Buying your first home can seem like a real minefield with so many financial and historical hurdles in your way that you may not even be aware of. From getting the mortgage, through finding the house, to finding the money for all the additional costs, it can all mount up into a very daunting and confusing process.
Laura Lamb of the Mortgage Company Oxfordshire Ltd. navigates first time buyers through the associated costs of buying a home, potential credit obstacles and how to tackle them.
Borrowing enough to cover all your costs:
Apart from the cost of the property itself there are lots of other costs you'll need to pay for before completion.
- When you or your broker are looking at the most suitable mortgage solution for you there may be an arrangement fee that can vary from £0- £2,000. It is worth doing the maths to decide if you are better off taking a mortgage with a higher interest rate but no fee, or a lower rate with a fee, a good broker should do this for you and confirm their recommendation. You can usually add the arrangement fee to the mortgage rather than pay it upfront but ultimately if you add it to the mortgage it will cost you more in the long run, as you will be paying the interest on it over the full term of the mortgage unless you make steps to repay it via mortgage overpayments.
- Broker fees – some brokers charge fees but not all do, it is worth looking for a broker who doesn't charge fees or offsets commission against their fee rather than one who charges flat fees to everyone. Some estate agent brokers charge one off "lifetime" fees which look like a good idea but actually can work out as a much more expensive option than going for a broker who doesn't charge any fees at all or charges smaller application/ upfront fees.
- Valuation and survey costs, these fees can vary significantly depending on the value and age of the property. Lots of lenders will pay for a valuation for first time buyers and then you would need to seek advice on whether a survey is needed. The RICS website has some useful information on the different types of surveys. You can find more info at https://moneyadviceservice.org.uk/en/articles/a-guide-to-homebuyer-surveys-and-costs As per the RCIS website a homebuyers report is around £400 on average and a building survey is upwards of £600
- Solicitors or legal Fees. You will require a conveyancing solicitor or a licenced conveyancer to complete the legal work for you when you buy a property. Legal fees vary depending on the value of the property but an average fee might be around £750-1000 . Different firms charge different rates, but it is worth asking around and trying to find a solicitor recommended by a friend or colleague as the efficiency of the service they provide will have a major impact on the timings and smooth running of your house purchase. Your solicitor will carry out all the necessary searches on the property you are buying to check there are no issues you need to be aware of, like the planned build of a sewerage works next door. Searches would cost an additional £200-£500. It's worth checking with your solicitor which fees attract VAT.
- Stamp duty land tax. In England, Wales or Northern Ireland changed recently. It used to be a flat level of stamp duty depending on the purchase price and this has now changed to the following for residential properties:
0-125k – 0%
125k – 250k – 2%
250k – 925k - 5%
925k -1.5 million 10%
For more information you could visit https://www.gov.uk/stamp-duty-land-tax/overview
Each part of your purchase is calculated at a different rate so If you purchase a property at the £140k the stamp duty is just £300 because you don't pay anything on the first 125k. If you buy at £250k then the first 125k is 0 and the next 125k is £2500 making the total stamp duty charge £2500.
The rules are different in Scotland. Your solicitor will be able to advise you and they pay this fee on your behalf upon completion.
- Moving Costs. Depending on the amount you have to move you should be expecting to pay around £50 and £100 per hour for 2 men and a van from a reputable professional removal company. But costings depend on where you are and what you need. However if you have furniture to move, especially large items like a piano, these costs are worth investigating and budgeting for
- Your deposit. This is may be the most obvious cost to buying a house, but should not be omitted from this list. The bigger your deposit the lower your interest rate will be and you are more likely to be offered a mortgage (but it is still not a guaranteed). Help to Buy and other affordable housing schemes only require a 5% deposit.
- Insurances. When you exchange (or conclusion of missive in Scotland), the property becomes your responsibility and your mortgage company is going to require you to have buildings insurance at the full reinstatement value of your property. If you have a family you might also consider taking out life insurance that will ideally be enough to cover repayment of the mortgage or help your family in the event of your death financially. Finally there is mortgage protection payment insurance (MPPI) that will cover your monthly mortgage payments should you have an accident, lose your job or become critically ill. Apart from buildings insurance the other two are optional, but worth considering to protect your home as your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
- Ongoing costs. If you have always lived at home or have never been responsible for paying the bills you need to consider the ongoing costs of your new property. Council Tax, utilities, telephone landlines, TV packages and broadband. All these costs add up and are mostly unavoidable. It's worth completing a detailed budget planner with costs and expected expenditure.
Sorting your credit score
If you have an impaired credit history or no credit history you are less likely to be approved for a mortgage as lenders are looking for proof of good money management. No credit history or missed credit card payments will give lenders the impression you struggle to manage your finances. Get your credit score from a reputable agency before going to a broker or applying for a mortgage so you know what you're dealing with.
If you have a low credit score there are several things you can do immediately.
- Get on the electoral register. Register to vote online or by post - if you are not on the electoral register it is harder to get credit.
- Don't apply for any more credit until you have sorted any problems with your credit score.
- Cancel any credit cards you're not using, large available balances may concern a lender as you could suddenly go on a spending spree!.
The above is only an overview and for a comprehensive guide to improving your credit score please refer to the webpage "how to improve your credit score" available via the money advice service.
In the longer term
- Get a fixed landline as well as a mobile
- Stay at the same address for a long period of time and with the same bank and if you do move make sure you always update your address history.
- Build up an employment history –some lenders will give you a mortgage on the first day in your new job but all lenders will look to see that you can hold down a job and that you have a history of consistent employment.
- Ensure all debts are registered to the correct name and address. Make sure there are no mistakes on your file, such as other people's debts, if it was joint finance and you are no longer with that person inform the debt agency
- Demonstrate you are a responsible borrower by making a small purchase on a credit card and paying it back every month for at least six months. Make sure you pay it back in full so you are not charged interest.
- Space out any credit applications, including mobile phone contracts, otherwise lenders might see this as desperation.
- Make all agreed repayments on time by setting up direct debits. Arrange smaller repayments if you need to.
Dealing with rejection
If you are turned down for a mortgage when you apply for an agreement in principle it will most likely be down to one of two reasons, affordability (including low deposit) or credit history. It's worth remembering that all banks and building societies have different policies – being turned down by your bank may have nothing to do with you personally and may just be down to their lending policy. The property itself is also subject to assessment by the lender to ascertain the suitability for the mortgage advance. If you get turned down by your bank always seek independent advice before giving up. How to make yourself more attractive to a lender...
Affordability - Saving is key. Start saving to prove you have surplus income and would be able to afford your mortgage payments. If you can reduce your spending and start saving monthly this will help you enormously. If you take home £1500 a month net and pay £100 to your parents, it would be worthwhile saving a regular amount of around £800-900 to show that you could easily afford a mortgage and bills. If you're renting then we would still recommend trying to save but if you earn £1500 a month a pay rent at £700 and you pay all other living costs then a lender can easily see what you have spare each month and if the mortgage is around £700 a month it backs up the affordability. Subject to lending criteria and status.
Credit score – make changes in accordance to the information above to improve your credit history.
While making these changes will not guarantee acceptance from a lender, it may improve your chances. Using a mortgage broker who can approach lenders directly on your behalf will also help you, especially if you have applied for a mortgage directly and been turned down.
It can be a minefield, but if you know what you need to budget for and what could put a stop to your plans, you are far more likely to be successful.
The information provided by Laura is aimed at people in England, Wales and Northern Ireland.