As a first-time buyer, stepping onto the property market can seem like an impossible task. There is so much to consider, yet minimal guidance to help you get started. This article can help you succeed. We’ve included all the information you’ll need to get you started on your journey to buying your first home.
In this article, you will learn:
- Who is a First Time Buyer?
- What help is available.
- The process of buying a house.
- The alternative routes to buying a house.
Who Can Be Considered a First Time Buyer?
The simple answer to this question is, an individual who has never purchased a property. This applies to most first-time buyers. They may have lived in rented accommodation or with friends or family in the past. The buyer would save a deposit for their first house and it would be the first property they have owned.
Some technicalities apply when considering who is not a first-time buyer. In terms of gaining access to the government help to buy schemes, there are some differences between those who have never purchased a property and those who have never owned a property.
The UK government defines a first-time buyer as an individual who has never owned or purchased a property. However, this can include inheritance and shared ownership of property. If you have had any share of a property in the past, you won’t be classed as a first-time buyer in the eyes of the government. This means even if it is the first property you are autonomously purchasing, you won’t be eligible for the help to buy schemes.
What help is available to First Time Buyers?
There are a number of government schemes, savings accounts and products that have been designed to help first time buyers save for their first home. Most of the schemes involve government bonuses paid on the amount of money you save. This gives you incentive to put money into the account to earn the maximum government bonuses
Help to Buy ISA (closed to new accounts)
The Help to Buy ISA is a scheme specifically for first time buyers that closed to new accounts 30 November, 2019. However, if you had an account open before this date, you can keep saving until November 2029. The scheme has been stopped in favour of the lifetime ISA, which will be discussed later in the article.
If you opened a help to buy ISA before the closing date, you are the holder of a tax-free savings account that the government add 25% of your savings too, once you purchase a house. The scheme was designed to help young buyers to save for a deposit to buy a home.
How does it work?
A 25% contribution is made, by the government, on top of your savings. The maximum amount you can save in the account is £12,000. This would give you an additional £3000 bonus. However, it would take you 4 and a half years to receive the maximum bonus as there is a £200 savings limit per month.
The minimum amount needed to qualify for the 25% bonus is £1600. This can be claimed on the purchase of a house, giving you an additional £400.
You should also be aware that Help to Buy ISAs are available to each individual, not each property. This means if you and a partner both have an account, the savings and additional bonuses for each account can be combined in the purchase of a joint property. This could lead to an additional £6000 contribution, if you have saved the maximum amount.
How do you access the money?
You can withdraw money whenever you want from a Help to Buy ISA. However, this affects the length of time it takes to reach the maximum bonus as the savings payment per month is limited to £200.
The bonus you receive is based on the closing balance at the time you make the claim. You won’t see any bonus payments during the period of saving. This amount can be requested from the government by your conveyancer or solicitor, once an offer has been agreed by a seller.
Interest rates will vary on the amount of money you save depending on your provider. No interest will be paid on the government bonus amount as the bonus is not received until requested by a solicitor. This differs to a lifetime ISA in which you are paid a bonus amount each month and can accrue interest.
You should also be aware that the government bonus will be put towards the mortgage deposit, not the exchange deposit. The two terms are often confused. An exchange deposit is paid to the seller after the exchange of contracts. As this point is legally binding, the exchange deposit acts as additional security for the sellers of the property. The mortgage deposit is the amount paid to a mortgage provider which is later added as additional equity in the property. When paying the exchange deposit, this will usually come out of the mortgage deposit amount. With a Help to Buy ISA, this money can only be used within the mortgage deposit paid to the lender.
Who qualifies for a Help to Buy ISA?
- Only First Time Buyers are granted access.
- You must be a resident of the UK or a servant to the crown.
- Aged 16 or over.
- The home you purchase using your Help to Buy ISA must be your only home, and purchased with a mortgage.
- The property to be purchased must be worth up to £250,000 (up to £450,000 in London).
- Any mortgage can be used to fund the purchase. Not limited to a help to buy mortgage
- You cannot use the scheme if the property you are purchasing has intentions to be rented. It must be the home you will live in.
- Cannot be used on overseas properties.
