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First Time Buyers
Jake Stott talks about mortgages for First Time Buyers.
How is the mortgage process different for First Time Buyers?
The process is very similar to purchasing your second or third property or even a Buy to Let. The only main difference for a First Time Buyer is that they often don’t have the knowledge to go out and buy a property just straight off the bat.
They’ve never done it before – they’re not sure of the fees. They might struggle or need some extra support to guide them through the process. Sometimes with a First Time Buyer I’ll meet them with a family member there – a parent or brother or sister who may have bought a property in the past. They can give an extra level of support and make sure they’re understanding everything, including some of the jargon.
What is an Agreement in Principle?
An Agreement in Principle is also called a Decision in Principle. The basics of it are that a broker takes information from the client and goes to the mortgage lender. We explain the client’s income, how much they want to borrow and the property price – roughly, if they’ve not found a property yet.
The Agreement in Principle is confirmation that the mortgage company is happy to consider lending the money. It means that the client can go out and put an offer in on a property. A lot of the time we get clients that come in and don’t particularly know how much they can borrow. They might be looking at properties that may be over their budget.
I always say that it’s best to come to me before looking at properties. We can look at the monthly costs for what you’re looking to borrow and whether that’s affordable to you. The last thing you want to do is find your dream property and find out that you’re £20,000 short of the mortgage needed.
How much can First Time Buyers borrow and what sort of deposit is needed?
With any mortgage, it’s all about affordability. There’s no straight answer for every single client because everyone’s circumstances are completely different.
The rule of thumb is that you can usually borrow four and a half times your income. So, if you’re earning £20,000, you can borrow roughly around £90,000 – but a lot of factors come into play there. For example, if you’ve got any children; if you’re living on the property on your own and pay all the bills yourself; or if you have large credit commitments like credit cards or car finances, that can all impact the affordability. If your costs are high, you might not be able to borrow as much as you thought.
Some lenders might give you a bit extra if you’re a First Time Buyer earning over a certain amount. But it’s so personal to the particular case and the particular client, so the best way to find out what you can borrow is go and speak to a bank or broker.
The issue with going to a bank is that every bank’s criterion is completely different so they’ll give you a different borrowing amount. But a broker can search 30 to 50 high street building societies and smaller lenders – so you might end up being able to borrow slightly more. It might not be the best rate, but it gets you the property you want. So, speak to a broker for an affordability assessment and an idea of how much you can borrow.
In terms of the deposit, there’s a lot of different deposit schemes out there. A lot of lenders are offering 95% mortgages at the moment, so you can put a 5% deposit down. You do need a fairly good credit score for this.
The thing to remember is the more deposit you actually put down, the better interest rate you’re going to get. Interest rates are calculated in bands – 5% is the first banding and then once you reach 10%, 15%, 25% and then 40% deposit you get slightly better interest rates.
How do I know what my credit score is and how do I improve it?
A lot of people get hung up on their credit score but it’s not actually the most important thing. Credit scoring gives you a rough idea of how well you’re doing – are you average, poor, fair, good or excellent at keeping up with your debts?
In the UK there are four main credit reference agencies and each one will give you a different score. Lenders generally use one credit reference agency, or they’ll take a picture from three. You might have a great credit score on Experian but on Equifax there’s information that you didn’t know was there. A lender that searches Equifax might then decline your mortgage application.
We recommend a company called Checkmyfile that compiles the data from all the credit reference agencies into one report. That gives you a much clearer view so you can deal with any issues.
The best thing is to have a look before you speak to a broker. Often clients have a small default on their credit files – from a mobile phone provider, for example. You might have thought you’ve paid your bill. You never got a letter through the post because they’re not chasing you for five or ten pounds. But that can have an impact when you come to get a mortgage. Most of the time you can call the provider, pay the bill, and get that off your credit report. That usually takes around six to eight weeks.
If you’ve got more serious issues on your credit report like missed payments, defaults or CCJs, it doesn’t mean you can’t get a mortgage. It just means that your interest rate will probably be higher, and you may need a higher deposit.
What is a First Time Buyer ISA? Are these still available?
Everyone’s probably heard of the Help to Buy ISA which the government released quite a long time ago. That was great because you got a bonus on whatever you put in the account. But then they decided to close it down and replaced it with the Lifetime ISA.
The lifetime ISA does two jobs – first it does the same as a Help to Buy ISA. You put your money in, and you can get a bonus when you purchase your first property. Second, if you decide not to do that, you can use the money for retirement. You get a bonus from the government when you reach retirement age.
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What other help and schemes are available for First Time Buyers?
