Getting a mortgage – 7 things First Time Buyers should know
Can you afford your mortgage repayments?
Your first step is to find out whether your income provides you with enough money to pay back a mortgage. If you have a regular income, it needs to be big enough to leave you the spare cash you need to pay the mortgage every month. If you have one or more large loans already, lenders might not feel happy about lending you more and potentially leaving you in an impossible position.
Your car finance or credit card or personal loan repayments might be too large, leaving you without enough money to set aside each month to pay off a home loan. You might have a bad credit record or CCJs – County Court Judgements – against your name. All this will affect your mortgage application and impact the interest rates the lender will want to charge.
You can fully expect the mortgage lender to ask a lot of questions and make plenty of checks. They’ll not only make sure you can genuinely afford to pay the loan back, but they’ll also ‘stress test’ your ability to pay if interest rates go up or your circumstances change. And they’ll want to see actual evidence of your outgoings as well as proof of income. Once you’ve explored your finances and confirmed you’ll have enough money, it’s time to think about the deposit you’ll need to pay.
How much deposit do you need to save?
Once upon a time, 100% mortgages were common. Now they’re as rare as hen’s teeth. It’s more than likely you’ll need to pay a deposit on your first home, and that means saving anything between 5% and 20% of the purchase price. If the home you want costs £150,000 you will need at least £7,500 to hit the 5% deposit mark. The more you save, the better and cheaper choice of mortgages you’ll have.
What about the other costs involved in buying a home?
As well as a mortgage, you’ll need to fork out money to pay for a collection of other sale-related things. Surveys, solicitors, removals, home insurance, the cost of decorating and furnishing your new place, plus any fees associated with arranging the mortgage and valuation. And there’s Stamp Duty, a special tax the government levies on the property market. In Scotland it’s called Land and Buildings Transaction Tax, and in Wales it’s called Land Transaction Tax. But whatever it’s called, as long as your property is liable for Stamp Duty you will have to pay it. Bear in mind first time buyers don’t pay Stamp Duty on the first £300,000 of a home worth up to half a million pounds.
Know the difference between freehold and leasehold
If you want to buy a house, it’ll probably be freehold. A flat, however, will probably by leasehold, unless someone in the building has already bought the freehold for the residents to share. The difference is simple – a freehold lease includes ownership of the land under and around the property, a leasehold doesn’t. Plus most leaseholds come with the burden of paying ground rent or yearly service charges so make sure you check these both with the estate agent and via your solicitor.