A Lifetime ISA has two alternative purposes. The account can be used for retirement purposes, or for the first purchase of a property. Within this scheme, the government will provide a 25% bonus payment on the savings within your account. There is a set limit to the payments made and the bonus that is available per tax year.
Also known as a LISA, the account has a deposit limit of £4000 per year. The maximum yearly 25% bonus is therefore £1000. The government bonus is paid into your account on a monthly basis. The calculation for payment is made based on the amount you pay into the account between the 6th of that month and the 5th of the next month. Certain providers may have alternative dates for bonus payments.
Using a Lifetime ISA to purchase a property
The Lifetime ISA can only be used by First Time Buyers when purchasing property. It must also a house that you plan to live in. It cannot be used on buy to rent properties or holiday homes. The money can be used to purchase properties under £450,000 and you must use a traditional repayment mortgage.
As with the Help to Buy ISA, the Lifetime ISA applies to each individual account, not the property. Purchasing a property with a partner therefore means the funds can be combined if both parties meet the eligibility criteria.
Who qualifies for a Lifetime ISA?
- An account can be opened with any bank, building society or investment manager that offers the product
- Must be aged between 18 and 40. You can continue paying into a Lifetime ISA until you are 50.
- UK residents or crown servants.
How do I access the money?
Due to the monthly government bonus, you must pay a 25% charge for withdrawals from the account. However, withdrawals can be made at any time.
When used for the allocated purposes, funds can be withdrawn:
- When using the money to fund the purchase of your first home. The property needs to be bought with a mortgage and worth less than £450,000.
- When aged 60 or over. The account can then be used as retirement funds.
- If you’re terminally ill.
When using the Lifetime ISA to buy your first home, you’ll need to inform your conveyancing solicitor so you can complete a declaration. They can then contact your ISA provider to have the funds released in full.
Help to Buy Equity Loan
This scheme is available only in England for first time buyers who wish to purchase a new build property.
5% of the property price is needed as a deposit. You can then borrow up to 20% (up to 40% in London) of the property price which is invested as an interest free equity loan. The loan remains interest free for 5 years and repayments begin within the 6th year. The equity loan payments are interest only however, they do not reduce the amount you owe.
Payments can be made to reduce the amount of equity owned by the government. In order to do this, the property must be valued at the time of repayment and the percentage paid back should be to the current value of the property. For example, paying back 10% of an equity loan on a property that was valued £200,000 at purchase can be revalued at £220,000 meaning you will pay £22,000.
There are certain circumstances which require you to repay the full equity loan. This can occur when:
- You reach the end of your equity loan term (usually 25 years)
- Your mortgage repayments are complete.
- You sell your home
- You may also be asked to repay the loan if you do not keep to the terms and conditions of the loan.
Help to Buy Mortgage Guarantee Scheme
The indirect effects of the Covid-19 pandemic have decreased the availability of 95% loan to value mortgage products. This leaves worthy households who will be able to afford repayments but not down payments at a disadvantage for property purchase.
The mortgage guarantee scheme provides some security to mortgage lenders. It covers 80% of the purchase value of the guaranteed property and covers 95% of net losses. The lender therefore only retains a 5% risk of losses in the case that the property has to be repossessed.
The aim of this scheme is to encourage lenders to continue the availability of 95% loan to value mortgages. It reduces risk for lenders and demonstrates the success of the products. This also provides the opportunity for first time buyers to access the ability to purchase property.
Help to Buy – Wales
This scheme offers shared equity loan to first time buyers for new build houses. Similar to the equity loan, the scheme offers a shared equity loan of up to 20% with the payment of a 5% deposit.
The loan is to be paid back within 25 years but this amount can be paid before that point. If you want to change ownership of your property you will need to seek permission from Help to Buy Wales. This also applies if you want to sell your home or make any improvements. To make repayments on the loan, you must obtain the market value of the property to pay the proportion of the current market value.
