be 100% sure that you are ready for homeownership.
For first time home buyers, the prospect of it is very exciting and can be quite scary.
However, it is a complex process, especially for those who have no idea what it involves.
Before even starting, make sure that buying a home for the first time makes more sense than renting because it will most likely be the most expensive purchase you will ever make.
The process of buying a home comes with various steps from saving for a deposit to making an offer.
There are also costs that you might forget about.
All of this can become overwhelming and result in poor decisions which will not be good.
Thankfully, there are a number of tips that will help.
Here are 10 top tips for first time home buyers.
Be Ready to Commit to a Loan
The most important tip for first time home buyers is to be sure you are ready to commit to a loan.
The average mortgage loan term is between 15 and 30 years.
Although you don’t need to stay in your home for that amount of time, buying a home is still a massive commitment.
Before taking on a mortgage, be 100% sure that you are ready for homeownership.
First, ask yourself the following questions:
- Am I ready to commit to this home and city for at least 5 years?
- Do I have an emergency fund that can cover at least 3 months of expenses?
- Do I have a stable income?
If the answer to any of these questions is “no” then it might be best not to go into homeownership for now.
Continue saving and keep researching.
Think about any upcoming events that could affect your location, income or expenses.
If so, these are other reasons to hold off for now.
Research the Different Mortgage Types
When it comes to buying a home for the first time, it is important to look at the types of mortgages available to see which one is best suited for you.
How much you pay in monthly mortgage repayments will depend on the size of the loans and what type of mortgage you get.
The different types of mortgage include:
It keeps monthly mortgage repayments at a set rate for two, three or five years. In some cases, it can be fixed for up to 10 years.
Once the deal ends, it is usually best to switch mortgages to avoid paying your lender’s standard variable rate (SVR), which tends to be much higher than your fixed-rate deal.
This tracks the Bank of England base rate, which means that the interest amount you pay each month could increase or decrease if the base rate does.
If you choose this option, make sure you can afford the repayments if interest rates rise.
Discounted Variable-rate Mortgages
A discounted, variable-rate mortgage usually lasts for between two and five years and is fixed at a set percentage below your lender’s SVR.
However, if the SVR changes, your mortgage rate will change too.
With an offset mortgage, you can use a linked savings account to offset against the amount you owe on your mortgage.
So instead of earning interest on your savings, it means you pay less interest on your mortgage.
This is because your savings balance is used to offset the amount you owe in mortgage debt – and you only pay interest on the debt balance.
Save More Money for a Deposit
Building up a deposit is one of the biggest challenges, especially if you are a first time buyer.
The key to saving a deposit is to start saving as much as you can as soon as you can.
Typically, a deposit is 5-20% of the house price.
For example, for a £200,000 property:
- 5% – £10,000
- 10% – £20,000
- 15% – £30,000
A 5% deposit is the absolute minimum and even then, your choice of mortgage lenders will be restricted.
This is because lenders are cautious about who they lend to.
Therefore, it is better to put down more money for a deposit. Some of the benefits include:
Cheaper Monthly Repayments
The bigger the deposit, the smaller the loan will be.
The smaller the loan, the cheaper your monthly repayments will be.
Better Mortgage Deals
A larger deposit will also make you less risky for mortgage lenders and, as a result, they’ll generally offer you lower interest rates.
For example, 90% mortgages are generally priced around 0.7%-1% cheaper than 95% deals.
Better Chance of Being Accepted
All lenders carry out affordability checks to work out whether you can afford the repayments, based on your income and outgoings.
By putting down a small deposit, you are more likely to fail these checks because you will need to spend more on your mortgage each month.
Bigger Buying Budget
Lenders typically offer a loan of up to four-and-a-half times your annual salary.
So if your salary is relatively low and you can’t borrow enough, you may need a larger deposit just to make up the value of the property.
If you own more of your home outright you are less likely to fall into ‘negative equity’, where you owe more on your mortgage than your property is worth.
Being in negative equity can make moving house or switching mortgage very difficult.
But in addition to your deposit are moving costs, legal fees and stamp duty.
Stamp Duty Land Tax (SDLT) is a tax paid when you buy property or land over a certain value in England, Wales and Northern Ireland.
SDLT rates depend on the value of your property. The higher the value, the higher the amount of tax you are required to pay.
But first time home buyers pay no stamp duty on the first £300,000 of homes worth up to £500,000.
A rate of 5% applies for homes costing between £300,001 and £500,000.
