Applying for a mortgage as a first-time buyer can be daunting, particularly when coupled with a fast-moving property market. We take a look at how to successfully deal with the mortgage aspect of taking on your first home.
It is always recommended that you start looking at mortgage options before you find somewhere to buy. This will help you assess how much you want to borrow before you begin thinking about viewing properties.
It will also prevent you from ending up trying to rush through a mortgage application because you have found your dream home.
Mortgage in principle
You can ask your chosen lender to provide a mortgage decision in principle. This is the offer to loan you money without a specific property being named. Once you have found somewhere, you can let the lender have this detail and the time they take to issue your formal mortgage offer will be substantially less than if you were to start the whole application process at this point.
You can use an online affordability calculator to work out how much you can afford to borrow. Your credit rating will be important to the lender and it is crucial not to do anything to jeopardise this, such as cancelling a credit card. If you have had a card for a number of years and it has been paid off, this can be seen as a positive point by the lender.
If you need help deciding what type of mortgage is right for you, a mortgage adviser will be able to help. Check whether they are independent and whether they charge a fee for their service.
You can also ask your bank or building society what they would be prepared to offer you as their client.
Once you have decided which lender you would like to use, you will need to fill in their application form and provide the information they ask for. It is recommended that you do not make too many applications as lenders will be able to see that several credit checks have been requested and this could deter them from offering you a loan.
Deposit
The amount you have been able to save for a deposit can have an effect on the loan you are able to secure. If you have a larger deposit, you may be able to find better repayment terms. You should ensure that your deposit is readily accessible and that you can provide evidence of it if necessary.
The deposit is a sign of good faith that the buyer is committed to the purchase.
The seller will be entitled to retain the deposit if the buyer were to default after an exchange of contracts. Usually, a 10% deposit of the agreed purchase price will be required from the buyer upon exchange.
Sometimes a seller may be willing to accept a less than 10% deposit, however, under the Law Society Standard Conditions of Sale, if the buyer were to forfeit the deposit following exchange, the seller will be entitled to recover the full 10% deposit under the terms of the Contract.
Government help
You may be eligible for a government Help to Buy: Equity Loan. This is available for first-time buyers who have never owned a home before and who are intending to buy a newbuild property sold by a Help to Buy registered homebuilder.
There is a maximum price the property can cost, which varies by region. By way of example, the maximum property purchase price for the North West is £224,400 and for the South East, £437,600. You will be required to pay a minimum of 5% deposit and arrange a repayment mortgage for at least 25% of the purchase price. You can then apply to borrow an equity loan for 5-20% of the property purchase price, or up to 40% in London. Interest is not payable on the loan for the first five years.
Alternatively, the government offers a Lifetime ISA which can be used towards the purchase of your first home. You can open the ISA if you are aged between 18 and 40 and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
You can put in up to £4,000.00 each year until you are 50. You must make your first payment into the ISA before you reach 40 years of age. The Lifetime ISA limit of £4,000.00 counts towards the annual ISA limit which is currently £20,000.00 for the 2022 to 2023 tax year.
The Government Help to Buy Equity Loan Scheme will close to new applications at 6pm on 31st October 2022.
All applicants must meet the eligibility criteria. If you are married, in a civil partnership or cohabiting with your partner, you must make a joint application.
Whilst the equity loan is interest free for the first five years, in the sixth year, the borrower will be charged interest at a rate of 1.75%. This will be applied to the equity loan amount originally borrowed. The annual interest will be spread over the year in monthly payments. The interest rate increases every year in April, by adding the Consumer Price Index (CPI) plus 2%. The interest payments will decrease if the borrower makes a part repayment of the equity loan, as the amount the interest rate is applied will reduce.
The borrower will need to pay a monthly management fee of £1.00 until the equity loan is paid off.
If the borrower re-mortgages or makes an equity loan repayment, administration fees will be charged.
There may also be additional fees for example, legal fees, mortgage arrangement fees and for market valuation reports.
The borrower can repay part or all of the equity loan at any time. Repayments are based on the equity loan percentage and the market value of the property at the time of the repayment. The borrower will need to obtain a market valuation report from a chartered surveyor at the time of the repayment.
The smallest repayment the borrower can make is 10% of the market value of the property.
If the borrower wishes to sell their home, they will need to pay the equity loan percentage of the market value or agreed sale price if it’s higher.
If the borrower does not keep to the terms and conditions of the equity loan, they may be asked to repay the loan in full.
Contact us
If you would like to speak to one of our expert property lawyers, ring us on 01252 733770 or email us at enquires@baker-law.co.uk.