Alternative help for First Time Buyers
As an alternative to the aforementioned assistance for purchasing a house within the UK, there are also some schemes that allow first time buyers to enter the property market whilst they might not be able to fund the whole purchase of property. The two schemes include the Shared Ownership Scheme and Right to Buy
Shared Ownership Scheme
Shared ownership allows you to purchase a share of between 10% and 75% of a property. This can be of assistance to anyone who cannot afford 100% of a mortgage. Due to your financial circumstances you might have been rejected for a full mortgage, or cant afford the deposit. This scheme allows you to own a proportion of the property and pay the mortgage on what you can borrow, whilst paying rent on what you don’t own.
You can increase your share in the property later in time by purchasing the share for its current market value.
The scheme applies for eligible candidates who are:
- First time buyers, previous homeowners who now cant afford one, an existing shared owner looking to move.
- Household income is less than £80,000 (£90,000 in London)
- You must take out a mortgage to pay for your share of the purchase price.
Right to Buy
Council and housing association tenants are given the opportunity to purchase the property they are currently living in with the help of the Right to Buy scheme. Eligible candidates are given the opportunity to own their home with a government discount of up to £84,600 (£112,000 in London).
The purpose of this scheme is to give opportunity for those living in council houses or housing association accommodation to purchase their home and be able to create their own space. This gives the tenant freedom to personalise the space and can be their first step to getting on the property ladder.
Purchasing a house as a First Time Buyer
The process of buying a house can be extremely complicated at first glance. Many buyers, no matter whether its their first or third, can find it to be a stressful task. Taking anywhere from a couple weeks to a number of months, it is understandable why so many struggle with keeping track of the process and staying organised and on task.
We have covered the 14 essential steps to purchasing a house as a first-time buyer. Learn every step that should occur along the way and feel free to return to this list to make sure you stay on target.
Save for your deposit
As previously discussed, some of the government schemes available, such as the Help to Buy ISA and Lifetime ISA, have been organised with the intent to help you save for a deposit. By maximising the amount, you save you could have additional thousands of pounds contributed by the government.
With a first-time buyer mortgage, you’ll likely be looking for a 95% or 90% loan to value mortgage. This means you’ll need to save 5% or 10% of the property value as your deposit. It can be a good idea, before you start considering purchasing a property, to speak with a financial advisor. They can discuss your income and financial outgoings in relation to a mortgage deal that you can afford, rather than spending all your money on mortgage payments with nothing left spare.
After deciding the property price, you will budget for, make a timeline for your savings. Stay consistent and make the most of the resources available to assist you as a first-time buyer.
Calculate moving costs
Although the majority of government schemes typically help you cover the cost of the deposit, you will also have to save a large amount of money to cover additional costs associated with purchasing property.
Mortgage arrangement fee
This can differ between mortgage providers and their products. When arranging a mortgage, you may be charged a fee. There are some fee free mortgage products however the deals may not be as good when considering interest or the mortgage term. Consider what is necessary in your circumstances and budget for a mortgage arrangement fee if it’s essential. This can cost anywhere up to £2000.
Often requested by your mortgage provider as part of your application, the property valuation is to confirm that the amount you are requesting to pay for a property is accurate and reliable. A licensed surveyor will attend the property and carry out an inspection of the quality of the property, the number of bedrooms, any modernisation and comparisons of the local market. This will give you a valuation price which your purchase offer should be within the range of.
Although this survey is typically requested, and can be arranged by the mortgage lender, you will typically be held liable for payment of the service. Depending on the property and local area, the valuation can cost anywhere between £100 and £1000.
It is completely your choice as to whether you have a survey performed on the house you are due to purchase. It is entirely recommended however. By budgeting for a home survey in the early stages of the property purchase you could save yourself thousands, or even tens of thousands of pounds in the future.
Surveys occur in varying degrees of detail and depth of inspection. The majority give an insight into the quality and structural soundness of a property. Discovering any benign issues now before purchasing the property and having them cause serious issues in the future can save you extreme amount of money and hardship.
If the results of a survey indicate genuine structural or safety concerns, you will have the authority to negotiate with the seller. The result of this negotiation could be to have the issues resolved before completion or, a reduced property price to cover the future remedial work required.