The main one is called Joint Borrower Sole Proprietor. That’s real jargon and most people won’t understand what it means. But basically, it’s where you’re buying the property as a sole owner, but you’re a joint borrower. You might have a brother, sister or parent who can come on the mortgage with you and boost your affordability amount but only one applicant is named as the beneficial owner on the property deeds. That way you can borrow more money.
The benefit is that your family member won’t be subject to stamp duty charges. If you already own a property and buy another one, there’s a stamp duty surcharge of 3%. But with Joint Borrower Sole Proprietor, there are two borrowers on the mortgage but only one on the title deed for the property. It’s a great way to help First Time Buyers get onto the property ladder.
Another option is a deposit lockoff scheme, so if your family member has a bit of cash saved, they can put that down against the mortgage. It goes into a savings account and accrues interest over time. Again, it helps First Time Buyers onto the property ladder.
What is shared ownership?
This is a great option because it gives you the option to buy a percentage of a property. The minimum usually is around 25%. Say the property is worth £100,000. You might get a mortgage for £25,000 and put a 10% deposit down – you own part of the home, and a housing association will usually own the remainder. It is possible to borrow up to 100% of the mortgage without recourse to a deposit. This product comes by way of availability and so funding may be by way of an exclusive product from time to time.
You’ll pay a mortgage payment and some rent on top of that. What’s great about that is it gives you the option to do something called ‘staircasing’ where, after two years or five years, when your fixed rate mortgage is up for renewal, if your affordability has gone up you can buy another share on the house – for example taking it up to 40%. You can keep doing that all the way up to 100% ownership.
Has Help to Buy finished?
Unfortunately, yes, this scheme has ended, but there are other options out there on private schemes. Say, for example, you’ve got a 15% deposit. You need a little bit extra to get a property that you really want. A house building company might boost your deposit, but they will also get something out of it themselves. Some charge you interest on the loan, and some will want a share in the property.
Say for example, they boosted you from 15% to 25% deposit. If the property goes up in value, they will want a cut of that profit later on down the line. So, there are a few options out there for First Time Buyers. Speak to a broker and we can give you a better understanding of what the best option is for you.
What sort of fees are involved when buying your first home?
Most people think first of stamp duty, but for First Time Buyers there’s no stamp duty to pay for a property of less than £425,000. So, unless you’re buying a really big property or one in a very desirable area, most First Time Buyers won’t pay any stamp duty.
Mortgage fees is the next big one and there are three ways that these might apply. The first one is your broker fee. You do pay for advice from a broker and for us to get you the mortgage. With the lender there might be valuation fees and there may also be an arrangement free or a product fee. These usually average out at £1,000, but it can be a little bit less or more.
A product fee can sometimes be added to the mortgage balance – but that does mean you will be paying interest on it for the remainder of the mortgage term. There are also solicitors’ costs. There’s generally a set fee for legal work and there are extra costs on top like searches. They’ll do a search on the property checking with water companies, whether there’s been a mine there in the past – all those details and due diligence on the property that you’re purchasing.
The other thing is surveys. Usually when you pay for a mortgage valuation through the lender – which can sometimes be free – these are basic valuations. A surveyor goes out to the property to make sure it’s worth what you’re paying for it. It usually takes around 20 minutes. But you can pay extra – say £300 or £400 on top for a full Homebuyers’s Report.
With that, the surveyor will look at the property for a couple of hours and look for any issues – if there’s any damp, dry rot, brickwork issues, structural issues etc. That gives you more peace of mind. Some lenders will help you with that as part of the mortgage, while others don’t, and you need to find your own RICS surveyor in the local area.
Is mortgage protection important?
A final thing that a lot of people don’t think about, but is very important, is protection. Protection is a big part of mortgage advice. You might be taking out a 30 or 40 year debt and a lot of things can happen in 40 years.
If you are a young family and something happens to the breadwinner, it can massively affect the family and whether or not they can even afford the mortgage. It’s a great thing to speak to your broker about. Fingers crossed, your life insurance or critical illness cover will never be needed, but it’s good for peace of mind to have it in place. Plus, the younger you are when you get it, the cheaper it is.
How can Fort Advice Bureau help First Time Buyers?
With First Time Buyers, it’s just about guiding you through the process and giving you a better understanding of how everything works. It’s not a quick and easy process to buy a property. It can take 12 to 13 weeks on average, and it can be quite stressful.
You’re waiting for valuations to go through. You don’t know what’s happening. A lender might come back and ask for additional documents So having a mortgage broker there can really help. We do this day in, day out and we know how everything works.
We give you a safety net and keep you calm in a stressful situation. I like dealing with First Time Buyers because it’s a big achievement buying a house. Helping someone go from renting to getting their own property is great.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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