Top 5 Tips for First-Time Homebuyers

The September 2020 House Price Index Data showed that on average a house in the UK costs £244,513. This is roughly a 4.7% increase compared to the same period last year. Despite the pandemic, house prices have maintained a steady growth largely driven by the increasing demand from first-time homebuyers.

On July 8, 2020, the UK government temporarily increased the Stamp Duty Land Tax threshold to £500,000 which means the tax charge on most property purchases is effectively lowered. The reduced rates run until March 31, 2021. This is significant because if you are one of the many homebuyers and you are looking to buy a property, this is one of the best windows to lock in prices.

However, the question is, how do you go about buying your first home? Are there factors to consider and hurdles to expect? Well, let us look at all this and more below.

1. Save For Your Deposit

Conventional mortgages are typically approved to a certain percentage of your home value. In the industry, this is referred to as the Loan-to-Value (LTV). If the lender gives you an LTV of 85%, it means you need to deposit 15% of the value of the home to access the mortgage.

Lifetime Individual Savings Accounts (ISAs) are one of the best ways available to help you save and buy your first home. Assuming you are between 18 and 40, you can maximize your savings by putting in up to £4,000 a year until you attain the age of 50.

Here is the best part of all this, the government will give you a bonus of 25% each year up to a maximum of £1,000 per year that is added to your ISA. Count this as free money from the government. You can invest your Lifetime ISA in stocks, bonds or a mixture of both.

When you reach the age of 50, you won’t be able to pay into your Lifetime ISA account anymore or be entitled to the 25% government bonus. However, your savings will still be earning investment returns or interest.

When buying your first home valued up to £450,000, you can withdraw your Lifetime ISA use the funds to make a downpayment. Homebuyers with sufficient deposits tend to get attractive mortgage terms and lots of offers. It also saves you the hassle of having to look for bad credit loans to prop up your deposit.

2. Improve Your Credit Rating

In the UK, first-time homebuyers account for about 34% of all home purchases. Expectedly, most of them finance their purchases using mortgages. Typically, homebuyers scout for low-deposit mortgages and as well as those with low Annual Percentage Rates (APRs). However, with credit tightening, lenders of conventional mortgages are becoming stricter on who they lend to and their credit score.

Therefore, knowing your credit score and working to improve it will help you access fairly priced mortgage facilities.

The first step is to get hold of your credit report from. The best approach is to get your report from all the three credit reporting agencies (CRAs): Equifax, Experian, and TransUnion. Then, check whether the information they have about you is accurate. If you fall below the ‘Good’ credit score category, you need to seriously work on improving your credit rating.

Some of the ways to improve your credit score include:

  • Making credit payments on time
  • Trying to always keep within your credit limit
  • Avoid taking cash out of your credit card as this may indicate cash flow problems
  • Keeping a healthy bank balance
  • Surprising as sit is, getting on the electoral roll can help boost your credit score
  • Avoid payday loans
  • Check whether your financial history is linked to another person as their defaults can affect your rating

If there are any credit cards you are no longer using, consider shutting them down. Unused credit lines can damage your credit score making it harder and expensive even when looking at getting approved for bad credit loans.

Before you begin shopping for a house, make a list of the features you consider worth having. These are your non-negotiables. They include things such as the location of the home, its square footage, and the amenities it comes with.

You may never get all the features in one home but this will act as your guide when visiting open houses within your area of choice. With your budget set as a guide, look at properties below and above your budget to see the interplay between value, location, and features. Afterward, reevaluate your list in light of what you want and what is out there.

4. Get an Agreement in Principle (AiP)

An AiP or mortgage in principle is your first step to a mortgage. It gives you a quick confirmation on whether you can borrow the amount you need for your property purchase. As long as you don’t make lots of AiP requests, your credit score won’t be affected.

The beauty with AiPs is that they don’t dig into your full credit check. Just tell the financial institution how much you would like to borrow, the size and structure of your income, and your estimated monthly expenditure.

While AiP is not a guarantee that you will be approved for a mortgage, the lender will give you a certificate that helps in affirming your seriousness when negotiating with a seller. For first-time homebuyers, having this certificate gives you a boost, especially in a competitive market. An AiP lasts for 90 days and is renewable thus giving you enough time to do a house search.

5. Evaluate The Mortgage Providers and Terms

There are various mortgage lenders in the UK from mainstream banks such as Barclays, Lloyds Banking Group, and Nationwide Building Society to lenders of bad credit loans. What is important is to get a lender that understands your unique circumstances. In evaluating your mortgage providers, look at the following features.

  • Maximum LTV: How much is the lender willing to finance as a percentage of the home value. If the home value is £300,000, a 70% LTV means you’ll get approved for £210,000. You’ll then be required to raise the rest, 30%, as a downpayment.
  • Initial rate: Discounted mortgages give initial rates of about 1.2 -1.4% for the first two years and thereafter the rate goes back to the standard variable rate.
  • Subsequent rate: This is the standard variable rate you’ll be servicing the mortgage at for the rest of its term. It is usually between 200 and 300 basis points above the initial rate.
  • The annual percentage rate of charge (APRC): When comparing mortgages from different lenders calculating the APRC is critical. It helps to show you the percentage annual cost of a mortgage, factoring in the relevant fees such as application fee, arrangement fee, booking fee, completion fee, product fee, and valuation fees.
  • Monthly payment: Because of the difference between the initial rate and the subsequent rate, you’ll have two sets of monthly payments. The first will be applicable for the initial rate period usually 2 years then the second will run for the remaining duration of the loan. Ensure you find out exactly the size of these payments.
  • Mortage duration: Most mortgages for first-time homebuyers run for more than 25 years. This gives you a break as you spread your monthly payments. The longer the term the smaller the monthly payments.

Conclusion

Buying your first home is an exciting experience but can also be a challenging time when it comes to finances and other considerations. However, as long as you put a good amount of down payment or deposit and secure a mortgage at the best rates, you are off to a good start. While you may qualify for bad credit loans, boosting your credit score rating can give you access to attractive conventional mortgage offers.  Whatever the case, always compare and contrast the home loan facilities offers you get to lock in the best deal!

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan