buyer guide, to explain everything you need to know about buying a property. So, you can embark on your house hunting mission with confidence.
- What is the definition of a First-Time Buyer?
To qualify as a first-time buyer, you must never have acquired an interest in a residential property or an equivalent interest in land situated anywhere in the world.
- Why does it matter if you’re a First-Time Buyer?
First-time buyers can receive coveted Stamp Duty relief eligible for certain schemes. These benefits can make a real difference to the costs you face when buying a home, but not everyone qualifies as a first-time buyer.
- Reasons why you may not qualify as a First-Time Buyer
It doesn’t matter if you’re purchasing a property alone or with others, but if you're purchasing the property with other people then you all must meet the first-time buyer criteria.
You inherited a property or were given a property as a gift you previously.
Received property through a financial institution on behalf of a person under an alternative financial scheme.
You were added to the title deeds of a property someone else purchased, however you still may be able to qualify if:
You previously received a property as a trustee.
You own or previously owned non-residential or mixed-use property.
The interest you acquired was the grant or assignment of a lease with less than 21 years to run.
- Taking out a mortgage
A mortgage is a big loan you can borrow money from a lender to buy property, eventually you'll have to pay back the loan with interest, this typically happens over time via regular payments -otherwise known as a traditional repayment mortgage – or in one big hit after many years – known as interest-only.
When you take out a mortgage you must put down a deposit, the deposit is a percentage of the value of the property you want to buy, minimum deposit being five percent. The mortgage amount makes up the remainder of the remainder, up to 95% of the property’s value, this is the loan-to-value or LTV.
- Loan Security
A mortgage is a type of secured loan, which means it’s secured against the property you buy. The lenders interest in the property is noted with the title deeds at Land Registry. This means that the lenders can repossess the property if you’re unable to maintain the payments.
- Monthly payments
Paying your mortgage each month is like paying rent, except you're sending money to a mortgage lender rather than landlord. Whether you opt for a payment or interest only mortgage will determine on how much your monthly payments will be.
- Repayment mortgage
The most common type of mortgage is a repayment mortgage, this is where you pay back a bit of your mortgage debt each month with interest. The part that goes towards paying our outstanding mortgage debt is called a ‘’capital payment’’, once you have met all your repayments with interest you own a 100% of the equity in your property will be all yours.
- Interest-only mortgage
The maximum loan-to-value for an interest-only mortgage is 75% which is less common among first-time buyers who usually require a higher loan-to-value as the term interest only suggests only make monthly payments on the interest being charged not towards the mortgage balance at the end of the mortgage term you must have the means to pay back or your loan debt in one go.
Interest rates are how banks and building societies make money. The amount you pay in interest is calculated by applying your interest rate to your outstanding loan payments. You pay your interest each month usually alongside your capital payment. There are different mortgage interest rates such as fixed tracker variable and more, which we will explain in more detail.
- Interest and Capital
In the beginning the total monthly payment is mostly interest as the mortgage balance is at its highest. Your monthly payment also includes capital payment towards the mortgage balance, so each month overall debt reduces. As your monthly payment to the lender has not changed you might be paying interest falls and capital payment increases.
- Term of your mortgage
Our mortgage term is the period over which you pay mortgage, typically taking 25 to 30 years. The length of time you agree on will affect your monthly budget, the shorter the term is, the less your pay overall - but the higher your monthly payments.
- Deposits for First-Time Buyers
You must save up for a deposit if you want to take out a mortgage first-time buyers deposits are typically 5% to 15% of the total market value of the property, you might get variable to put down for a deposit, helps to determine what mortgage size you’ll need.
- Large Deposit
The bigger the deposit the less you'll need to borrow and the less you'll need to pay in interest large deposits give access to more competitive mortgage rates because they result in a lower loan to value.
- First-Time Home Buyer Benefits
There's no debate that buying a home is more expensive than it used to be, however there are actually some nice benefits to being a first-time buyer.
- Stamp Duty Exemption
Stamp duty is a tax paid on residential property purchases. First-time buyers typically pay less stop duty than everyone else. The amount you pay depends on the value of the property or purchasing:
On properties up to three hundred thousand you’ll pay zero pounds on strategy duty tax.
On properties up to half a million you'll pay 5% stamp duty. Unless you're buying a shared ownership property in which you won't pay any stamp duties.
On properties over half a million you do not receive any stamp duties regardless of if you’re taking part in a shared ownership scheme.
- Help in Raising a Deposit
There are two government schemes which offer support on building up a deposit. These are Help to buy: ISA and Lifetime ISA. They’re both savings accounts where you store money to put towards your deposit. With ISA the government gives you a bonus there's a percentage of the amount you contribute the bonus isn't loan and you don’t have to pay it back.
Help to buy: ISA, this is only available for first-time buyers purchasing a property was up to 250 thousand pounds or 400 thousand pounds in London. You put 200 pounds into savings account each month and the government add 25 percent bonus. You can receive a maximum bonus of 3 thousand pounds towards your deposit.
