First Time Buyers
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First Time Buyers
All about mortgages for First Time Buyers with Joe Eden.
How is the mortgage process different for First Time Buyers?
It’s not hugely different to the traditional approach when moving home. Buying a property can be exciting, but a lot of people lose the excitement because of the worry and the stress, which is a real shame.
The process is not too different, other than you’re in a better position because you don’t have a property to sell. You’re not going to be in a chain so you’re literally ready to go. That puts you in a great position from a negotiation perspective.
What is an agreement in principle?
Everyone calls it different things and it seems to be estate agents who kick this off, asking for your ‘decision in principle’ when you first start viewing properties. Some people call it an agreement in principle, some call it a mortgage in principle, some call it a decision in principle. All of them are exactly the same thing – it’s essentially a pre-approval process.
A lender will do a credit score and run some background checks on you and your affordability. If it’s successful you’ll get a certificate confirming how much you can borrow. It just shows that you’ve been pre-approved for a mortgage subject to the full underwriting of your documents and valuation.
How much can a First Time Buyer borrow? What sort of deposit is needed?
It’s now November 2022 and there have been changes with the Bank of England base rate, which has meant lenders have changed their interest rates. That’s had a knock- on effect on how much lenders can borrow.
Borrowing costs have become more expensive, which in turn means lenders can’t loan you as much. You have less disposable income after your mortgage, especially as inflation is rising and the cost of living is increasing.
That said, there are still lenders that can lend between four and five and a half times your annual income. If you’re buying as a single person, especially in the South of England, that sometimes is a problem. But if there are two incomes on the mortgage it usually makes it a lot easier to buy a home.
Affordability is entirely different to the deposit. A lot of people think that if you’ve got a huge deposit, affordability doesn’t matter, but it’s really not like that. There have been a lot of changes over the years which means that lenders have to responsibly stress test the affordability separately from the deposit.
Some lenders will still be more favourable on affordability if you have got a bigger deposit, but it doesn’t mean that a huge deposit will get you around the affordability checks. The minimum deposit you need in this market is 5% of the purchase price.
How do I know what my credit score is and how do I improve it?
The main credit agencies, like Experian, Equifax and TransUnion will usually charge you to check your credit score. When you sign up you usually get a 30 day free trial and after that you’ll have to pay around £15 per month. There are some free ones but these often don’t give you the data that you need.
Most give you your credit score which is good, but if there’s anything on your credit report, they don’t provide the details. If you’ve had a missed payment you’ll want to see where that was.
My personal preference is checkmyfile.com which gives you a 30 day free trial. What’s so good about them is you see clear data from Experian, Equifax and TransUnion with all the details you need.
I had a client last week where we’d been to a couple of lenders and couldn’t get a decision in principle, which usually suggests that there’s something on their credit profile. He’d checked online and nothing had come up on his file. We got the Checkmyfile report and it clearly showed missed payments that turned into a default. But it only came up with Equifax – not on anything else.
A lot of lenders will do a decision in principle without leaving a footprint on your credit profile. It’s called a soft search. But if you’re using lenders who leave a hard search in your credit profile and you do two or three checks that decline, that will have a negative impact on your credit score. By going straight to your credit report there’s no negative mark in your credit profile.
What is the First Time Buyer ISA and are these still available?
No, the Help to Buy ISA has finished now. If you’ve already got one, that doesn’t stop but you can’t open a new Help to Buy ISA. We’re not financial advisors so we don’t set up savings accounts and things like that, but the most common one we see clients use is called a Lifetime ISA or LISA.
It’s very similar to the Help to Buy ISA. You can open them now and contribute up to £4,000 a year. The government will give you around 25% bonus back, up to £1,000. So if you put £4,000 a year into a LISA, with your bonus your statement will show £5,000.
A lot of people think they haven’t got enough money to save right now, but you could literally open a LISA with £1. You usually need to have the account open for a minimum of 12 months before you can actually buy a property with your bonus. So if you set it up now but don’t contribute to it for six months that’s fine. It just starts that clock ticking now.
What is a Joint Borrower Sole Proprietor (JBSP) mortgage?
A JBSP is essentially a replacement of the ‘guarantor’ mortgage. Joint Borrower Sole Proprietor is what it says in the tin. It’s where you bring someone else onto the mortgage as your joint borrower. But you are the sole owner of the property: the sole proprietor.
Most lenders like the joint person to be a family member. So you could potentially bring mum or dad or a sibling onto your mortgage, and both of your incomes will count towards affordability. You’ll both be on the mortgage but only one of you will be on the property’s title deeds.
