First time buyer guide – how much can you borrow for a mortgage and what government schemes are available?

EVEN though this year has been faced with the coronavirus pandemic and also the UK entering another recession, some Brits are using the opportunity to buy their first home.

The market saw a “mini boom” in the summer after house prices saw the biggest monthly rise in 16 years in August and mortgage approvals reached their highest for 13 years.

It's a great time to be a first-time buyer with falling house prices on the horizon — It’s a great time to be a first-time buyer with falling house prices on the horizonCredit: Alamy

And earlier this year, Chancellor Rishi Sunak scrapped stamp duty for properties up to £500,000.

Economists meanwhile think house prices will fall by nearly 14% next year as the property market feels the impact of coronavirus and the stamp duty holiday ending.

But if you are hoping to get on the property ladder this year then there are a few things you should think about before taking the plunge.

We’ve put together a guide to everything you need to know about buying your first home.

How much deposit do I need?

The basic rule is the bigger your deposit the better the rate you’ll get and the smaller your monthly repayments will be, but not everyone can wait that long.

A decade ago, borrowers were able to take advantage of lots offers that meant they didn’t need to stump up any money before getting their mortgage.

Nowadays, you’ll need a deposit that’s at least 5% of the property value before you can take out a mortgage.

That means you’ll have to borrow the rest from a bank or building society – the chunk of cash you borrow compared to the deposit is called the loan to value (LTV).

So if you put down 5%, you’ll take out a mortgage for 95% LTV, or 90% LTV if you’ve got a 10% deposit.

A few 0% mortgages have also slipped onto the market, which make it look like you don’t need a deposit at all.

Most buyers find getting the deposit together is the biggest hurdle to homeownershipCredit: Getty – Contributor

This is where the buyer borrows 100% of the mortgage without having to stump any of your own funds upfront, but most of them rely on you getting some sort of financial assistance from your family.

But they are few and far between at the moment, but there are a couple of options from the Mansfield Building Society which are worth checking out.

Meanwhile Nationwide is offering loans to first-time buyers with a 10% deposit – with an interest rate of 3.49% for two years.

What schemes are there to help me buy a home?

There are a whole host of schemes out there that will help you get on the property ladder, from boosting your savings to splitting the cost of buying with a housing association.

Help to Buy Isa

These are tax-free savings accounts that for every £200 you put in, the government will add an extra £50 towards buying your first home.

The maximum you can earn from the top-up is £3,000, which will see your £12,000 savings boosted to £15,000.

These Isas can be used to buy homes worth up to £250,000 outside of London, rising to £450,000 in the capital, and you’re not restricted to a new build either.

But they were only on offer until the end of 2019, so people interested in opening up one now won’t be able to.

Help to Buy equity loan

The government will lend you up to 20% of the home’s value – or 40% in London – which will help you purchase a property with a smaller mortgage.

Before you get the loan, you’ll need to make sure you have a deposit that’s worth 5% of the total property value.

This is particularly useful to first-time buyers who can’t get a big enough mortgage based on their salary, despite having enough for a deposit.

The loan is on top of a normal mortgage and can only be used to buy a new build property.

It’s interest-free for the first five years, and after that you’ll be charged 1.75% interest, which will increase by inflation plus 1%.

In other words, it’s a lot and you’re be better off paying back the loan before the interest-free period ends.

There’s going to be a new scheme which will open to first-time buyers only will be available for two-years from 1 April 2021. The Help to Buy scheme will then end on 31 March 2023.

This new scheme will be limited to first-time buyers and there will be regional price caps on what you can buy.

The current format was due to end in December 2020 but has been extended by two months because of building delays caused by the pandemic lockdown.

Do I need a survey and how much do they cost?

A SURVEY gives a detailed inspection into the condition of a property, highlighting any major repair work that’s needed.

They’re not compulsory but can help you decide whether or not you’re paying the right amount for your home.