Lifetime ISA: you can take up lifetime ISA if you’re 18 to 39 years old and you’re either a first-time buyer or saving for retirement, you can save up to four thousand pounds a year and the government will add a 25% bonus.
- Help with Low Deposit
There a two types of government schemes aimed at helping people with small deposits, these are: help to buy equity loan scheme and shared ownership.
- Help to Buy Equity Loan Scheme.
This scheme is offered to people who want to buy a new build property. You can buy up to 20% of the property’s value in England and Wales and 15% in Scotland. Meaning if you need a 25% deposit must only save 5% equity loan would cover the rest of the deposit.
- Shared Ownership.
This is where you part-buy and part-rent a home from a housing association. As you’re only buying a portion that is often less than 50% of the purchase price, you can take out a much smaller mortgage lending in proportionately smaller deposit then if you’re buying the whole property.
- Additional Costs
There are some additional costs that come with buying a property for the first time and it's best to be aware of these from the outset.
- Stamp Duty Tax
As explained, you’ll only pay stamp duty as a first-time buyer if you’re purchasing a property worth over 300 thousand pounds even then you’ll receive some relief, unless the property is worth 500 thousand pounds.
Your mortgage lender will need to confirm their value of your property before they lend you money to you. While the mortgage applications are being processed, the lender will arrange a valuation for lending purposes. Some lenders might not charge depending on your mortgage type.
There are two types of surveys: a homebuyer report and full structural survey.
- Home Buyer Report
Part of a homebuyer report evaluation, but the difference between a homebuyer report and evaluation for lending purposes is that the surveyor also prepares a report for you on the state of the property. This report identifies any work that might be necessary now and in the future.
- Full Structural Survey
A full structural survey is much more detailed but is only necessary if you plan on doing extensive work to the property it was built before the 1990s, it’s of unusual construction, or if you feel that there might be problems with the actual structure.
It’s unsurprising that there are a lot of laws and legal requirements involved in buying a house. You’ll need a conveyancer or solicitor to guide it through the process and to represent you by lacing with the seller’s solicitor. This is when everything goes smoothly, it’s worth asking about costs beforehand as conveyancing can vary in cost quite a bit.
- Mortgage Broker Fee
A mortgage broker manages your entire mortgage application. At John Charcol, we not only guide you through the application process, throw out the paperwork and find the best rates. We could also help you move into a new home, set up service providers and more with our exclusive concierge service.
- Removal Fee
You’ll have to pay removal fees to transfer your possessions from your previous residence to new one, so you need to budget for this. We can arrange removals for you with our convenient concierge service. Is one of the benefits that come with being a John Charcol customer.
- Steps to Buying a House for the First Time
Now you know a bit more about what’s involved in buying your first home. Here is more about the process you’ll go through.
1. Talk to a Mortgage Broker or Adviser
It’s best to speak to a broker from the outset, ensure and talk with an advisor that you establish which type of mortgage suits you and how much you can potentially borrow, you might also get a decision in principle, this is a promise from your lender but based on the information you give him, they’ll give you the money.
2. Find a property
This is the best thing, this is your time to shop around, speak to estate agents and don’t be afraid to view a property more than once.
3. Put in an offer
Think you for the one, then be ready to make an offer. The estate agent will be able to advise you on whether to make an offer or asking price, or be prepared to negotiate, estate seller is underwhelmed with your first offer.
4. Offer acceptance
Success, the offer on your home has been accepted, now you can proceed with the mortgage application.
5. Make a Formal Mortgage Application
This is when the lender checks different documents, like passport or proof of earnings during this period the lender also organizes a valuation of the property to make sure it’s worth the volume you want to borrow one satisfied a formal monk dropper, will be sent to you and your solicitor.
This is where the solicitors or conveyancers will draw up contracts for purchase and check if everything’s okay. To check any leases for things that might cause you all the lender problems in future. The conveyancer also takes care of the local authority search and Land Registry moments.
7. Exchanging Contracts
The exchanging contracts is when your solicitor and the seller’s solicitor exchange contracts. You won’t have to pay for the property yet, but you’ll have a legal agreed on a date, it at this point while you’ll hand over your deposit money. Past this point you cannot withdraw from the purchase without losing money.
Completion is after you exchange contracts and paid for your new home in full. Money will have been transferred to the sellers’ solicitors and the keys released to you. Exchange and completion can happen on the same day, but this can depend on whether the properties fully built and also ready.
No lender will loan you money for a property without buildings insurance – and this is minimum level of insurance that you need.
Buildings Insurance-This is required by all lenders.
Contents Insurance-This is not a necessity where you take out a mortgage.
Income Protection Insurance-This helps ensure that your monthly payments will be covered if you’re unable to work due sickness or injury.
Specialist Insurance-This isn’t for everyday circumstances, only if your property has a special construction feature, is it a high-risk area or will be unoccupied for a long period.
So, that was our guide for first-time buyers.
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