Although it is becoming harder and harder for first-time buyers – a situation that as I explained in my last blog has become even more pointed during the COVID pandemic – it is still the ultimate aim for many couples.
The stamp duty holiday has offered some encouragement and if, as is being reported, lenders are going to become a little more flexible that could persuade some to take the plunge. And, of course, the continued efforts of the ‘bank of mum and dad’ can’t be overlooked. Many parents have recognised that a little (or a lot of) help with a deposit is probably the most useful gift they’ll ever give their children and are acting accordingly.
So if you’re getting ready to buy your very first home we thought it may be useful to answer some of the questions we’re asked most often by first-time buyers.
Above all else, you need to make sure your finances are in order and that means being able to show you can not only cover the deposit but also the agent’s fees, your legal fees, and all the other costs involved in buying a property.
You will also need to be able to prove that your outgoings will leave more than enough to pay your mortgage each month and that there’s a bit of a buffer in case interest rates or mortgage charges were to rise in the future. Be prepared to be asked for bank statements, information on loans and contracts, and proof of what you spend on your family, leisure activities, travel, and food.
All of these details go into the ‘affordability’ calculations your mortgage lender will perform to assess whether you are a good risk or not so it may be worth using one or two of the free ‘mortgage calculators’ many lenders now offer. This will give you a much more informed idea of what you should be borrowing which will make you look like a more serious prospect in a lender’s eyes.
It is also a good idea to have yourself officially credit checked as this is almost certainly the first step a lender will take before progressing your application.
And, if you are planning on borrowing any money from the ‘bank of mum and dad’ you will need to disclose this to your lender and accept that they may have to ask for further information about the gift.
Although first-time buyers were already exempt from paying stamp duty on properties that cost less than £300,000 the Chancellor has now raised the threshold to £500,000 for all buyers so stamp duty probably won’t be an issue.
The majority of lenders now include a basic survey (really just for valuation purposes) within most of their mortgage products but it could be a good idea – especially if you are looking at an older property – to pay for a more detailed survey in case there are any underlying problems that could require expensive and extensive remedial work. It could be that finding such issues can be used to negotiate a lower price but for first-time buyers, the cost of putting these types of problems right is probably going to make going any further impossible.
However, even though the basic survey may be free, lenders will charge a fee for arranging your mortgage, and for larger purchases this fee could be £1000 or more.
The final cost is going to be your legal fees, the cost of the searches, and other expenses that your lawyer will have to pay in order to complete their part of the purchase.
Firms do charge at different levels but the lowest price isn’t always the best option. You need to bear in mind that the cost covers not only the legal work but also the quality of their work, the quality of service you receive, and their ability to make sure your purchase progresses as quickly as possible.
Generally speaking, you’ll need to put down a 10% deposit. Some lenders will still offer 5% but in the current climate those types of deals are few and far between and industry figures have shown the average deposit is actually closer to 15% as a higher deposit will open up a wider range of mortgage options.
You also need to bear in mind that there’s a difference between your exchange deposit (usually 10%) and your mortgage deposit which is the balance of the purchase price not covered by your mortgage.
There are two types of property, freehold, and leasehold.
With a freehold, you own your property and the land it’s on outright. A leasehold will only give you the right to live in the property for a specific period of time and you will almost certainly have to pay an annual fee (covering the ground rent and/or service charge) to the freeholder.
Generally, flats are usually leasehold while houses tend to be freeholds but it’s worth checking to make sure and if it is leasehold, make sure you find out exactly how long the lease has to run. If you’re worried it’s too short, speak to a lawyer as they’ll be able to explain the situation in context and may be able to find a way to extend or alter the lease.
Usually, you’d make an offer through the seller’s estate agent either by phone or in person at their premises. It is also worth putting your offer in writing by confirming it by email.
Be prepared for the agent to ask a few questions. As first-time buyers, they may ask how quickly you can move and whether or not you have the deposit or your mortgage offer in place. These may sound like sales techniques (and probably are!) but your ability to progress the sale quickly forward could also persuade the seller to accept your offer.
At this stage your offer isn’t legally binding so you can simply walk away. However, if you want to you could come back with either a higher offer or reasons why you made the initial offer you did.
We will be back very soon with some more of the questions we’re asked by first-time buyers but, in the meantime, if you are in the process of finding or buying a new home and have any questions of your own, please email me at Jeremy.Tulloch@collinshoy.com or call me on 0208 515 6600.