Here’s our guide to the different types of surveys there are and how much they cost:

Valuation survey, £150 to £1,500 – This is carried out by the lender to make sure that you’re paying the right amount for the property.
Condition report, £300 or more – This gives a traffic light report to indicate the conditions of various states of the property – green for okay, orange for cause for concern. The report provides you with a summary of defects and possible risks but won’t provide any advice or valuations.
HomeBuyers report, £450 or more – On top of everything you get in the condition report, you’ll also get a valuation and an insurance reinstatement value – which is an estimate of how much you’ll receive if the building were to burn down.
Home Condition survey, £400 to £900 – These are carried out by the Residential Property Surveyors Association (RPSA) rather than the Royal Institution of Chartered Surveyors (RICS) and includes information on broadband speeds, a damp assessment and boundary issues to consider. The price depends on the valuation of the property.
Building survey, £500 or more – These are extensive reports where the surveyor will go into places such as the attic, check behind walls and look between floors and above ceilings. It will also provide advice on repairs, estimated costs and timings, and what will happen if you don’t carry out the repairs. Prices depend on the size of the property.

Lifetime Isa

This is another government scheme that will give anyone aged between 18 and 39 the chance to save tax-free and get a free bonus of up to £32,000 to use towards their first home, or retirement.

You can save up to £4,000 a year into the Lifetime Isa (LISA), either as a lump sum or by putting in cash when you can.

The government will then add a 25% bonus on top, effectively giving you free money.

It means that if you save £1,000 a year, you’ll have £1,250 after 12 months, and if you save the full £4,000 a year you’ll have £5,000.

Savers can continue to put money into the account until they’re 50 but there are a few catches. You can only use a LISA for a property if you have NEVER owned a property before.

That means if you’re a first-time buyer purchasing with someone else (a partner or friend, for example), they cannot have owned a property before.

The money never comes to you, but will be paid directly to a solicitor. Also if you want to buy a home worth more than £450,000 with your LISA, you won’t get the 2% bonus plus you’ll pay a 5% exit fee.

There’s also a charge of 20% if you withdraw it too early. It’ll go back to 25% in April next year.

Shared ownership

This is when you co-own a property with a housing association, which will charge you rent on its part of the property.

Many mainstream banks and building societies offer shared-ownership mortgages which aren’t limited to first-time buyers but they are reserved for specific properties.

There are plenty of schemes that have been launched to help you get on the property ladderCredit: Alamy

You can buy anything from 25% to 75% of the property, and you can increase the amount you own over time – this is called “staircasing”.

Unlike private renting, you won’t have a landlord who can ask you to move out at any time, and your rent rate is likely to be less than market value.

The downside is that each year your housing association reviews your rent, which may rise, and if you go to sell the property the housing association has the opportunity to find a buyer first.

“First dibs” in London

London Mayor Sadiq Khan launched a scheme in the capital that gives Brits “first dibs” on new homes before foreign buyers snap them up.

This is because 13.2% of new-build homes are sold abroad, rising to 36% in the most expensive parts of the capital.

There’s an online portal which you can sign up to, called the Homes for Londoners property search, where you can see what’s available to you and book on to open days.

Do I need to pay stamp duty?

In March, Mr Sunak announced the temporary relief in the Commons as part of a raft of measures that aim to boost the economy following the coronavirus lockdown.

Buyers will pay no stamp duty on homes under £500,000 instead of £125,000 until March 2021.

This will go back to £125,000 for house buyers, but will continue to be £500,000 for first times buyers from April 1, 2021.

Meanwhile, experts are warning people to buy a home in the next two weeks to benefit from the discount due to the amount of time it takes to go through the purchase.

If you’re not sure how to figure out how much stamp duty you will pay on a property consumer site MoneySavingExpert has a stamp duty calculator that does the maths for you.

Here is our guide on how to calculate stamp duty and how stamp duty relief for first time buyers has effected the housing market.

How do I get a mortgage and how long does it take?

A mortgage is a loan used to buy a house, so you’ll need to apply for one from a bank or another lender.

You’ll need to apply for a mortgage once you’ve found the house you want to buy but it may be better to do this first as that way you will know what properties you can afford.

What type of mortgage suits you?

