Becoming a First-Time Homeowner: The Money Matters

first-time buyer

Money is the key to the first door on your homeownership journey. It’s no secret that property prices can be daunting, but don’t be disheartened. The vast majority of us can’t afford to buy a house outright. Instead, you’ll contribute a portion, the deposit, and secure a mortgage to cover the rest. This mortgage will be repaid, with interest, over time or upon selling the property.

The size of your deposit hinges on various factors, including the property type, location, and the possibility of utilizing government-backed schemes we’ll explore later in this guide. Beyond the deposit, you must also budget for other moving expenses. In 2019, the average cost of moving was a substantial £10,400. Fortunately, first-time buyers typically incur lower costs, but it’s wise to maintain a financial safety net.

Key Financial Considerations

Before setting your sights on a new home, conduct a thorough financial self-assessment. Do you have existing debts, like credit cards or loans? Are your finances well-organized with consistent savings, or do you often find yourself in overdraft territory? Your financial health significantly influences your mortgage rate. A strong financial footing will secure better terms, while shaky finances might make mortgage acquisition challenging or result in unfavorable rates.

Leading up to your home purchase, focus on tidying up your financial records. Opt for high-interest ISAs for savings, clear outstanding debts, and avoid taking on additional credit cards or loans. Your credit score plays a pivotal role in mortgage approval. To boost your credit rating, consider financial expert Martin Lewis’ advice: obtain a credit card, make regular purchases, and consistently pay off the balance. You can check your current credit score for free at

Unveiling the Deposit

The deposit is your initial key to the treasure chest of homeownership. A larger deposit reduces the amount you need to borrow, opening doors to better mortgage deals with lower interest rates and shorter repayment periods. To determine the required deposit, research property prices in your desired area. As a general guideline, most lenders offer mortgages of up to 4.5 times your income, with your deposit covering the remaining property cost.

It’s advisable to save at least 5% of the property’s value, though aiming for more can be advantageous. Research from Halifax reveals that, in 2018, the average first-time buyer deposit stood at 16%. When in doubt, it’s better to overestimate your savings target.

A Helping Hand from the Bank of Mum and Dad

If you’re fortunate enough to receive financial assistance from family members, it’s a valuable resource. However, it’s crucial to define the terms of this support in advance. Is it a gift or a loan? What are the repayment expectations? Does it grant your parents a say in your property choice?

Let’s consider an example. You’re eyeing a one-bedroom flat in your area with an average price of around £180,000. Your annual income is £30,000, making you eligible for a maximum mortgage of £135,000 (30,000 x 4.5). Your deposit savings goal should hover around £45,000, and governmental schemes, which we’ll discuss later, may reduce this figure. You could also receive contributions from family members or jointly purchase with someone else. However, if this amount still seems daunting, exploring more affordable property options is a viable strategy.

Unraveling the Mortgage

Now that we’ve grasped the importance of your deposit, let’s delve into the intricate world of mortgages. A mortgage is a financial lifeline, a sum lent to you by a mortgage lender (typically a bank) to bridge the gap between your deposit and the property’s cost. It’s repaid gradually, usually through monthly installments, which include interest. Your interest rate depends largely on your credit score.

Types of Mortgages

Mortgages come in various flavors, each with its own unique characteristics:

  • Fixed Mortgage: This is the most common type. With a fixed mortgage, you pay a consistent rate each month, simplifying budgeting. After a fixed period, you may transition to the Standard Variable Rate (SVR). Many opt to remortgage with a different lender at this point to maintain a fixed rate.

  • Interest-Only Mortgage: This is an uncommon choice, primarily used for Buy to Let properties. Your monthly payments only cover the interest, not the principal. These mortgages cannot be used with Help to Buy schemes, and you must have a plan to repay the principal, such as savings or selling the property.

  • Variable Mortgage (Tracker): This type of mortgage adjusts with the interest rate set by the Bank of England.

  • Variable Mortgage (SVR): Here, the interest rate varies based on the lender’s internal systems.

  • Discount Mortgage: Initially, you’ll enjoy a fixed or discounted rate, which later reverts to an SVR mortgage. Ensure you evaluate the long-term savings to see if this option truly works in your favour.

The Standard Variable Rate (SVR) is the interest rate charged by the lender once the initial discounted, fixed term, or tracker period concludes. When it comes to mortgages, you have the freedom to choose. At this stage, you should focus on flexibility and the ability to overpay. Determine whether your mortgage allows overpayments and explore the limitations.

Also, assess the mortgage’s flexibility regarding sticking with the same lender. Although many opt for remortgaging with a new provider after the tie-in period ends, you might decide to move sooner than planned. Be aware of the tie-in period’s duration and the fees for early relocation.

Seeking Mortgage Guidance

Navigating the mortgage market can be overwhelming, and that’s where a mortgage advisor or broker comes in. Many first-time buyers who seek professional advice recommend it. If you lack the time, energy, or expertise to unearth the ideal mortgage deal, a broker will tailor a solution to your unique circumstances, considering your income, lifestyle, and expenditures. They can explain the process in detail.

Before engaging a mortgage advisor or broker, consider their charges, and keep in mind that, while they should be impartial, they may receive commissions from lenders. Additionally, note that they may not have access to all available options, as certain deals are exclusively accessible directly to buyers. Thus, conducting some independent research could be advantageous.

