First flat

Buying a house is exciting! But it’s stressful too and can feel like a pipedream. Here’s what to expect, how to maximise available help and the choices you’ll need to make

The Basics

1. Figuring Out What You Can Afford

See an adviser or use a tool like the Money Adviser Service’s mortgage affordability calculator to get a sense of what you can borrow. As a general rule of thumb, individuals earning £30k a year or more can typically borrow up to 4.5 x their salary. Couples can borrow a multiple of their combined income – though this is often slightly lower than the 4.5 x figure.

Add in any savings you have for a deposit, and bingo – you have your overall budget. You should then get a mortgage in principle in place, as you’ll need to prove to estate agents and sellers that you’re a good bet for the money you’re saying you can pay.

Do remember that interest rates are at near historic lows. It's worth thinking about repayments of your mortgage if rates went up by a few %. You will have a choice of a fixed rate or a variable rate mortgage. More on this in the Mortgage 101 section.

The other thing to bear in mind is - if you take out an interest-only mortgage - how will you pay back the big chunky loan at the end of the term? Repayment mortgages avoid trouble down the track but are more expensive to service today.

2. Finding The Perfect Pad

Make sure you know what’s important to you. Do you want rolling hills or a hip and happening high street? If you must be in THE perfect (and therefore probably expensive) spot, are you ok with having only 1 bedroom? Or is having 3 beds in a less great place ok? Is your commute to work bearable? If you have (or are considering) kids, are the local schools well rated by Ofsted? It may seem like a long way off, but it’s worth bearing in mind…

How long has the property been on the market? If it's been hanging around for a while there is usually a reason. There's no such thing as a free lunch.....Find out why.

3. Starting The Ball Rolling

You need to know what you can afford. There is no harm in approaching an independent broker for some quotes on current mortgage deals. Don't just go to your bank who may well have rubbish deals. Get a helicopter view of the market.

A broker will take your details, ask you some core info such as whether you want to pay off interest only, or both interest and the loan, and then offer you some deals. Don't be afraid to ask them how they are paid - it is probably commission from the mortgage firms which is OK but better to have clear /out in the open.

Remember deals change and rates move so quotes will usually only be valid for a short time - but no harm in getting a sense check on your Maths!

4. Offer - Exchange - Completion

The actual buying process is invariably a stressful one. It has a number of steps and it takes MONTHS. (Seriously. Two months is as quick as it gets.) By the time your mortgage company has finished with you, you will feel like a victim of slow water torture. They will want to know what colour pants you wore last Thursday. And ask for a level of detail which makes you want to scream. Be prepared!

Having an offer accepted is just the start. You then have to swing various practicalities into place – such as getting a survey done (NOT something you should scrimp on), getting lawyers in place and getting an ACTUAL mortgage offer in place. Be aware that the deal you have on your mortgage in principle may or may not still be available, which can be a nasty shock. Surveys can also throw up serious work to be done which can be used then to negotiate the agreed price. But be careful with this - everyone has their breaking point and there are limits to how much we can take the mickey before people walk away and refuse to engage any more. Do you want the flat? And what is your final price? Know your limits.

Up until exchange, either one of the parties can pull out without any serious money being lost (other than any fees paid to surveyors or for lawyers for local searches, etc). You’re only really ‘safe’ when you get to exchange – which is when the buyer and seller swap signed contracts and the deal becomes legally binding. At this point, you’ll also have to pay a deposit – normally 10% of the property – which you will lose if you then decide to pull out of the purchase.

The final stage is completion. This is the point where you get the keys and the place is all yours! Completion often happens on the same day as exchange. But it can be many days, weeks or months later, depending on circumstances. This is something for you to negotiate with the vendor.

5. Keep Your Cool

There's no shame in renting. That is way better than stretching your finances to breaking point and living in a world of stress.

And also keep calm throughout the process. There is seldom just one 'perfect' flat. You may lose one, get gazumped and get caught in the annoying property dance. It's awful at the time. But there is always another pile of bricks around the corner to make into your home.

Saving Up

Saving up for a house is one of the key reasons we Brits save in the first place. There are a few handouts available to us which are well worth investigating. A core one to consider if you are under 40 is the Lifetime ISA.

Designed specifically to help those putting money away for a first home (or retirement), this is a tax-free way to save – with an appealing extra. The Government will give you a 25% top-up on everything you pay in. It comes with a fairly hardcore health warning though. Change your mind, decide not to buy a flat, and you will pay a hefty withdrawal penalty to get your money back.