That’s really helpful for stamp duty. There’s a stamp duty surcharge if you own a second property in the UK. So if your mum and dad own a property already and they come on the mortgage with you, with a normal mortgage they would be hit with an extra 3% stamp duty. With a Joint Borrower Sole Proprietor mortgage, they aren’t going to own any part of your property so it doesn’t trigger the extra stamp duty.
It’s not as popular, but sometimes we see parents get the son or daughter to help them. Usually lenders like to see an exit ahead. A perfect example is where a junior doctor or solicitor brings mum or dad onto the mortgage as their joint borrower, and we can clearly show the lender that in five years’ time their salary is going to increase. At that point they can remortgage and take the mum and dad off the mortgage.
There are some more quirky lenders who wouldn’t be as worried about that, but many do seek an understanding of what is going to happen in the future.
Speak To an Expert
We’ll have an initial five minute chat to address any burning questions, then we’ll set up a Zoom call or a meeting and spend an hour or so going through your affordability and any advice that we can offer at that stage.
That’s entirely free. No matter what type of finance we do, whether it’s residential, Buy to Let, bridging finance, we don’t charge a penny until we physically apply for a product for you.
What is Shared Ownership?
Shared ownership is where you buy a share of a property. It has to be linked to a shared ownership scheme, you can’t buy any property you want. But Rightmove has a box for shared ownership that you can tick to view relevant properties for sale.
Say the market value of a property is £200,000 and there’s an opportunity to buy 50% of that property. You’ll be buying that share for £100,000; your deposit is based on that, so with a 5% minimum deposit you’d need £5,000.
The affordability is only based on the £95,000 remaining, so if you’re struggling to find properties within your budget for affordability or for deposit reasons, a shared ownership scheme is brilliant.
The only downside to shared ownership is that because you only own half of the property, you have to pay rent for the remaining part. It isn’t always a 50-50 split. With some schemes you might buy as little as 30% – but whatever the percentage is that you don’t own you pay market rent for.
As rental prices increase that can affect affordability with lenders. If that rent is £400 a month to the housing association, that will have to come into the affordability.
What is the Deposit Unlock Scheme?
Deposit Unlock is a new scheme that has replaced the Help to Buy Equity Loan scheme. That was a scheme for new build properties where you could buy a property with the support of the government.
Let’s say it was a £100,000 property. You would put your £5,000 in, the lender could lend you up to £75000 and then the remaining 20% would be given to you through the Help to Buy scheme as a loan. The government would have a 20% stake in your property which helps if you haven’t got the affordability to borrow the whole amount.
Deposit Unlock works in a similar way – you still only need a 5% deposit for a new build property. But the developer covers any shortfall. Let’s say the bank lends you 95% – the developer might have insurance to essentially cover around 10% of that. So if there was a default, the developer’s insurance kicks in to reduce the lender’s risk.
What fees are involved when buying a house?
Stamp duty is usually the biggest cost in a home purchase. As it stands (November 2022), for First Time Buyers there’s no stamp duty to pay up to £425,000. That threshold has increased a couple of times over the last few years, which is good.
So for now that’s a huge saving. The other things to account for would be:
Mortgage fees: A lot of lenders won’t have upfront costs for First Time Buyer products. Typically a lender will have a couple of rates, one being a low interest rate with an arrangement fee, and then a higher rate with no arrangement fee. You just need to work out what’s best. A lot of lenders allow you to add that arrangement fee to the mortgage itself.
Surveys: A lot of mainstream lenders offer free mortgage valuations, including Santander and Nationwide. Others might charge £200 to £400 for the survey depending on the property price. The survey cost is one of the only upfront mortgage related costs with a lender.
How can a mortgage broker help a First Time Buyer?
It’s a good idea to sit down with a mortgage broker when you’ve just started saving your deposit – even years before you’re ready to buy. We’ll help you work out your initial budget and the costs including your monthly payments.
Interest rates have gone up quite drastically so you might be looking at houses at £200,000, £300,000 or £400,000 but not realise that the monthly payment might not be within your budget. Sitting down with a broker allows you to work out what you could afford.
We will scope out the whole process, which helps if you’ve never been through this before or had any advice on it. We help you understand how much money you need to get started, how much to set aside for fees and what to expect along the way.
It’s a way to educate yourself before you start viewing properties – and it will probably put you in a better position from the estate agent’s point of view.
