There comes a time in most people’s lives when they contemplate putting down some form of roots through the purchase of their first property. Such a transaction is obviously a very individual thing, dependant on income, location, aspirations, personal relationships and indeed projected career path and it is often a thing that is worth having a chat with someone first to explore the “art of the possible”. The following offers some initial basic thoughts and considerations (in no particular order of importance) from which a plan of action can start to be drawn up - potentially before you start talking in detail to professional financial advisors or mortgage providers so that you remain in charge of the process that ultimately results in you taking on a significant debt (but a good one!).
1. How much will you need to buy your first home?
The first step is work out how much you need to save. Your deposit is by far the biggest thing you'll be saving towards. It will usually need to cover around 10% of the cost of the property (although some institutions are now offering 5% mortgages), with a bank or building society lending you a mortgage to cover the rest. Browse websites such as Rightmove to see how much properties cost in the area you want to buy in, then use a borrowing calculator (there are lots on the web) to get a rough idea of how much you might be able to borrow. Generally, the less you earn, the smaller the mortgage you will be offered – meaning you may need a bigger deposit to buy the property you want. If you buy with someone else, you’ll be able to apply for a larger mortgage, and potentially build up a bigger deposit.
2. Other costs to factor in.
Often individuals overlook that the purchase of a property itself requires quite a significant outlay before, or just as you get the keys – below are some examples
- Cost Valuation fee The mortgage lender will conduct a valuation to check the property is worth roughly what you've offered to pay for it. Charges for this range from £0-£1,500, depending on the terms of the deal and value of the property.
- Arrangement/product fee This is the fee for taking out the mortgage. Cost between £0-£2,000, depending on the deal.
- House survey fee All mortgage providers demand a minimal survey of the property (to check value) and often for older or more expensive homes it is worth having a full survey. This is when a professional surveyor examines the property to check for structural defects. Cost is again between £350-£1,300 depending on the value of the property and type of survey
- Conveyancing fees These relate to the payment given to a solicitor or conveyancer to handle the legalities of buying the property – usual cost. £500-£1,500
- Search fees Searches should identify issues that might negatively affect the property you're buying (eg flooding) – approx. £300
- Buildings insurance This covers you if anything major goes wrong with the property. You'll need to have it in place from the day you exchange – usually in the region of £120 pa
- Money transfer fees You may have to cover money transfers between mortgage lenders, conveyancers, buyers and sellers - hopefully a small amount - approx. £35
- Land Registry fees this is the charge for registering yourself as the property's new owner – usually £90-£140
- Removal fees The cost of hiring a van or a removals company. This will vary depending on how much stuff you have and how far it needs to be transported – anything between £100-£1,200+
- Stamp duty This is the tax you'll pay for buying the property. If it's your first home and it costs £500,000 or less, there is currently no charge. From the first of July this is reduced to an upper limit of £300K and after the 1st October it returns to £250K.. As with much of the above the amount you need to budget for depends on property price but for the moment the waiver for first time buyers is very significant.
- Miscellaneous Costs you also need to factor in the amount you’ll be spending on commuting, contents insurance and utilities such as gas, electricity, water and council tax, then there’s the cost of decorating and furnishing your new home. This will vary depending on how much work you want or need to do.
3. What type of house do I want?
Again lots of questions to ask yourself:
- Is this somewhere I intend to live in? If so am I intending to use it all the time or just at weekends?
- Is this an investment property? If so is it located in the right place to maximise the rental market? Don’t forget you will have to pay tax on most or all of the rental income received.
- One or two bedroomed property? Whilst two bedrooms are more expensive, it is not proportionately so and may give you the flexibility to take in a lodger and thus get some more income to offset the cost of the mortgage.
- How long am I going to be able to live in it? How long is your draft, where will the next one be, will I sell it when I move out of the area or try and rent it?
4. How to save for a deposit more quickly
After working out how much you ideally need to save each month, you should set a plan for how to achieve it. Here are some ideas from sites such as Which and Money Saving Expert
- Reduce your bills. Perhaps the most satisfying way of saving money is to reduce your outgoing bills. Do this by: Switching your energy bills to cheaper tariffs, if your landlord will let you. Shopping around for cheaper mobile phone and broadband packages. Checking your council tax – if you live alone, and in a few other circumstances, you can get a 25% discount on your council tax bill. Cancelling unused subscriptions, eg TV and music streaming, gyms, clubs, newspaper and magazines.
- Cut down on everyday spending. Making small changes to your everyday outgoings really can add up over time. Check your bank statement and have a look at what you're spending on – apps like those from Monzo and Starling automatically break spending down into categories, which makes the process easier. Perhaps you hadn’t realised that the daily cup of coffee you buy costs you £600 a year, or that you’ve been spending £150 on clothes every month. Identifying any areas you can cut back on – eg taking coffee from home in a thermos flask, or limiting yourself to one new clothing item a month – can free up substantial amounts of cash to be stashed away in your deposit fund.
