Buying your first property is a huge moment in anyone's life. You will likely spend hours searching for your ideal home on Rightmove or Zoopla, assessing what is available and what you are likely to be able to afford.
Before taking the next step in the journey, it is a good idea to arm yourself with as much information as possible on the financial side of buying a house. This includes working out how much you can borrow, saving for a deposit, choosing the right mortgage and working out how much stamp duty you will have to pay.
With this in mind, we have put together a guide to the key points, provided links to sources of further information and brought together up-to-date resources to help you successfully navigate the property market.
How much can I borrow?
In the past lenders would multiply your annual income to work out how much they would be happy to lend you, but now it is focused on affordability. Income is still a key consideration but it will be compared to your outgoings so that the lender can build up a full picture of your finances.
There will be larger scrutiny on your fixed spending, such as loans or credit card repayments (as these can’t simply be stopped or reduced) and they will be less worried about discretionary spending like eating out (as this can easily be reigned in). Even if you have little or no debt, you may still fall foul of the affordability checks as lenders will often stress test your finances to see if you could survive an interest rate hike. The amount you can borrow will be based on the deposit you are willing to put down, the overall loan-to-value (LTV),which we will cover further down in this article, and the affordability of the loan.
For more information on this, check out our article: "Am I likely to be approved by a mortgage lender?" To get a rough idea of how much you'll be able to borrow and how much it will cost you, use the Habito mortgage calculator*.
How much deposit will I need?
In today's market you are likely to need a minimum of 10%, but the more you can pull together the better. Having a bigger deposit has multiple benefits; it will mean you need to borrow less, you will have access to a larger number of lenders (meaning you have more choice) and you will also be likely to get a much better rate. Getting a deposit together is no easy task and there is no quick-fix. Some are lucky enough to be gifted money from parents or grandparents but others will have to cut back and save or perhaps earn additional money via a second job or side hustle. Whatever you do, the fact remains that if you don’t have some sort of deposit, it is unlikely you will be offered a mortgage.
To find out the latest levels of deposit required by lenders, read our article: "How much deposit do first time buyers really need?"
What does loan-to-value mean? (LTV)
Lenders will often quote the ‘loan-to-value’ or ‘LTV’ on the product it offers. Put simply, this means the size of the loan relative to the value of the house. If, for example, the mortgage is 90% LTV, you will need to have 10% deposit.
To work out the total deposit required, you first need to know the property's value. Then, grab a calculator and subtract the LTV from this amount. For example, if the property is £300,000 and the mortgage is 90% LTV, you subtract 90% from £300,000, which equals £30,000 - the amount of deposit you'd need to have to secure the mortgage.
If the figure that comes up is more than the amount you have saved, you will either need to negotiate down the price of the property, find a cheaper property or try to save more money.
Bear in mind that the lender will carry out an independent valuation of the property before approving the mortgage. If they value it at a lower price than the one you have agreed with the vendor, you will have to contribute more towards the deposit. For example:
Property Price Agreed - £300,000
Current Deposit - £45,000
LTV - 85%
Lender's revised loan-to-value workings
Property Price Agreed - £300,000
Property Value (by lender) - £295,000
Lender will loan 85% - £250,750
Current Deposit - £45,000
Further deposit required - £4,250
How to save for a deposit
The prospect of saving tens of thousands of pounds is understandably daunting, but there is some light at the end of the tunnel in the form of first-time buyer schemes, such as equity loans and shared ownership schemes. We will cover all of them below and their purpose, either to help build a deposit more efficiently or to help bring down the LTV.
What is a Help to Buy ISA?
No longer available, the Help to Buy ISA was set up by the Government in 2015, in order to help first-time buyers save for their first home. It provided a tax efficient way of saving as it included a 25% boost from the government. The Help to Buy ISA was closed to new applicants on 30th November 2019 in favour of the Lifetime ISA.
What is a Lifetime ISA?
Similar to the Help to Buy ISA, a Lifetime ISA can be used to save towards your first home, with the advantage of a 25% boost from the government boost, but it can also be used to save towards retirement. You have to be aged between 18 and 40 to open a Lifetime ISA and you can put in up to £4,000 per year (until you are 50). The government will add up to £1,000 a year and the Lifetime ISA counts towards your annual ISA limit which for the 2020/21 tax year is £20,000.
You can transfer money from any other existing ISA (including a Help to Buy ISA) into a Lifetime ISA, however it is limited to the Lifetime ISA allowance, which is currently £4,000 for the 2020/21 tax year. If you have already contributed to your Lifetime ISA in a given tax year, then you can only transfer what is left of your annual allowance. As with other types of ISA, you can only make contributions into one Lifetime ISA in each tax year.
You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both. When you turn 50, you will no longer be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.
Withdrawing money from your Lifetime ISA
You can withdraw money from your ISA if you’re:
- buying your first home
- aged 60 or over
- terminally ill, with less than 12 months to live
- You’ll pay a 25% charge if you withdraw cash or assets for any other reason.*
The 25% charge is to recover the government bonus received but will apply to the whole savings pot, meaning you may get back less than you have paid in.
*The 25% withdrawal charge has been reduced to 20% until 5th April 2021. This means if you need to access your Lifetime ISA savings prior to 5th April 2021, you will only have to pay back the government bonus. This is expected to be for a limited time only and is in response to the current financial crisis.