For those who are not first time buyers, tax is paid on homes worth £125,000 or more, and commercial properties and land valued at more than £150,000.
Take Advantage of Government Schemes
There are several home ownership schemes available from the government that vary between England, Scotland, Wales and Northern Ireland.
For those with a smaller deposit, there is Help to Buy.
Help to Buy offers first time buyers the chance to buy a home with a 5% deposit. There are limits on the value of the property you buy, which vary across the country.
The equity loan part of Help to Buy is only available on newly-built homes in England worth up to £600,000.
You need to secure 80% of the value of the property through your deposit and mortgage. For the remainder, the government provides a loan.
A Help to Buy ISA means the government will give you a bonus £50 for every £200 saved for a deposit.
However, the bonus cannot be claimed until after the initial deposit needs to be paid.
A Lifetime ISA presents a better option and is open to those aged 18 to 39.
Looking at Properties
After coming up with a budget, you will now be in a better position to look at properties.
Think about whether you would like to buy a house or a flat. Would you prefer a new build home or an existing property? Freehold or leasehold?
You can sign up for property alerts with real estate companies so you can be the first to know about new properties that match your requirements.
You can also register your interest with local estate agents and housebuilders.
When viewing a property, it is good to go with another person, whether it be a family member or friend.
It is worth keeping in mind several questions as they will help determine if the property is right for you. They include:
- How long has the house been on the market?
- Why is the vendor selling the property?
- Has the vendor found another property – otherwise you may find yourself unable to move in for several months longer than you had initially expected?
- Have any other offers been made on the property to help determine what offer you should make if you want to proceed with a purchase?
- What is included in the sale?
First time home buyers will be more attractive to vendors as they do not have another place to sell.
It is also good to speak with the neighbours to see whether they are like-minded.
They may also provide information the vendor might not want to share with you.
Pay off Debt & Build an Emergency Fund
Owning a home is much more expensive than renting, even if the monthly house payment is similar or cheaper than the current rent amount.
Being a homeowner means you are responsible for everything such as maintenance, upkeep and mishaps, which can add up fast.
Therefore, it is important to clear any debts and have an emergency fund.
Purchasing a home without other debts and with an emergency fund protects you from financial setbacks if things go wrong.
Because your money won’t be tied up in other payments, you will have the money to pay for any expenses that may come your way all of a sudden.
After clearing debts, first time buyers should stick to a budget.
This is easier said than done but it will be beneficial in the long term.
Work with a Real Estate Agent
First time buyers should work with a real estate agent when it comes to finding the right property.
They are experts in the home buying process.
A real estate professional can help by:
- Showing you properties in your area that fit your needs and budget.
- Attending showings with you to learn more about your priorities as a homeowner.
- Helping you decide how much to offer for a property.
- Submitting an offer letter on your behalf.
- Helping you negotiate with the seller or the seller’s agent after you submit an offer.
- Attending the closing with you to make sure that everything is in order with your sale.
But it is important to remember that only a buyer’s agent will work on your behalf.
Do not rely on the seller’s agent to represent your best interests.
And always choose a qualified real estate agent when it comes to buying a home.
Check Credit Score
When it comes to buying a home, lenders will look at your credit history.
If you have a high credit score, it indicates you have managed credit well in the past. Therefore, lenders are more likely to lend to you.
But if it is not high, there are various ways to improve your credit score.
Surprisingly, not having a credit card may work against you because there is no proof of how you have managed your debts.
So ensure you have one and use it occasionally. But clear the debt each month or pay off more than the minimum amount.
This shows that you take your financial obligations seriously and will make a big difference.
Make sure that your credit cards, bank accounts and other contracts are registered to your current address.
Finally, monitor your credit history to make sure you have not been scammed.
Putting in an Offer
After finding the house you want, you will need to put in an offer to the seller via your estate agent.
You may need to provide proof that, as a first time home buyer, you can secure a mortgage.
This is where an agreement in principle comes in use.
As a first time home buyer, you’re in a strong position to negotiate because you don’t have anything to sell, meaning you are not part of a chain.
When your offer has been accepted, you will need to apply for your mortgage formally.
This is also the point to get surveys carried out on the home you’d like to buy. Now you are on the final stretch of the home buying journey and it is largely managed by solicitors.
Buying a home for the first time does not have to be overwhelming.
Thankfully, these 10 tips can help prevent that.
When it comes to buying a home, it is you and your loved ones who bring it to life.
By considering these tips, you can maintain your financial health. As a result, your quality of life will increase with the purchase rather than decrease.