This is a guest post written by Caroline Hughes. Caroline is co-founder of Lifetise, which creates interactive tools to help make big life decisions easier and more affordable. They’ve recently launched HomeFinder which shows people where and how they can afford to buy a home.
Most people want to own their own homes. Some see it as security. Many feel that renting is throwing money down the drain. Others just really want to decorate their place to match their taste.
We know that it is hard for first-time buyers (FTBs) to get that initial step onto the property ladder, so if you are a FTB, this article aims to help you with two things:
1.How much should you spend as a first-time-buyer
2.Should you use the government’s Help-to-Buy scheme to get on the property ladder?
The first thing to do is work out what you need from your home:
- How many bedrooms do I need?
- What, if any, outdoor space do I need?
- What/where/who do I need to be near (family, work, school, etc)?
The majority of first-time-buyers fall into one of these categories:
- Singleton happy with one-bedroom/studio flat
- Young couple wanting two-bedroom flat, more space for yourselves and a baby (now or in the future)
- Young family looking for small 2 or 3 bed house with garden
No matter which category you fall into, unless you have enough money to buy a house outright, most of us will need a mortgage to buy a property in order to spread the cost over a period of time.
The size of the mortgage is usually the main factor in how much you are able to spend as a first-time-buyer, and there is a limit on how much you can borrow. The amount you can borrow will depend on how much you earn. Lenders won’t want to lend more than they think you can afford, the maximum that you are likely to be able to get nowadays is 4.5x your annual salary (excluding things like overtime and bonuses which are not guaranteed), if you are buying as a couple this is more likely to be 3x your combined salaries. This can vary from lender to lender and will also depend on outstanding debts and other outgoings, so it’s worth asking before you apply.
All mortgages demand that you pay some of the value of your home with your own money, this is called the ‘deposit’. Typically you need to put down at least a 10% deposit (i.e. 10% of the cost of the home), though some banks are offering 5% deposits. The bigger the deposit you can put down, the better your mortgage interest rate will be.
It is the combination of your mortgage + deposit that is your starting point for looking at how much you can afford to spend on a house.
The standard repayment period for a mortgage is 25 years, but you can choose a shorter period. If you take a shorter term (say 15, or 20 years), then you’ll pay less for your house overall, because you won’t rack up as much interest. The flipside is that your monthly repayment amount will be higher, so you’ll have less disposable income.
Most people take the 25 year mortgage term, so they can manage the monthly repayments. Then choose to make overpayments when they have extra cash, to pay down the capital amount quicker (and pay less interest overall).
Please remember that interest rates can and will go up. They’ve been at record lows for years and this trend is starting to change, so it’s best not to max yourselves out based on current interest rates. When comparing mortgage deals look at the lenders’ standard variable rate, this will be what you typically go on to once your initial deal has ended. We would recommend using a mortgage broker to help you find the best deal. Make sure you choose one, like Habito, which surveys the ‘whole of the market’, so you know that you are getting access to all available deals.
Traditionally, your monthly mortgage repayment should not be more than 25% of your monthly income. This has become increasingly hard to stick to due to price inflation outpacing wage hikes, many people pay more than one-third of their income on repayments – we would definitely NOT recommend this.
Stamp duty is often the bit that people forget about and it can come as a nasty surprise. Stamp duty is a tax that you pay when you buy a home, so you need to factor in this cost when deciding how much to spend on a property. It is calculated as a percentage of the property value, so the more you spend on a house or flat, the more tax you pay too.
There is good news for first-time buyers who want to spend less than £500k on a property – the government has drastically reduced the amount of stamp duty that you will pay, saving you up to £5,000. To find out how this works, check out our stamp duty article.
Starting to suffer from brain melt? Don’t worry that’s perfectly natural. We created HomeFinder to do all of the calculations for you, as well as show you areas where you can afford to buy.
Let’s do a walkthrough, with a fictional couple, Sam and Mina from Bristol, so you can see how this works.
They’ve been pretty disciplined about saving and managed to save £28,000 for a deposit. Ideally, they want a 3 bedroom house, not too far out of town.
Mina earns £42k
Sam earns £38k
Combined earnings = £80k
They find a mortgage provider willing to lend them 3.5x their combined salary….£80k x 3.5 = £270k.
This mortgage cannot be more than 90% of the purchase price, so they still need at least £30k for the 10% deposit. Of course they’ve saved £28k already which means they’re just a couple of thousand pounds away from being able to buy a £300,000 home. Fortunately for Sam and Mina there are plenty of 3 bedroom houses available a short bus ride or a healthy walk (get those 10,000 steps in!) from Bristol City Centre.
