Buying your first home can be a daunting prospect. There are many complex issues to consider. You budget, mortgage and finding the right home are all crucial but there are other issues such as stamp duty and putting the right legal agreements in place as well as home insurance.
Here, we cover some of the main points for you but remember to always get professional advice before making any binding decisions.
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Do first-time buyers pay stamp duty?
First-time buyers pay less or no stamp duty when buying their home, provided the property value is below £500,000.
There is no tax due on homes worth £125,000 or less, regardless of whether you are a first-time buyer.
However, those taking their first step on to the property ladder don’t need to pay stamp duty up to £300,000.
A first-time buyer pays stamp duty at a rate of 5% on the property value between £300,000 to £500,000.
If the home is worth more than £500,000, first-time buyers will be required to pay the normal rates of stamp duty.
This is 2% on a property’s value between £125,001 and £250,000, then 5% on the portion between £250,001 and £925,000.
This means a first-time buyer purchasing a home worth £300,000 would save £5,000 in stamp duty, compared to someone who has previously owned.
Anyone buying a home worth between £925,001 and £1.5million pays tax at a rate of 10% on this portion. After £1.5million tax is charged at 12% on the remaining portion.
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How much deposit should you have in the current climate
To buy a home you usually need a deposit of at least 5%.
The average UK house price stood at £286,000 in June 2022, according to the Office for National Statistics (ONS).
Therefore, you would need to save a deposit of £14,300 to have a 5% deposit on the average priced home.
Of course, there are big regional variations and in some parts of the country, notably London, you will struggle to find a home at this price – meaning you need to save a far larger deposit.
On the other hand, in cheaper parts of the country, such as the North East, house prices are lower and the deposit requirements less tough.
Home buyers with a smaller deposit will pay a higher rate for their mortgage than someone with a larger chunk of money to put down.
In some cases, it can be worth taking the time to save a larger deposit to unlock better mortgage options.
There are also some companies that offer loans to boost the deposits of buyers. However, these can have high interest rates and fees and not all lenders accept loans as a deposit.
Finding the right home insurance
If you have a standard bricks and mortar home you will likely need buildings and contents insurance, whereas flat owners will probably only need contents as their building’s managing agent should cover buildings insurance within the service charge.
If you are a landlord you will need landlords insurance.
There are also plenty of non-standard homes that can require more expertise to find the best cover at the right price. For all the best value deals make sure you use specialist home insurance.
Can first-time buyers buy to let?
It’s a more unusual route into ownership, but first-time buyers can be a landlord, rather than a resident, of the property they hope to purchase.
Buy to let lenders prefer investors to have some experience in the sector with first-time landlords considered a bigger risk.
As a result, there is a smaller selection of lenders for first-time landlords to choose from.
Lenders may also want more security before offering a loan, such as a larger deposit, as well as higher earnings or a bigger rental yield.
Even if you’re not a first-time landlord, buy to let mortgages usually require a deposit of least 25%. This compares to a deposit of just 5% for some first-time buyer mortgages.
Lenders will typically want assurances that you know the market where you are buying.
You will need to carefully do the sums and make sure the expected rent covers the mortgage – lenders usually require the rent to be at least 125% of the mortgage repayment.
Increased regulation and taxes on landlords in recent years mean there is a lot to consider before purchasing a buy to let. A letting agent can help talk through and manage some of the requirements, though this comes at an additional cost.
It’s definitely worth searching for buy to let accountants near me to find support as a new landlord and to ensure you’re following best practices and keeping your accounts in good order.
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How to get a mortgage
It’s important to search the market to get the best mortgage deal for your individual circumstances.
But with more than one hundred lenders in the UK, each offering different rates, fees and criteria, it can be difficult to know where to start.
A good mortgage broker will take the time to understand your borrowing requirements and source the deal most suited to your needs.
Some advisers only search from a limited panel of lenders, so look for one that can scan the whole market.
Brokers might charge a fee for the work or others will just take a commission payment from the lender if an application goes through.
Mortgage lenders decide how much they think you can afford to borrow broadly based on your income, outgoings and credit history.
Before making a mortgage application, lenders can provide borrowers with a so-called Agreement In Principle (AIP) which shows the loan amount they are likely to offer you.
