Buying a house is one of the biggest financial commitments you will make in your lifetime. With property prices soaring, getting on the property ladder can feel like an impossible task for many.
Whilst we can barely scratch the surface of all the things you need to consider in the space of one article, we’ve put together a few pointers to help steer your finances in the right house-buying direction.
Start saving early
It should go without saying, but the earlier you start to save, the sooner you’ll be in a position to consider buying. As soon as you start earning, set up a standing order to siphon off a little each month into an ISA.
There are a couple of special ISA options available to you:
- A lifetime ISA (LISA): save up to £4,000 a year and the state with add a 25% bonus if you’re going to use it to buy your first home. You have to have had the LISA open for at least 12 months to get the bonus cash.
- A Help to Buy ISA: save for your first home into a Help to Buy ISA and the government will boost your savings by 25%, up to a maximum of £3,000. Your solicitor will apply for the bonus when you are close to buying your first home.
It is possible to have both a Help to Buy ISA and a LISA< but you can can’t get the first-time buyers’ bonus on both.
Grow those savings
As well as adding to your deposit ISA each month, you could investigate other ways to grow your money. Depending on how much you can save each month, when you’re hoping to buy your home, and your appetite for risk, a stocks and shares ISA may be a good choice. In the longer term, they tend to result in a better return.
If you have time on your side and a bit of disposable income each month to play with, getting some professional financial advice could really help you reach that savings goal quicker.
The aim is to get together as big a deposit towards your first home as you can. This is the amount you put towards the cost of the property. You are likely to need at least 5% (more commonly 10% – 20%) of the purchase price.
Generally, the bigger the deposit you have, the more likely you are to get a mortgage and the lower your interest rate is likely to be.
Show lenders that you can borrow well
As you grow those savings, it’s important to prove to lenders that you don’t pose a credit risk. It can be a good idea to use a credit card, paying the balance off in full each month. With any other regular payments – rent, mobile phone bills etc. – make sure you always pay on time, every time. This will help keep your credit score in good shape.
It’s a good idea to check your credit report before you apply for a mortgage. This will give you the chance to correct any mistakes which may negatively impact your prospect of securing a mortgage.
Find out how much you can borrow
When you get to the stage where you’re seriously considering buying, it’s helpful to know how much you can borrow.
There are various online affordability calculators which can help you figure out how much you can afford to borrow. There are also mortgage calculators which will help give you a rough idea of how much you might be offered by a lender. These kinds of tools will help you see if buying is a reality for you.
If you only have a small deposit or low income, there are some schemes out there designed to help you, such as the Help to Buy scheme and shared ownership schemes. Now could be a good time to investigate these options.
Make sure you take into account ALL the costs
It’s not just the list price of the house that you need to think about when planning your finances. Moving house is expensive in other ways. Remember to factor in:
- Stamp duty– first time buyers pay no stamp duty on the first £300k for properties worth up to £500k. Most first-time buyers will fall into this bracket, but if not, it can be a good chunk of money
- Valuation fee– the mortgage lender assesses the value of the property to see how much they’re willing to lend you. This fee could be anywhere between £150 and £1,500, depending on the value of the property. Budget around £300.
- Survey– you should get any property you’re intending to buy surveyed to check there aren’t any underlying problems. This is usually between £400 and £800. You may need to pay for more than one of these if the first sale falls through.
- Legal fees– for most people, it’s safe to allow £500 – £800, but fees can be higher.
- Removal costs– this can be anything from the cost of hiring a van, to upwards of £1,000, depending on how much stuff you have to move.
- Mortgage fees– it’s not just the amount you borrow that you have to account for. There could be booking fees and arrangement fees, which could be in excess of £1,000. It’s best to pay them up front rather than adding them to your mortgage to avoid paying interest on them. You may also have to pay your mortgage broker a fee – this could be around £500.
- Insurance– you’ll need buildings and contents insurance as a minimum. This might also be the right time to consider taking out life insurance to pay off your mortgage if you die before you’ve repaid it all. It can also be a good time to write a will.
