The housing market, especially in the UK, is renowned for being tough to crack and rather volatile in times of upheaval. The COVID-19 pandemic has been no different and house prices across the country have seen large rises, particularly in suburban and rural areas as the work from home trend has become more established practice. In this article, we look at the process of buying your first home, including mortgage affordability, getting together a deposit, and several other key considerations.
Processes will vary depending on your country of residence, so please use this as a rough guide of what to look out for when buying your first home.
What level of mortgage can you afford?
Property prices have steadily increased for much of the past twenty years and, as a result, people’s ability to buy a property is more than ever limited by how large a mortgage loan they are able to borrow from a bank. A mortgage is a specific type of long-term loan provided by a bank to a borrower to enable the borrower to purchase a property. The loan is secured against the property, which means that in the event that the borrower is unable to repay the loan, the bank has the right to take possession of the property.
A useful first step for any prospective buyer is calculating how large a mortgage they can afford to take out. Traditionally, banks would lend up to three times a borrower’s salary (or, if a couple is taking out a joint mortgage, their combined total salary) but as property prices have risen and interest rates have fallen, banks are increasing the amounts they are willing to lend. This is known as an earnings multiple and it plays a huge role in determining what you can afford to borrow. There are plenty of online calculators available that can help you work out what your borrowing capacity is.
A key point to remember is that banks will only offer a mortgage to someone that they deem “credit-worthy”, which means that someone is likely to pay back any amounts that they borrow. Creditworthiness is measured through your credit score, which is a number assigned to you based on your financial history of paying bills, loans, and credit card repayments. You can check your credit score online through free services, such as Experian.
Getting together your deposit
In most cases, banks will not lend you the total amount you need to buy a property and you will need to put up around 10% of the purchase price as a deposit. Some mortgage providers will accept deposits as low as 5% of the purchase price in light of high property values.
Saving enough money to get a deposit together is no easy task and can be rather daunting. As with any savings goal, it is important to make a plan, define your goals and stick to them. In order to increase your savings rate, there are only two things that we can ever really do: cut our expenditure or increase our earnings.
One of the best ways to save money is by reducing our housing costs—in London, it is common for people to spend nearly 40% of their income on rent alone; elsewhere in the UK, around 25% is more common. Searching around for a cheaper place to live can really add to your ability to save. Other ways to reduce your housing costs include house-sharing (rather than renting an individual property) and if you are able to, living with your parents.
As well as saving for a deposit, there can be lots of other upfront costs when purchasing a home that you will need to save for. These include legal fees, surveyors, potentially mortgage fees and stamp duty. Stamp Duty Land Tax is a tax paid when buying property over a certain value (there is a discount for first-time buyers). There are lots of good online calculators for checking how much stamp duty you will need to pay on your purchase, so ensure you add this amount to your savings goal so you are not caught short.
Other factors to bear in mind
1) Interest rates: Even if you are able to get a mortgage, you should consider whether the monthly repayments are affordable. A key determinant of this will be the interest rate on the mortgage—although central bank interest rates are at historic lows, they may rise, which might mean that the interest rate on your mortgage could increase. As such, for good measure, you should consider whether you can afford a rise in interest rates before agreeing to a mortgage.
2) Ground rent and service charges: If you buy a home in a UK city, there’s a good chance that it will be a flat. Typically, when you buy a flat, you buy what is called a leasehold—due to a quirk of the law, you have not bought the flat outright, instead, you have bought a very long lease to the flat (this is often 999 years for new flats) from the ultimate owner of the block of flats, who is known as the freeholder. Often, the freeholder will charge a fee called ground rent, which is typically an annual fee. Additionally, flats often come with service charges—fees that cover the costs of maintaining communal areas such as corridors, gardens and amenities.
3) Solicitors and surveyors: It can be tempting to look for ways to cut out costs when purchasing your home but whilst you want to get a good deal, you also want to ensure you are getting a high-quality service, particularly when it comes to solicitors and surveyors. Solicitors will review the mortgage and home documentation to ensure that what you think you are buying is actually as it seems and that the mortgage documentation does not include any provisions that might adversely impact you. Similarly, a surveyor will inspect the property for defects—hiring a good surveyor could save you plenty of money down the line in the event that defects are present.
Overall, buying your first property is likely to be the biggest financial decision that you will ever make. The information in this article will hopefully provide you with a strong starting point when the time comes to start planning your first property purchase.