Renting? Buying? Living in the woods? What is the right answer?
The perception is that everyone wants to buy a home. But for some people, now might not be the right time, or the financial commitment too great.
There are pros and cons with both buying and renting, which you should consider carefully before you commit to buying your first home.
Buying a home is a long-term commitment and not one that’s always easy to unwind if you change your mind. You need to be certain that you can afford to take it on, both now, and in the future if, for example, interest rates rise.
If you decide to continue renting for the time being, please do carry on reading this guide. Our helpful hints and tips will make it much easier for you to buy a home, and secure a mortgage, when the time is right. At London Money, we have had clients come back to us after first speaking to us eight years before.
The timing needs to be right and the timing is all yours.
How much deposit will you need?
Most people know that a deposit is needed to buy a home. But not everybody knows exactly what it is, or how big it needs to be.
A deposit is a lump sum of money, which, when added to the amount you borrow, will enable you to buy your first home.
Your deposit can come from your own savings, a gift or loan from parents or other relative, a Government source (see below) or a combination of these.
As a minimum, you will need to find at least 5% of the purchase price. So, to buy a house worth £200,000 you’d need to save £10,000. However, the larger your deposit, the better your mortgage options will be. A 10% deposit
might take longer to save, but, it will probably mean lower monthly repayments.
Saving that kind of money can be difficult, even when there are two people saving. But fortunately, there is some help available. Part 4 covers help from the Government in more detail, but below is a summary of two initiatives you may have heard of already.
Government help: Saving for a deposit
The government has two key schemes to help first time buyers build up their deposit:
- The Help to Buy ISA, and
- The Lifetime ISA
Both let you save tax-free and attract bonus payments from the government.
Help to Buy ISA
- The government will boost your savings by 25%
- In other words, for every £100 you save, they will add an extra £25
- The maximum bonus you can receive is £3,000
- You can kick-start your ISA by paying an initial lump sum, in the first month, of up to £1,200
- The maximum you can then save is £200 per month
- ISAs are taken about by individuals, if there are two of you (or more) buying a house, you can both open Help to Buy ISAs
- The interest you receive is tax-free
Help to Buy ISAs are available from banks and building societies. There are a number of key criteria you have to meet to qualify. You must:
- Be 16 or over
- Have a valid National Insurance number
- Be a UK resident
- Not surprisingly, you must be a first-time buyer
- Not own another property anywhere else in the world
When you come to buy a home, there are some further restrictions you need to be aware of:
- The home must be for you to live in, it cannot be a Buy to Let investment
- The property must be in the UK
- It must be purchased in conjunction with a mortgage
- The maximum purchase price is £250,000, or £450,000 in inner and outer London boroughs
- The Lifetime ISA is designed to help younger people save for retirement and/or their first home
- You need to be aged over 18 but under 40 when they take out a Lifetime ISA
- You can pay in up to £4,000 each year, and receive a government bonus of 25% up to £1,000 on top
- You can use some or all the money to buy your first home, or keep it until you are 60, when it can help fund retirement
- The bonus is paid until savers reach 50, and could be a much as £32,000 with the maximum saved from the minimum age of 18 onwards
- Unlike a Help to Buy ISA, the account isn’t closed when you use it to buy a property, so you can return to it to save for retirement
Unless the money is used to buy your first home, or for retirement, any cash you withdraw will incur a penalty. There are also some further restrictions which you will need to adhere to if you are to avoid the penalty:
- The property you purchase must be worth less than £450,000
- The property is for your own use, it cannot be a Buy to Let investment
- The Lifetime ISA must have been opened for at least 12 months before you buy a house
There are very few ‘no-brainers’ in life, but the Lifetime and Help to Buy ISA are two of them. If you are a first time buyer, and meet the other criteria, using them to help save for your deposit should definitely be considered.
If you’ve managed to save up a deposit, then congratulations are definitely in order. Don’t spend too long patting yourself on the back though, we’re not out of the woods just yet. Your deposit is only the start of a long list of costs that will feel like they are pouncing on you like you least expect it.
What are the other costs of buying a home?
Your deposit will be your largest expense, but there are many other fees that you must budget for.
Many mortgages have arrangement fees, typically around £1,000. There are of course mortgage products without fees, but the interest rates tend to be higher. Your mortgage broker can advise you on the best deal taking
all these factors into account.
If your mortgage does have an arrangement fee you can usually add it onto your loan. But remember you will pay interest on it as well over the next 25, 30 or even 35 years. A mortgage broker will tell when you it may be
better to add this fee to the loan or pay for it in advance.
Your lender will conduct a mortgage valuation survey to ensure the property is worth what you have agreed to pay for it. You will need to cover the cost, typically between £200 – £400. This can’t be added to the loan and needs to be paid upfront. Many lenders now offer a free basic valuation so it is always worth checking
the small print, every penny helps.
You might want an independent survey to check for problems with a property; especially if it is older or you have other concerns. Expect to pay £1,000 or more. But, that may well be very cheap, compared to the cost of buying a property with significant defects which you will have to put right.
Property solicitor/conveyancing fees
You will need a solicitor to deal with the legal aspects of buying a property, there are also various searches which need to be undertaken, these are known as disbursements. Typical costs here are £500 to £1,000.
You will pay Stamp Duty when you buy a property worth more than £125,000. The exact amount you pay is based on the value of the property and is calculated in bands.
Let’s face it, most first time buyers won’t be troubled by the 10% and 12% bands. But, even at the lower end of that scale, Stamp Duty costs can mount up. And remember, you must pay it when you complete the purchase and it can’t
be added to your mortgage.
Here’s a worked example to show you how Stamp Duty is calculated on a purchase of £300,000:
- 0% on the first £125,000: £0
- 2% on the next £125,000: £2,500
- 5% on the final £50,000: £2,500
Total Stamp Duty: £5,000, we told you it soon mounts up!
Moving costs will vary on how many belongings you have and how far you are moving. Expect to pay around £500 – £1,000.
Your mortgage lender will require you to have buildings insurance. You may save if you combine it with home contents insurance.
Expect to pay up to £300 for a combined policy; although this can be paid monthly.
If you’re buying a new build property, you’ll usually be asked to pay the builder a reservation fee of £500-£1,000 to show your commitment. This is usually non-refundable if the sale does not go through. Remember,
this is not the same as your mortgage deposit although it is deducted from the amount you will need to pay at completion.
“As a first-time buyer, I was ignorant of pretty much everything. But, not minding my utter naivety, Martin tirelessly guided me through every stage of the house-buying process. He doesn’t just broker mortgages, he helps people find their home.”