Buying your first home using your Lifetime ISA
You can use your savings to help you buy your first home if all the following apply:
- the property costs £450,000 or less
- you buy the property at least 12 months after you open the Lifetime ISA
- you use a conveyancer or solicitor to act for you in the purchase - the ISA provider will pay the funds directly to them
- you’re buying with a mortgage
If you are interested in learning more about the Lifetime ISA, we go into more detail in our article Lifetime ISAs explained - are they the best way to save?
How to reduce the amount of deposit required
If you are struggling to save the amount required for a property in your local area, there are some further schemes available that could help reduce the amount of deposit you need to contribute.
What is a Help to Buy equity loan?
The Help to Buy equity loan scheme was launched in April 2013 and will run until March 2021. It is only available on new-build properties in England and anyone can benefit from the scheme (not just first-time buyers) Scotland, Wales and Northern Ireland offer similar schemes but operate slightly differently.
The government will lend you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home.
As a result of providing this assistance, the government has an entitlement to a share of the future sale proceeds equal to the percentage contribution required to assist your purchase. For the first five years of Help to Buy home ownership you will pay an initial monthly management fee of £1. This will continue until the loan is repaid. After five years, the equity loan will be subject to an additional interest fee (collected from you on behalf of Homes England by Homes England’s Mortgage Administrator) of 1.75% per annum on the outstanding amount of the equity loan. From the fifth anniversary of the loan this fee will increase each year by the increase (if any) in RPI plus 1%.
The scheme is designed so that you pay back the loan when you sell your property, giving the Government 20% of the sale price. The government therefore share the proceeds from the rise (or fall) in property prices
Who is eligible for a Help to Buy equity loan?
- anyone in England interested in buying a new-build property (until March 2021)
- buyers must always provide a 5% cash deposit contribution (5% of the full
- buyers must take out a first-charge mortgage with a qualifying lender
- the maximum purchase price is £600,000
- the property purchased must be your only residence
What is Shared Ownership?
If you are unable to get a mortgage on 100% of a home, Shared Ownership (sometimes referred to as Share-to-Buy) offers you the chance to buy between 25% and 75% of a property, paying rent on the remaining share. It is a great way of getting yourself onto the property ladder as it allows you to buy a bigger share in the property (referred to as 'staircasing') when you can afford to. You need to think carefully before you apply as it will restrict your options when you come to sell and there are fewer lenders that offer shared ownership mortgages.
Who is eligible for Shared Ownership?
- your household earns £80,000 a year or less outside London, or your household earns £90,000 a year or less in London
- you are a first-time buyer, you used to own a home but can’t afford to buy one now or are an existing shared owner looking to move
Things to consider before entering into a shared ownership arrangement
- fewer lenders to choose from
- restricted options when it comes to selling
- shared ownership properties are sometimes sold on a leasehold basis
Can shared ownership properties be converted to freehold?
A shared ownership property will not automatically become a freehold property once the equity share has increased to 100%. In fact, some housing associations never sell the freehold. Housing associations have the right to retain the leasehold if they wish to, even if the owner is able to buy the property outright and increase the equity share to 100%. It would be wise, therefore, to discuss the possibility of buying the freehold before you enter into a shared-ownership arrangement.
What other options are there?
Buy a property with friends
If you are struggling to get a mortgage on your own, you could consider applying with siblings or friends. Some lenders allow joint applications of up to four people. Pooling your salaries together will help you be able to afford a better property, but remember you'll need to find somewhere that meets everyone's individual needs and there may be complications if and when you decide you want to move.
Ask for a gifted deposit
Family or friends are able to contribute towards your deposit, as long as they are willing to do so. The money must be a gift, with no expectation that it will be repaid. The person or people donating the money must also acknowledge that they have no rights over the property or the equity within it. Another point to consider is, if the person contributing the money dies within seven years, there may be inheritance tax implications.
Try a guarantor mortgage
As well as gifted deposits, parents or grandparents may be able to help you by acting as a guarantor for all or part of the debt, shouldering the responsibility if you don't make the payments. These products are fairly complex and you will need to have some open and frank conversations with your family, but they may be a way of securing a home if everyone is in agreement.
Will I have to pay stamp duty as a first time buyer?
First time buyers in England and Northern Ireland are usually not required to pay stamp duty on the first £300,000 for homes worth up to £500,000. However, a temporary stamp duty holiday was introduced in July 2020 meaning the threshold currently stands at £500,000. Stamp duty will be payable on any amount over the £500,000 threshold. Meanwhile, some lenders have offers where they will either help with stamp duty or pay the total amount and some developers offer deals to pay the stamp duty when you purchase one of their homes.
A summary of the stamp duty rates prior to the introduction of the temporary stamp duty holiday is below:
|Property Value||% payable (Residential)|
|Over £125,000 - £250,000||2%|
|Over £250,000 - £925,000||5%|
|Over £925,000 - £1,500,000||10%|
Find the best mortgage product for you
There isn't a one-size-fits-all solution to choosing the right mortgage. The right product will depend on your circumstances, on the interest rates that are available from the lenders at the time you are buying and your own approach to your finances. A good starting point is our article "Beginners guide to mortgages"
To get an understanding of the two main types of mortgages, it is also worth reading "What is a fixed rate mortgage:Everything you need to know" and "What is a tracker mortgage and is it right for you?"
The process of finding a suitable mortgage can be made easier by using an independent, whole-of-market mortgage broker. They will have an encyclopaedic knowledge of the products available - and can also often provide access to exclusive products that aren't available to the general public - while also assessing which mortgage would be right for you. If you don't have a mortgage broker already you may want to consider online broker Habito*, which provides a good level of service and has access to over 90 lenders.
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