1. The Vital Statistics

  • You must be 18-39 to open one (and can pay in till you’re 50)

  • You can save up to £4,000 a year, with an extra £1,000 free from the Government

  • You can put your money into cash or stocks and shares (which is a good option if you’re saving horizon is 5+ years)

Unless it's for a first home or retirement, withdrawals have a 25% penalty, equivalent to a loss of just over 6%.

Imagine you saved £1,000 by April 2019 and so got a £250 bonus due in May. You'd have £1,250 total (ignoring interest for ease). If you withdrew it in June, and closed the account, the 25% penalty would be £312.50. So you'd get £937.50 back.

Withdrawing for reasons other than buying a house, retirement or death(!) loses you 6.25% of what you contributed.

2. The Fine Print

  • It must be for a first home or retirement

  • You get spanked with withdrawal charges if you take the money out for any other reason

You can save up to £4,000 a year in a LISA as a lump sum or by putting in cash when you have it spare. The Government will then add a 25% bonus on top. So if you save £1,000, you'll have £1,250. If you save the full £4,000, you'll have £5,000.

And that's before interest or growth.

  • The bonus is paid every year until you hit age 50.

  • Once in your account the bonus counts as money, so you'll get interest on it too (or investment growth/loss).

  • You only get the bonus on contributions, not interest or stocks and shares growth/loss.

  • The max bonus is £33,000 if you open it at 18, and max it out until you hit 50 (unless you're born on 6 April, when the max is £32,000).

3. The Providers

Currently there’s not much choice. Stocks and Shares LISAs offer the potential for higher growth but they come with volatility. If you want to buy over the next 3 years stick with cash. If it's about 3-4 years you could think about shares but it's a bit risky. Over 5 years and it is worth considering the shares type of LISA.

Cash

  • MoneyBox

  • Newcastle Building Society

  • Nottingham Building Society

  • Paragon Bank

  • Skipton Building Society

Stocks & Shares (check out our Best Buys (https://www.boringmoney.co.uk/best-buys/all-providers/) tables) 

  • AJ Bell

  • EQi

  • Foresters Friendly Society

  • Hargreaves Lansdown

  • Metfriendly

  • MoneyBox

  • Nutmeg

  • OneFamily

  • The Share Centre

  • Transact

  • Unity Mutual

4. Other Stuff

If you’re wondering whether you should plump for a LISA or a Help to Buy ISA, check out our LISA v Help to Buy guide (https://www.boringmoney.co.uk/media/2737/guide-to-lifetime-isa_updated.pdf).

  • To get the bonus you'll just need to buy a property that costs £450,000 or less with any residential mortgage (not buy to let). That includes Right to Buy, shared ownership, self-builds, and Help to Buy loans. The LISA is intended to help you buy your first home, so you're not supposed to rent it out.

  • If you're planning to buy a home together, it's important to understand that there's no such thing as a joint LISA: you and your partner/spouse need to open separate ones. Which you can do if both of you are first-timers.

  • The maximum property price is £450,000.

  • The account needs to have been opened for 12 months before you can use it.

  • Help to Buys are a better bet for anyone uncertain about future plans.

  • If you are certain then a Lifetime ISA gives you more potential. Think about a stocks and shares version if your time frame is 5 years+.

Mortgage 101

1. How Much Can I afford

Mortgages are primarily calculated on your income. Lenders use sophisticated affordability tools, but as already mentioned, a general rule of thumb is that you can borrow up to x4.5 your salary. It’s not just about a salary multiple, though. Lenders will (and you should) look at affordability as well. I.e. what are your monthly outgoings? Can you afford the monthly repayments? What if interest rates went up by 1% - could you still afford repayments then? All of these things will define what someone is willing to lend you – and therefore the max budget you can spend on that perfect pad.

2. Types Of Mortgage - Part 1

  • Repayment mortgage – quite simply, this means your monthly repayments are actually paying off your loan. So at the end of the term, you own your place outright and owe nothing more.

  • Interest-only – here, your monthly payments are only paying off the interest on your loan. You will still owe the amount you actually borrowed at the end of it all, and will need to pay it off with money from somewhere else, or the money you make when you sell the property.

There are pros and cons to each. If you can afford it, it normally makes most sense to opt for a repayment mortgage. That way you’re actually paying off the loan, and will consequently pay less interest on it in the long term. It also means you fully own your home at the end.

However, the monthly repayments on an interest-only mortgage are much lower. So this can help with affordability.

Unless you have a compelling reason, repayment is the way forward. It's also the one you're most likely to get as some lenders just won't offer interest-only deals. Those that do will want to see a credible repayment plan and might limit how much you can borrow.

