Today – Understanding finance for first-time homebuyers
Understanding finance for first-time homebuyers
When you are looking to build a home or buy a house for the first time, it’s important that you understand all the costs involved in the process and how the process works. You also need to make sure that you have enough money to go through all the steps required in buying a property.
In most cases, you will need to understand some new financial terms and will need to get to grips with how much you should save to meet the requirements to finance the property. In this article, we take a look through quite a few of the factors that you need to know, so you have a better understanding of how it all works.
What deposit will you need to buy your house?
Before you even start thinking about properties, you need to work out how much deposit you will need, and how much you can afford. Typically, you will need between 5% and 25% of the value of the property.
At 5%, a property of £150,000 would require a £7500 deposit. There aren’t many mortgages at 5% for first-time buyers, so you’ll likely need to go up to at least 10% or £15,000 for £150,000 properties. The amount of deposit you will require will largely depend on your credit history.
Before booking viewings, estate agents may want to know you have the money
Before you can see a property, some estate agents will ask for proof that you can buy through an agreement in principle. Usually, you also won’t be able to hold a new build home until you have your agreement in principle.
Using help-to-buy to purchase a property
With this government-funded scheme, you only need a 5% deposit, and the government will provide you with a 20% loan on an interest-free basis for five years. The lender is then guaranteed a 25% deposit and will provide you with better interest rates and open up products available to you. After the initial five years interest-free period, you need to pay interest on the equity loan from the government. Help-to-buy is currently only available (November 2019) on new build homes.
It is also possible to purchase a share of a property and pay rent on the rest. This is a way that new home buyers can get onto the property ladder. Often, shared ownership properties are tagged so that you can identify them on property sites such as on Rightmove UK website.
If your plan is to buy a property with a view to renting it and making rental income, you may need to obtain a buy-to-let mortgage. But before jumping into this niche, you should understand what being a landlord entails, so that you are sure it is something you can handle.
Note: You cannot rent your part of a shared ownership property until you own it 100%.
You have probably seen on TV or on the Internet, adverts for guarantor mortgages. These are where someone with a good credit history guarantees that you will pay the monthly instalments and that if you fail, they will cover the costs. Guarantor mortgages have become more popular, with friends and family providing the security that lenders need to have confidence in lending to first-time buyers that they otherwise wouldn’t consider.
The help to buy ISA provides you with a savings boost
For every £200 you save, the government will add £50 with a maximum bonus of £3000. This money can be put towards a deposit for a home purchase. Each of a joint application can bring their own help to buy ISA to the transaction.
Affordability has been a key term in the mortgage market in recent years. It essentially means that lenders will look at your income and expenditure and work out whether you can afford the repayments on loan. They will also look at your income-to-loan ratio as part of the process. Essentially, the lender will want to know that you have the disposable income now to cover any increase in expenses that will come when you buy a home.
Hopefully, this article has cleared up some of the uncertainties you may have had about how mortgages work. When you are a first-time home, it’s well worth using a broker to ensure that they present your case in the best way possible and give you the maximum chance of getting approved by the best lenders.
Understanding finance for first-time homebuyers is a feature post – you might also like my post on ways to create a beautiful home on a budget