Seven things a first-time buyer needs to know
Work out your budget
The first thing to work out is your budget. Don’t make the mistake of thinking the lump sum you have saved can all be used towards the deposit.
“You will need to account for all the other expenses too,” says David Hollingworth, mortgage expert at London & Country.
For first-time buyers looking at purchasing a property under the value of £125,001 stamp duty will not apply, although there are fewer properties for sale under this threshold.
Properties worth £125,001-£250,000 incur stamp duty of 1%. Those worth £250,000-£500,000 incur a 3% stamp duty charge; rising to 4% for homes worth £500,001-£1m. Expensive homes of £1m-£2m pay 5% rising to 7% for those over £2m.
But other fees must be considered, including: legal fees, survey and evaluation fees and potentially mortgage arrangement fees. In addition you should think about the moving costs and furnishing the property.
Putting together a budget of this kind allows you to see exactly how much you are going to have free as a deposit. The valuation and survey fees will vary depending on the property value and how thorough a survey you opt for.
For a basic valuation - the minimum required by the lender before they will consider you for a mortgage - you are looking at a fee between roughly £200 and £300.
However, you might want to go for a homebuyer’s or full structural survey, which will be more in-depth and unearth more complex problems should they exist. A homebuyer’s survey will cost you roughly twice the amount of a basic survey, and a full structural survey will cost approximately three times the basic one.
The size of deposit you’ll need
"In today’s market the size of your deposit is absolutely crucial in deciding what kind of mortgage you’re going to be able to get in terms of rates and even in deciding which lenders you will be able to approach,” says Hollingworth, “The bigger the deposit the better your position."
While there is still the odd 5% mortgage deal on the market, you are likely to need a deposit of 10% to 15% of the total. To be a candidate for the best rates you will need to have at least a 25% deposit. This is one situation when less is definitely not more.
What can you afford?
At this stage it’s a good idea to work out the monthly payments you could afford. A good way to get an idea of the deal you could expect is to approach a lender and ask them to work out an agreement in principle.
This involves a credit check by the lender who will then credit score you and work out the mortgage they might offer based on the value of the property and the size of your deposit.
It’s wise not to approach too many lenders for an agreement in principle because it could adversely affect your credit rating. On the other hand it can be helpful to have one to take with you when viewing properties, to show you have a lender’s stamp of approval.
It can also be useful to see whether your savings fund is on target to meet your needs.
Don’t withhold any details
It is important to take this chance to have a chat about any circumstances peculiar to your situation, in relation to your income flow, for example.
Hollingworth says: “It is well worth informing a lender about any irregularities in income or any other potential stumbling blocks at this stage. There is no point going through the whole process only to get to the end and be refused because of something you should have shared from the start.”
If you choose to use a mortgage broker, then this is when they will earn their salt. They can discuss your personal circumstances and steer you away from applying for mortgages unsuited to your situation.
“When deciding on the type of adviser to use, look at what structure they use and whether they are advising for the whole market or just a panel of lenders, they will have to declare this,” says Hollingworth.
The property search
You may have found a property already, or may only have an idea of the type of property you are looking for, but until you have found the right home, and had your offer accepted, you won’t get any further in securing a mortgage deal.
“A lender can’t give you a mortgage offer without knowing which property you are going to move into,” says Hollingworth.
Fixed or tracker?
Homebuyers would need a crystal ball to know for sure if it would work out better to fix their mortgage or track the base rate. In the end it comes down to whether you want to know where you stand.
Trackers are going to look cheaper at the moment because of the low base rate, but you don’t know when that might change.
For most first-time buyers, it is better to know exactly what the outgoings are going to be so you don't have to worry from one month to the next about a rise in interest rates.
Make sure you keep an eye out for fees: arrangement fees may be payable at the start or end of your mortgage term, or may be added onto the mortgage total, but you need to be aware of this.
Reviewing your deal
Whatever you decide, make sure you are prepared for when the deal ends. “A couple of months before your deal is up, have a look at the market and give yourself plenty of time to find and switch to a better one,” says Hollingworth.
If you fail to do this you will usually be put on to your lender’s standard variable rate (SVR), which is unlikely to be competitive compared to the rest of the market.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.