THERE are tonnes of different mortgages rates out there but you need to make sure that it’s the best one for you. Here are some of the ones available:

Fixed rate – The interest you pay is locked for two, three, five or 10 years. It’s good if you sign up when the interest rates are low, but if interest rates drop, you’re stuck paying the higher rate.

Variable rate – Standard Variable Rate (SVR) means that your rates will go up and down with the market trends.

Tracker mortgage – The rates change in line with the Bank of England’s base rate. So if it goes up, so does your mortgage rate.

95% – This is the rate for people who can only afford to put down a 5%. But with such a small deposit you’re at risk of falling into negative equity if house prices drop. If they drop 6% then your house is worth less than your mortgage.

Flexible – You can choose to pay more than your regular payment if you can afford it. Then if you’ve overpaid, you can take a payment holiday if you find yourself in difficult circumstances. But in return for the flexibility you’ll be hit with higher rates.

Cashback – These marketing ploys aren’t always as good as they’re cracked up to be. The idea is that the lender gives you money back when you take out a mortgage with them. But take a closer look at the interest rates and any additional fees as you’re likley to find better rates elsewhere.

When you apply, you’ll need to have saved enough for a deposit which is usually a minimum of 5% of the property value.

Often when you apply for a mortgage you’ll need three months’ worth of bank statements and a good credit score in order to pass the affordability checks.

You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.

Shop around for the right deal by checking offers for first-time buyers on Money.co.uk or on the Money Advice Service.

Most people get advice from a mortgage broker, which is a qualified middleman who has a duty of care to recommend a suitable mortgage for you but their services often come with a fee of around £500 – although there are free ones such as London and Country and Trussle.

Agreeing a mortgage “in principle” allows you to get an idea of how much the bank is likely to lend to you and how much interest you’ll pay.

They usually last between 30 and 90 days and put you in a position to make an offer when you find the property you like.

What is freehold, leasehold and commonhold?

The difference between owning a freehold or a leasehold home could leave you renting like a tenant in your own home.

It can also affect the type of mortgage you will be able to get too so it’s important to get as many details about a lease as possible before buying a home.

Freehold

Most houses are sold as freeholds as it is the most straight forward way of owning a home and means that you own the house outright.
As a freeholder you own the land the property is built on and you’re entitled to live in a property indefinitely.

This even includes the air space above the house going up around 500 feet as well as the ground underneath the house.

Maintaining the property is entirely your responsibility so you will have to pay for any and all repairs.

Leasehold

Owning a leasehold on a property means that you have the right to live in the property for a set period of time, typically for 125 years in the UK.

This means that essentially, you’re a tenant in your own home because you don’t own the land that the home stands on.

Depending on the terms of the leasehold, you may have to ask the permission from the freeholder before making changes such as adding an extension or even owning a pet.

A leasehold agreement makes sense when living in a block of flats so that everyone living in the property also shares ownership of areas of the building such as the stairwell or hallways.

What if I want to buy a leasehold, what should I look out for?

ANDREW Johnson, money expert at Money Advice Service has some tips on what to consider before buying a leasehold.

Check how many years are left on the lease? You may struggle to get a mortgage on a leasehold property which has less than 70 years to run. A short lease will be a lot more expensive to extend.
Ask about the cost of extending your lease now if this might be an issue in the future. You don’t want anything that could impact your properties saleability in the future.
Ask how much the ground rent is? This may be a relatively small amount now but beware escalating ground rents which have seen substantial figures payable at the end of the term of the lease. This could negatively impact your ability to sell your property in the future.
Ask about service charges and other related costs? This generally covers repairs or maintenance to the property including buildings insurance. This can be several hundred or several thousands pounds, so consider how you will budget for these costs and the impact of any future increases.

It also means that any upkeep of a shared area, including the exterior walls and the roof, is the responsibility of the freeholder, so you won’t have to pay for any repairs in those areas.

But you’ll need to pay ground rent on any leasehold property, which can be anything between £1 a year to hundreds of pounds in annual fees.

These are often reviewed every year and the freeholder reserves the right to raise the fees.

Mortgage providers often will not lend on properties with these spiralling ground rent clauses, leaving leaseholders trapped and unable to sell their home.