- Earn on the things you do spend on. Use loyalty cards and consider taking out a cashback credit card, which will enable you to earn a percentage of what you spend in the form of credit on your bill. To max out the benefits of a cashback card you should use it for all your everyday spending but pay off the balance in full every month, as the interest you’ll be charged could outweigh the cashback you earn. Using a credit card responsibly will also help to improve your credit score - important for when you apply for a mortgage.
- Consider a saving/budgeting app. There are a number of apps that will funnel away your spare cash, building up your funds for a deposit. Some apps, such as Monzo and Oval, can round up your spending to the nearest pound and deposit the difference into a savings account. Other apps, including Chip, Plum and Cleo, use an algorithm to analyse your financial behaviour and decide how much you can afford to spend. The downside of these apps is that they rarely pay interest on the amount you're saving – so, once you’ve saved, you should transfer the funds to an account that does pay interest.
- Assess your renting situation. A more dramatic step, but the one that could potentially save you the most money, is changing your current living situation – moving back inboard if living ashore or indeed as increasing numbers of people saving for their first home are doing - choosing to move back in with their parents! Assuming this move will mean you pay below-market rent (or even none if you're very lucky) and spend less on bills and food, you could save hundreds every month and reach your deposit goal much faster. If you currently live alone, you could save a significant amount on bills and rent by getting a lodger (you'll need to check this with your landlord and may need a new tenancy agreement), or by moving into a flatshare. If you want to keep your own space, you could consider moving to a cheaper area - though if this would mean a longer commute, check whether the extra travel costs would outweigh the savings in rent.
In order to make your savings work for you, you ideally want to save them in an account offering a rate that beats inflation – otherwise the cash will end up losing value over time. While there’s nothing wrong with a traditional savings account, if you’re saving a large sum of money you may have to pay tax on the interest your savings generate. If you deposit your savings into an Isa, they’ll remain tax-free - and, if you save into something like a lifetime Isa, you could also get a government bonus of up to 25% on your savings when you buy your first property.
6. Improving your chance of a mortgage
There are things you can do now to improve your chances of successfully getting a mortgage once you are ready to apply. Mortgage lenders are more likely to say yes if you have a regular income and long-term employment – which in being in the RN you have! Ensure you maintain a good credit history. Make sure you are on the electoral register. This isn't to say that you won't be able to get a mortgage if you' don’t have these things, but it could make it harder to get a decent (low) rate of interest on the loan.
7. What to do if you cannot save a big enough deposit
Sometimes reaching your savings target can remain out of reach – particularly if you need to buy in an expensive housing region – and behaviours today allow for a much less restrictive multi-buyer regime:
- Utilise Forces Help to Buy. FHTB enables Service personnel to borrow by way of an advance, up to half their annual salary (up to a maximum of £25,000) and is intended to assist towards the balance of the purchase price (taking into account, for example, deposit, legal, surveyors, land registration and estate agent fees) when buying a property for which a mortgage lender is willing to advance a mortgage.
- Buy with friends or relatives. It’s becoming increasingly popular for siblings and groups of friends to buy property together. Some mortgage providers offer joint mortgages to groups of up to four people. They’ll usually only take the income of the two highest earners into account, but everyone is equally responsible for making the repayments. If anyone wants to leave the property or sell the house, things can get a little complicated, so it is very important to take legal advice before buying this way and if necessary have a legally binding agreement in place
- Get help from your parents. Given the UK housing market at present many parents want to help their children get on the property ladder, and there are several ways to do this. Some first-time buyers are in the fortunate position of being offered a cash deposit from their parents, either as a gift or a loan. This will need to be declared to the mortgage provider and you'll need to fill out official documents confirming the arrangement. If a gifted deposit isn't an option, it may be worth considering guarantor mortgages. These enable you to borrow with a small - or even no - deposit, provided your parent or family member offers their property or savings as security against the loan. The family member has to be willing to cover the mortgage if you miss a payment.
- Consider a Help to Buy equity loan. If you can manage to save up a 5% deposit but cannot borrow enough to buy a property in your chosen area, a Help to Buy equity loan from the government could help. In general this means that you put down a 5% deposit, the government loans you a set amount of equity, and you take out a mortgage on the remaining amount. The size of government loan differs depending on where you live: it's 40% in London, 20% in the rest of England, 15% in Scotland and 20% in Wales. The loans are only available on new-build homes.
- Look into shared ownership. Shared ownership schemes allow you to buy a share of a property (usually between 25% and 75%) and pay rent on the rest. The main downsides are that getting a mortgage on a shared ownership property can be tricky and it’s hard to increase your share if the property’s value increases.
I realise that all of the above is quite a lot to take in – and of course you may have already got the answers to some or all of the questions posed above. If you want to talk in detail about actually getting a mortgage or want a second opinion on the amount you think you can borrow get in contact and we can pass you on to one of the mortgage advisors that sits on the WEA Panel of Professional Advisors for a chat.