There are several fees included within the conveyancing process that are typically included within one conveyancing cost. These fees can be discussed with your conveyancing solicitor when agreeing on your services. They will talk you through the necessary expenses and explain that disbursements are fees that are required to be paid to third parties for several legal proceedings and financial checks.
Conveyancing fees, which pay for the work that your solicitor completes, can costs between £800-£1500 in addition to the disbursement fees.
Stamp Duty Land Tax is a fee paid to the UK government when purchasing the property. For most property buyers, 5% tax is paid after the property value of £125,000. However, for first time buyers there is a stamp duty exemption on property up to the price of £300,000. After this point, stamp duty is paid as a normal buyer would.
This exemption can save you thousands of pounds as the tax is based on a percentage of the property, depending on its value.
To facilitate a hassle-free move, one of the simplest things you can do is book a removals service. This entirely removes the stress and strain of relocating your belongings and worrying about damage to the items or the property. Whilst this can come at an additional cost to moving your possessions yourself, you may subsequently save yourself money in damages and replacement costs if you end up breaking high value items.
Several removals companies offer competitive prices with some being cheaper than others. The average tends to be around £500 for a moderate size property moving around 25 miles. Make sure you get a removals quote to consider within your budget.
Arrange a mortgage agreement in principle
A mortgage agreement in principle is an informal agreement with a mortgage provider that states that in principle, they would lend you the amount of money you have requested in a mortgage. The utility of this agreement is that it speeds up the buying process. You know how much you can borrow and that you generally shouldn’t have too many issues with your application, so long as circumstances haven’t drastically changed.
It also makes you a more appealing buyer as you appear prepared. A buyer without a mortgage in principle can face complications when it comes to the mortgage application.
You should be completely aware that a mortgage AIP does not guarantee that your mortgage application will be approved. It is not a formal agreement and circumstances can change. You should try to keep your financial position stable in the period between your mortgage AIP and the completion of a purchase.
Start house hunting
Now you know how much you can spend, you have saved up for the deposit and the associated moving costs, you can start looking for your very first purchased home. Especially with your first property, house hunting can seem impossible. You might find that there are so many properties that you can’t decide, or there is nothing out there that you like within your price bracket.
The important thing in both of these scenarios is to keep an open mind. Consider creating a list of priorities. This can assist in both narrowing down the criteria as well as widening the search whilst maintaining features that are important.
Simple factors to consider can include the location of a property, number of bedrooms, on-road of off-road parking and local schools. Don’t settle for a property that you really don’t like but also stay open minded for properties that might typically not be on your radar.
After shortlisting some properties, its time to book some viewings. The process here is generally pretty simple, a phone call or email is usually all it takes. This will get you booked in for a certain time and date so you can visit the property and look around.
There are certain things that you should consider during a viewing that can seem really overwhelming as a first time buyer. We recommend taking a friend or family member who has some experience in purchasing property and don’t be afraid to go back and view a property again.
One of the most valuable things you can do at a property viewing besides taking a look yourself is to ask plenty of questions. This can include details of fixtures and fittings that will be included, what parking is like, what’s in the local area, how the neighbours are. If there is anything you think of that is important to you, be sure to ask. You don’t want to commit to a property without knowing a detail that is pivotal to your daily life.
Make an offer
Once you’ve viewed a property a couple times and decided it’s the one, its time to make an offer. You will be aware of the asking price for a property and you have your budget in mind. There are different terms that can be used in relation to the asking price. For example, ‘offers in excess of’ and ‘offers in the region of’ are terms that give you a general guideline for what the seller is likely to accept. In the circumstance that these are used, a lower offer typically won’t be accepted.
However, in other cases, sellers can add an additional 5% or 10% to the value of the property in anticipation of lower offers. Don’t feel less confident as a first time buyer. Stick with your price and make the call to place your bid.
Apply for your mortgage
After having an offer accepted, it is important to get your mortgage application sent off as soon as possible. It is important to have your mortgage approved early on so you don’t waste too much time and money in the circumstance that your application is rejected. You also want to know the result of your application before exchange of contracts as this can be extremely costly if the mortgage request is rejected.
The application approval time is typically around 2 weeks, whereas the conveyancing process can take around 12 weeks. Although conveyancing can take a longer period of time, you want this arranged as early as possible. A mortgage approval is typically valid for 3-6 months which gives you plenty of time to complete the rest of the process.
Instruct a conveyancer or solicitor
Conveyancing is the process of legal transferring ownership of a property from one party to another. There are numerous legal facets that need to be taken care of so it is important to work with an experienced licensed conveyancing solicitor.
A conveyancing solicitors’ role is to lead the drafting of an exchange contract as well as representing you in the negotiations of the contract. They will also perform a number of legal and financial checks against you and the property to ensure the sound transaction of property.
See our article for a full list of the actions performed by a conveyancing solicitor.
Have a survey performed
Whilst not compulsory, a survey can be pivotal in securing your investment. We discussed this previously while considering costs of moving house. You will be far better off equipping yourself with knowledge of potential future costs than ignoring the availability of information.
There are three key surveys that are performed on properties to be purchased. The first is a Condition Report. This survey is a superficial evaluation of the property for its value and aesthetic qualities. There will be some insight into structural issues or damp, but only what is immediately visible within a search that takes a couple hours to complete.
The next level includes a Homebuyers Report. This is typically the most common survey completed for potential buyers due to the adequate level of detail provided. The inspection is non-invasive but takes a deeper look into the issues within a property. It rates each issue using a traffic light system, giving you a solid insight into the condition of the property.
A Building Survey is the most intensive report available for potential buyers. Again, the survey is non-invasive however the inspection is far more intensive than the previous counterparts. A detailed evaluation of the internal and external condition of the property is conducted. This includes analysis of all fittings and fixtures, the visible components to water and gas supplies as well as accessible structural components. The report will also be accompanied with advice for each specific issue and for an additional price can occasionally offer a valuation of the property.
Arrange home insurance
Home insurance is something that is typically of interest to both you and the mortgage lender. Before exchanging contracts, your mortgage lender or estate agent might require you to arrange for appropriate building insurance. If you don’t arrange an insurance policy by the time exchange occurs, your mortgage offer can be revoked.
Besides the ulterior motives of your mortgage lenders wishes, home insurance can be of great value to you as the owner. It provides a crucial safety net should an unlikely yet possible situation occur. This can include natural disasters, structural collapse or collision damage and covers the cost of repairs. This protects your investment and offers financial security when you would likely need it the most.
With everything in order, you should soon be ready to exchange contracts with the seller. Your conveyancing solicitor will take care of the majority of this process for you. They should talk you through the terms of contract, the negotiations from the seller and inclusion of any clauses that you want to be considered.
Once both parties are happy with the terms of the contract, a completion date can be arranged and contracts can be signed. This stage acts as a point of no return. Signing the exchange contract is legally binding for the transaction of the property meaning neither the buyer or seller should back out. As a first-time buyer, this can be intimidating. However, you have experienced enough of the process to know that your finances are secure and you are happy with the property. If you are not yet at this point, you shouldn’t go through with signing the contract as there are serious implications if you do back out.
Also consider that any delays to the exchange of contracts can lead sellers to accepting other offers. Try to be as efficient as possible whilst ensuring you are 100% committed to the purchase of this property.
After exchange, you should be aware of a completion date. This is the date that you become the legal owner of the property. Although you might collect your keys on this date, you don’t always have to move on your completion day. You may have limited availability in choice for your completion day and taking time off work or arranging child care can be a hassle.
As a first-time buyer you generally have more flexibility to move into your new home whenever you want, conditional to tenancy agreements. Once you have decided on a moving in date, book your removals early. The closer you leave it, the more you will pay. Availability reduces as demand increases which causes prices to go up the closer it gets. Save some money by booking in advance.
After all that, completion is one of the simplest stages of the purchase process. Your conveyancer will transfer the funds from the mortgage lender to the seller. The seller will then leave the keys with the estate agent to be collected by you. From that point you are free to move into your new property whenever you like.
Move into your first home
You’ve officially bought and moved into your first home! For many first-time buyers this is a huge milestone to be incredibly proud of. You now have a space to call your own. There will be plenty of time for redecorating and making changes to the house to make it your own. Start unpacking and get settled in your new home.