It is useful to get an AIP before putting an offer on a new home, so that you know you can get the required mortgage.
When it comes to a full mortgage application, you will need to prove the salary you receive through employment or other sources of income.
Your mortgage broker should talk you through the application process, but you can expect to be asked for bank statements and wage slips as a starting point.
When your adviser has all the information and supporting documents needed for an application, it will be submitted to the lender.
Sometimes providers come back asking for more information or clarification, before making a final decision on whether to lend.
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Is shared ownership for first-time buyers only?
Shared ownership schemes are designed to help people who would otherwise struggle to buy a property.
This means that you could be a first-time buyer, or you could have previously owned a home and now cannot afford to buy.
You may already own a property, including a shared ownership one, that doesn’t meet your current needs and can’t afford one on the open market that does. Or you are forming a new household, for instance, in the event of a relationship breakdown.
You will need to fall into one of the above categories to qualify for shared ownership.
Furthermore, total household income must be below £80,000 a year or £90,000 if you are in London.
And some schemes are only available to buyers with links to the area, such as a job or an existing home.
The idea is that you buy a share of a property as a stepping stone to buying an entire home.
Typically, you can purchase between 25% and 75% of a property through a scheme, though in some cases you can buy as little as 10% of a home.
Rent needs to be paid on the remaining share to the housing association or other organisation that owns the property.
You can buy more shares in your home in the future until you own 100% of the property, through a process called ‘staircasing’. It isn’t necessary to own 100% of the property if you want to sell.
Is Help to Buy still available?
Anyone hoping to buy a home through the Help to Buy equity loan scheme has until 6pm on 31 October 2022 to reserve a property and make an application.
The deadline is to make sure prospective buyers have enough time to complete a purchase before the scheme officially ends on 31 March 2023.
This means you will need to find the new-build home you want to purchase, reserve it with a registered builder, and apply online to a Help to Buy agent before the cut-off.
Through the initiative, the government lends buyers a loan of up to 20% of the cost of a home, or 40% in London.
Only first-time buyers can use Help to Buy and they will need to have a deposit of at least 5%.
The scheme is limited to new-build homes and is only open to buyers in England.
There are also regional price limits on how much a property can cost. For example, a home can cost up to £600,000 in London, whereas in the North East the price is limited to £186,100.
The equity loan from the government is interest-free for the first five years before interest of 1.75% kicks in.
Borrowers may be able to remortgage after five years to repay the cost of the loan and avoid paying interest.
Will the bank check my records?
Due to the huge sums of money involved, all banks need to make sure a borrower has a realistic chance of repaying the debt before offering a mortgage.
Lenders will usually look at someone’s credit records to gauge whether they have a good track record of managing money.
Someone who has a poor credit history is considered a higher lending risk.
And some lenders may be put off if you have blips on your record, for example, if you have missed a bill payment.
The good news is that there are specialist lenders, as well as building societies, that are willing to lend to borrowers with a less than perfect credit rating, including those with CCJs and a previous bankruptcy.
These lenders will usually take a bit more time to understand your circumstances. For example, they may want more information around why you didn’t pay a bill in the past and if you are likely fall behind on payments again.
Specialist lenders tend to charge higher mortgage rates to reflect the increased risk of a borrower, which means you’ll pay more for your loan.
If you are thinking of buying a property in the next two or three years, it’s worth taking the time to work on improving your credit rating so that you have the best choice of mortgages at the lowest rates when you come to buy.
If I bought a house then got divorced can I classify as first-time buyer?
Someone who has previously owned a property, even if they no longer do, is usually not classed as a first-time buyer.
For example, the Help to Buy scheme specifically excludes people who have been named on a property in the past.
If you have previously owned a house before a divorce, you will also not be eligible for first-time buyers stamp duty relief.
There are some lenders that will consider you a first-time buyer if you have not owned a home within the last three years.
In terms of mortgages, however, it doesn’t usually matter if you are a first-time buyer or a home mover, as the mortgages on offer are largely the same.
Lenders sometimes tailor higher loan to value towards first-time buyers, perhaps with cashback to help with fees.
However, someone who has previously owned a property and has a small deposit can usually still apply for these loans.
Remember to find the best cover at the right price, make sure you try specialist home insurance.
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