3. Types Of Mortgage - Part 2

  • Fixed-rate – The benefit of this is that you know exactly what interest rate you’re paying – and therefore exactly what your monthly payments will be – for as long the deal lasts. Most Fixed-rate deals are for a 2-5 year period, after which you fall onto the lender’s standard variable rate (SVR).

  • Standard variable rate (SVR) – This is a lender’s default rate. It doesn’t have to be pegged to the Bank of England base rate, and can be increased at any time by the provider. As a general rule SVRs aren’t the best rates on the market, so you should shop around when your initial 2 or 5 year deal expires.

  • Discount – Here, you get a discount on the lender’s SVR. For example, if the lender’s SVR is 4.5% and your mortgage has a 1.5% discount, you’ll pay 3%. Deals are sometimes ‘stepped’ – meaning you might get a 1.5% discount for year one, but only a 1% discount for year two.

  • Tracker – The interest rate on this mortgage will track the Bank of England base rate. So if your lender is offering +2% above the Bank’s base rate, it would currently mean you’re paying 2.5% interest. If the base rate goes up from the current 0.5% to 0.75%, your rate will also rise, to 2.75%. (And, of course, if the base rate fell to 0.25% again, your rate would also fall to 2.25%.

Like all mortgage deals, fixed rates have pros and cons. Sorry but this decision is up to you.

4. Length Of Mortgage

Most mortgages are a 25 year term. Though you can get one that lasts between six months and 40 years.

  • Pros of a shorter term – you’ll pay off the loan faster and will pay less interest on it.

  • Pros of a longer term – monthly payments will be lower. But be aware that the longer you have the mortgage, the more interest builds. So you’ll pay more over the life of the loan.

5. Fees

Don’t forget there are usually ‘set-up’ fees on a new mortgage. Arrangement fees, valuation fees, survey fees, gawd-knows-what fees....And often there are exit penalties if you want to leave it before any agreed timeframe.

That being said, these exit fees can still be worth it if you find you’re on a really poor deal. And it’s definitely important to remember to shop around when your deal runs out – as the standard variable rate you’ll be switched onto will almost certainly not be the best deal you can find.

6. Mind Boggle!

This is mind boggling stuff and actually having an expert talk you through it can be super helpful. There's no harm in getting some quotes from a mortgage broker. There are lots around. One of the Boring Money team used L&C (London & Country) recently and had positive things to report back.

Additional Costs

Don't forget - your house will cost a chunk more than it actually costs, so to speak. Here are five principal costs to consider.

1. Deposit

Unlike in the pre-financial crash days, you’ll need a deposit before a lender will give you a mortgage. This is normally at least 5% of the property you’re looking to buy. Though the best mortgage deals are given to those with the largest deposits (40% or more) – so the more you can scrape together, the better.

2. Stamp Duty

Urgh. More tax.

  • The good news here is that if you’re a first time buyer and your place costs less than £300k, you won’t have to pay a penny in stamp duty. Yay!

  • The bad news – especially for those living expensive places like London and the South East – is that you’ll have to pay 5% on anything over £300k, up to a value of £500k. Whether you're a first-timer or not.

  • The really bad news (and again, we’re looking at you, Londoners) is that if your place costs over £500k, you’re not entitled to any discount on stamp duty at all. So you’ll pay nothing on the first £125k, 2% on the chunk up to £250k, then 5% on the chunk up to £925k.

So if you want to buy a £600k flat (sadly a realistic possibility for first time buyers in the most pricey parts of the country), that’s a whopping £20k you need to factor in for stamp duty. Gulp.

3. Surveyor Fees

NOT something to scrimp on. There are several types of survey, with varying degrees of detail. Take advice on the level you’ll need (a simple one if it’s a newbuild vs a more thorough one if you’re in a particularly old or complex building). This should uncover whether the house has anything from rotting foundations to planning permission for a new nuclear power station opposite your front door. Painful as it might be – sometimes a survey might mean you have to walk away. But it’s better to know that now than when you’re having to unexpectedly fork out £30k to stop the roof falling in.

4. Legal Fees

You’ll need a lawyer to push all the paperwork through for you. Their costs generally vary depending on the price of your home but generally fall between £500 - £1,500. There are also Land Registry fees to pay, which is part of the process of officially transferring the property into your name. Costs vary depending on the value of your place, but assume from £200 - £500.

5. Moving (And Moving In) Costs

Finally, don’t forget the cost of removal vans. Or repainting that horrible bathroom. Or replacing the dodgy cooker. Everyone’s dead broke when they move into a new pad. But if you can, try to save yourself a small fighting fund for the inevitable expenditure that will fly out the door almost as quickly as you walked in.