- Decorating– can you just move in to the new home, or does it need some TLC first? Make sure you can afford to do what you want to do.
- Ongoing costs– suddenly, all repairs and maintenance bills are your responsibility. Don’t overstretch yourself so much on the mortgage that you can’t afford to look after your new home. It can be a good idea to ask the sellers roughly how much they spend of utilities per month so you can factor that in. And don’t forget council tax.
There may be ways to reduce some of these costs – Money Saving Expert is a mine of handy tips. But the key thing is being confident that you can actually afford to make this step. If not, it’s worth saving for a bit longer. Financial security is more important than owning a house right now.
Find the right mortgage
When it comes to mortgages, there are hundreds of different options. Choosing the right one can be mind-blowing. Comparison websites can be a good place to start. But it’s important not to just look at the interest rate. Look at fees and charges too. For example, will you get charged for overpaying your mortgage?
You can get help with finding the right mortgage from an independent financial adviser, a mortgage broker or a lender. All of these people will be able to explain the options in more detail and ask your questions.
It’s important to understand the different services they offer, and their charges. Some, for example, will be tied to a small selection of lenders. Others will have the freedom to go to the whole market. Some will charge a fee for their service, some earn commission from the lender, so you effectively don’t pay them anything.
We might be biased, but we’d recommend consulting an independent financial adviser at this stage, regardless of who you end up securing your mortgage through. Firstly, they are likely to have access to the whole market (but do check). But secondly, and perhaps more importantly, they will take into account other aspects of your life. They will, for example, look at how you can buy that home without jeopardising your retirement savings. They will help you figure out how much is a sensible amount to borrow now given your short term and long term financial goals. It’s about balancing risk and reward on a broader scale.
Remember: whoever helps you with your mortgage, you don’t have to borrow the maximum they will lend you!
It’s helpful to get an agreement in principle before making an offer on a house. That way, you know how much you can borrow. It’s also a strong positive indicator to the vendor that you’re serious, and that you can afford it.
Create a new budget once you’ve moved
There’s obviously the whole house buying process that we’re glossing over here. But let’s assume that all goes well and – hooray! – you’re in. If you planned properly, covering all of your new outgoings shouldn’t be a problem. But it’s a good idea to draw up a new monthly budget, just to be sure. Put any appropriate standing orders in place.
It’s also wise to reassess your savings options. Do you need to open a new ISA now your Help to Buy ISA is defunct? It’s time to start planning your finances for the next stage of your life!
Want to help your child buy their first home?
As financial advisers, it’s not unusual for us to meet with parents (and sometimes grandparents) who want to help fund their child’s first step onto the housing ladder. The Bank of Mum and Dad funds about 25% of mortgage transactions each year.
It’s critical that you seek professional financial advice if you’re considering taking this step. There are various options available, but they all come with some risk. Don’t compromise your own financial security by trying to help your children!
Some of the options to consider may include:
- Gift cash to help with deposit. Banks may need confirmation that it is a true gift and that you don’t have an interest in the house. You can give as much as you want as long as you’re still alive after seven years. If your estate is worth more than £325,000, you die within seven years, and you gifted more than £3k, you child may be landed with an inheritance tax bill.
- Be a guarantor on their mortgage. This can help them secure a mortgage. Essentially, you’re taking responsibility for paying the mortgage if your child can’t. This is a legally binding arrangement and should not be undertaken lightly.
- Equity as security. You can use a portion of the equity in your home as additional security against the loan.
- Family offset mortgages. Your savings are offset against your child’s mortgage. This reduces how much interest your child would pay.
- Buy a property with your child. You could get a joint mortgage. You are equally liable for everything. If you already own a property, it may be counted as a second home with implications for stamp duty and capital gains tax.
- Let them move back in with you. If your child is currently renting, a short stay back with you could be all they need to save up some much-needed cash for their deposit.
We hope this short summary gives you some useful food for thought. If you’d like to speak to us in more detail about how we can help you organise your finances for buying your first home, please get in touch.