First time buyers are usually obsessed with how much mortgage and deposit they’ll need, and that’s understandable as they’re the bedrock of buying a home. But there are a ton of other costs that come with buying a home that you need to prepare for in advance, as otherwise it could wreck the purchase and seriously undermine your finances…
Your mortgage lender will want to carry out a valuation to ensure the property is worth at least the amount it plans to lend you. And, unless otherwise stated in your mortgage offer, this cost will fall at your door and is typically dependant upon the cost of the property you are buying.
Budget for: Between £200 and £500
Your own survey
A lender’s valuation however, is not a survey and won’t tell you about the condition of the home you are considering buying. To find out this, you will have too commission your own survey from an independent surveyor. You can find one at the Royal Institution of Chartered Surveyors.
The cheapest and most basic survey is the home condition survey. It’s generally only recommended for new-build and convention homes and costs about £250.
For greater peace of mind, however, you can choose a homebuyer’s report, which includes a valuation (that your mortgage lender may use). Budget for about £400.
If you have concerns about the property, meanwhile or it is old, listed or an unusual structure, it may be worth shelling out for a full structural survey that typically costs anything from £600 upwards.
Local Authority Searches
You will have to pay for searches to be done on your home to check that there are no planning issues – for example a major road, property development supermarket is going to be built nearby – which could affect your purchase.
Budget for: About £300
Most lenders make you pay fees (such as an arrangement fee, which are now typically between £1,000 and £1,500) on top of your mortgage loan. You will usually be given the choice of adding the arrangement fee to the loan, which means you will be paying interest on it for the length of your mortgage.
Budget for: Around £1,500
You will need to hire a solicitor or licensed conveyancer to handle the legal aspects of your purchase, such as the payment of stamp duty and transfer of the property funds to the seller’s solicitor. You can usually opt to fix the price upfront but, even if you do, it may be more if there are complications with the purchase.
Budget for: Between £500 and £1,500
It’s important to have home insurance in place from the day you exchange contracts on your new home, most mortgage lenders only require you to have buildings insurance. The premium you pay for cover will depend on factors such as the size of your home and its location. Use sites from insurance comparison as well as those which arent on aggregators e.g Direct Line.
Budget for: Between £200 and £600
Employing a removal company can help to take the stress out of moving house, but of course, this will cost you.
Budget for: Between £200 and £1,000
In addition to these purchase costs, you should set aside a bit of money each month to cover maintenance and renovations. If your boiler is playing up or you’ve got a leaky roof, you no longer have a landlord responsible for fixing it. This is a big reason why you do not want to stretch yourself too thin when buying your home. As a rule of thumb, set aside 1% of the property value per year to cover these costs (so a £300k home would require £3k/yr in maintenance).
Now we have covered the plethora of costs involved and given you an idea of how to calculate them for yourself, let’s turn to the second issue of whether to use the Government’s Help-to-Buy scheme…
How does the scheme work? If you’re in England trying to buy a new-build property can take out a 20% loan from the government (40% in London) and cover the rest with a mortgage. This means you only need 5% deposit + 75% mortgage (55% in London).
In principle, this scheme makes buying a home more affordable by, firstly, cutting the deposit in half (5% rather than 10%) and, secondly, reducing the mortgage so that you should get a lower interest rate and therefore lower monthly payments (in theory).
This sounds great! So why then have fewer than 15% of first time buyers used Help-to-Buy since it was launched in 2013? Primarily because it only applies to new build properties and there are often not enough new-build properties available to make it workable. So, if you know that you want to buy a new-build, then Help-to-Buy could be an option for you, but if you are looking to buy in an area with very little new residential building, then you may be out of luck.
You should also know it is limited to properties costing up to £600,000, and it must be the only property you own.
You don’t have to pay any fees for the first five years. After that, you start having to pay fees, which increase in line with inflation. After 25 years or when you sell the house, you have to repay the loan based not on the amount you borrowed but on how much it is currently worth, so if the value of your home has doubled, then the amount you have to repay the government also doubles.
There are similar smaller schemes in Wales and Scotland. Help-to-Buy (Wales) offers a government equity loan worth up to 20%. It applies to new-build properties up to a maximum value of £300,000. The scheme closes in 2021. Scotland’s Help to Buy, known as the Affordable New Build scheme, offers a government equity loan worth up to 15%. It applies to new-build properties up to a maximum value of £200,000 until March 2018 and £175,000 until March 2019. The scheme closes in 2019.
Start taking baby steps
I hope all the information I’ve provided here proves more of a help than a confusing mess! If not then don’t worry, you’re not alone, it’s the reason we started with HomeFinder rather than the other big financial decisions in life. Just like walking, once you start putting one foot in front of another you’ll be amazed how quickly you get to your destination.