Mortgage Milestones: When to Apply

Once you’ve meticulously prepared your deposit and estimated your borrowing needs, it’s time to apply for a mortgage in principle (MIP). This is not a formal mortgage offer, but it signifies a lender’s theoretical willingness to provide you with the necessary funds. Acquiring an MIP demonstrates your commitment to buying a property, which can foster trust with sellers and enhance your chances of securing the desired mortgage amount.

You can obtain an MIP from any major high street bank or lender. The source of your informal agreement doesn’t significantly impact the process.

Key Mortgage Considerations

As you edge closer to selecting your mortgage, keep the following factors in mind:

  • Flexibility and Overpayment: Check your mortgage’s flexibility; can you make overpayments to pay off your debt sooner? Be aware of any overpayment limits.

  • Costs of Remortgaging: Many individuals opt to remortgage at the end of the tie-in period (typically 2-3 years). However, it’s wise to evaluate whether the potential savings outweigh exit fees, remortgage conveyancing expenses, and administrative costs from your new lender.

  • Mortgage Advisor/Broker: If you’re uncertain about the mortgage market, consider enlisting the help of a mortgage advisor or broker. They can match you with a suitable deal based on your financial situation, making the process more comprehensible.

Remember, a mortgage represents not only a substantial amount of debt but also a long-term commitment. Avoid short-term thinking and focus on your long-term financial well-being. Calculate your payments and aim to pay off your mortgage as swiftly as possible.

Unveiling Additional Costs

Now that we’ve demystified the deposit and mortgages, let’s shed light on the other expenses that come with homeownership. These include:

  • Conveyancing: The legal aspects of property transactions, managed by a conveyancer or solicitor.

  • Chartered Surveyor: A professional who assesses a property’s condition and value.

  • Removals: Costs associated with moving your belongings.

  • Mortgage Arrangement Fees: Charges related to setting up the mortgage.

  • Mortgage Booking Fees: Fees for booking the mortgage.

  • Valuation Fees: Often included in mortgage fees, these fees relate to property valuation.

  • Search Fees: Expenses incurred for inquiries your solicitor makes to local authorities.

  • Electronic Transfer Fee: The cost of transferring money.

  • Buildings Insurance: Insurance for the property’s structure.

  • Contents Insurance: Insurance for personal belongings within the property.

  • Moreover, other potential costs to consider are:

  • Stamp Duty (or Local Equivalents): As a first-time buyer, you may be exempt from Stamp Duty if the property’s value falls below a specific threshold.

  • Storage Fees: Expenses related to storing belongings.

  • Packing Fees: Costs associated with packing services.

After settling into your new home, you’ll need to budget for ongoing expenses, including:

  • Utilities: Payments for gas, electricity, water, and other services.

  • WiFi: Internet connectivity costs.

  • Council Tax: A local tax for municipal services, typically paid monthly.

  • Property Preparation Costs: Expenses for cleaning and changing locks.

  • Decorating and Furnishing: Costs related to personalizing your new home.

While this list may appear daunting, not all of these expenses may apply to your situation. The total amount you should save depends on factors like your location, the distance of your move, property prices, and personal preferences.

Furthermore, you can determine your Stamp Duty obligations, if any, by visiting our Stamp Duty calculator. Use our quote forms to obtain estimates for conveyancing, surveys, and removals, and remember that securing multiple quotes allows for comparison, potentially leading to cost savings for decorating and furnishing your new home.

Governmental Support for First-Time Buyers

Don’t be disheartened; governmental support is at hand to assist first-time buyers in their quest for homeownership. Here are some prominent government schemes designed to help you embark on your property ownership journey:

  • Lifetime ISA (Individual Savings Account): Although applications closed in November 2019, existing accounts continue to function as usual. For every £200 saved, the government provides a £50 state bonus at the end of each tax year. This bonus can be put towards your property deposit or used for retirement funding.

  • Help To Buy Equity Loan Scheme: This initiative facilitates homeownership with a low deposit, often as low as 5%. The government offers an equity loan, typically 20% (or 40% in London), reducing the mortgage amount. The loan is interest-free for the initial five years, and repayment occurs when the property is sold, based on its current value.

  • Shared Ownership: With Shared Ownership, you purchase a portion of the property and pay rent for the remaining part, allowing you to gradually increase your ownership through ‘staircasing.’ Shared Ownership properties are often new builds and reduce the amount you need to save and borrow.

  • Help to Buy ISA: Although this scheme is no longer open to new applicants, existing accounts continue to function as before. For every £200 saved, the government provides a £50 bonus, with your solicitor applying for it upon property completion.

  • First Home Scheme: Introduced in February 2020, the First Home Scheme offers a 30% discount on new build homes to eligible first-time buyers. It aims to prevent individuals from relocating due to unaffordable property prices. Further details on the scheme are forthcoming, so stay tuned to our blog and social channels for updates.

In summary, the path to homeownership may appear perplexing, but with the right financial strategy and government-backed assistance, the dream of owning your first home is closer than you think. Start your journey with confidence, and remember, the key to success lies in prudent financial planning and taking advantage of the available support. Your dream home is within reach, waiting for you to unlock the door.

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