Once confidence returns to the market, as it surely will, the present pause in transactions and fall in house prices will reverse – if you can afford it, it is a great time to buy your first home, says Michelle Niziol of IMS Independent Mortgage Solutions
It is a well-worn cliché that buying your house is by far the biggest investment you will ever take, but one that is nonetheless true. There are also pundits aplenty who prophesy booms and bust, good times and bad, risks and rewards.
Generally speaking, unless there is an obvious aberration looming in the housing market, or an actual abnormality occurring in the economy, then the timing of that first home purchase is largely a matter of personal circumstance and choice.
Is this post-Brexit period such a peculiar time? We, unlike many other self-accredited experts, do not think so. Undoubtedly, there is huge uncertainty, the level of housing transactions is down and lenders are cautious. But it is scarcely surprising that those involved in the housing market are pausing to take stock after the Brexit vote.
It is possible to argue, however, that if personal circumstances are favourable and the time is right to settle, then it is a good time to start on the housing ladder and find a first home. Interest rates are low, lenders are being encouraged to help first-time buyers and government policy promises support.
It is timely, therefore, to remind prospective purchasers of the primary principles of buying a house for the first time.
1 At the outset, make sure in your own mind that buying is the correct decision for you right now, and that you would not be better off renting.
Weigh the pros and cons carefully. It is not always that straightforward, especially if mobility is a factor in your employment.
2 Determine, realistically, how much you can afford. Four, and at very most five, times income is the maximum multiple. Securing a sufficient deposit is, of course, the main goal. The very minimum required by lenders is likely to be 5%, and even this amount constraints choice. The most likely amount needed to give a reasonable range of options is 10%, for the more you can put down the wider the access and the cheaper the repayment.
3 Do not forget that there are other costs of house purchase. Stamp duty, for example, is zero up to £125,000, the next £125,000 (the portion from £125,001 to £250,000) is 2%, the next £675,000 (the portion from £250,001 to £925,000) is 5% and even higher beyond that. There are also mortgage arrangement fees to be paid, (typically around £1,000) as well as surveyor fees, legal costs and moving expenses.
4 Lenders, and your own advisers, will need a good overview of your personal profile including such matters as employment, income, credit history and address record. Lenders tend not to like more than three addresses over the past three years, if you are employed on a fixed-term contract or in a probationary period, lending is restricted.
Credit history is particularly important, so that any evidence of missed and late payments makes borrowing more difficult, especially at higher loan-to-value levels.
Lenders need to see that applicants can manage their finances over extended periods of time. Six months previous bank statements plus a clean history of at least 12 months is normally needed, to include credit card repayments, mobile phone contracts, authorised overdraft compliance and no ‘bounced’ payments elsewhere. If you are self-employed, then the last three years of accounts will usually need to be submitted.
5 If you are buying with someone else then you will both need good credit scores, enough of a deposit and sufficient earnings to secure a mortgage. You will also need to have agreed how the ownership is appointed between you and what happens if either party wants to sell at a future time.
The usual choice is either an ownership by way of tenants in common or as ‘joint tenants’. With the former, the property can be split in an agreed percentage, and your share passed to a nominated beneficiary upon death. With the latter, the share owned by you passes to the other party if you die.
6 For a first-time buyer, there is not normally a choice between ‘interest-only’ and ‘repayment’ mortgages. Few interest-only deals are now available, and rarely offered to new entrants. In any event, a repayment mortgage, paying- off both capital and interest each month is preferable.
7 More important is the choice between ‘fixed’ or ‘variable’ rate mortgage. Frequently, first-time buyers opt for a fixed rate mortgage preferring the certainty of payments remaining the same through the term of the loan (most usually two to five years).
If, however, you are happy that payments can change, a variable mortgage might be attractive. Probably the most popular form of variable mortgage is the ‘tracker’ mortgage, which, as the name implies, the rate of interest tracks the Bank of England base rate, plus a set percentage above.
Variations exist with ‘capped rates’ that cannot go above a given level, and ‘discounted deals’ offering the borrower a reduction below the standard rate for a set term.
There is also the ‘offset’ mortgage whereby you, or your family or friends, can set off interest on savings held with the same lender against mortgage repayments. But its swings and roundabouts with the relative rates, so good advice is essential.
8 If buying a house for the first time outright remains beyond your financial means it might be possible to avail yourself of a ‘shared ownership’ arrangement. Shared ownership schemes are offered by housing associations and are available to prospective first-time buyers, or previous homeowners now no longer able to afford to purchase outright or who are already renting from a council or housing association. Household income must be less than £60,000 a year.
Under such arrangements you part-buy a share in your property (typically buying between 25% and 75%) on a shared ownership mortgage, and part-rent the remaining share from the housing association on an affordable basis.
Using a system called ‘staircasing’ you can then keep buying additional shares of the rented part of the property from the housing association until you own the lot.
The main downside, of course, is disposal if you wish to sell. It may make it difficult if you do not own the entire home, and in any event, the housing association invariably has first refusal to purchase for 21 years after initial acquisition. But it is a way of getting on the ladder.
9 In respect of the length of mortgage, most terms used to be for 25 years, but over recent years longer repayment periods for first-time buyers are more popular, though they do cost more in the long run.
10 For anyone struggling to put together a deposit for their first home, or even move up the property ladder with limited equity, there is now the Help to Buy scheme offered by government. Here, there are two main options – Equity Loan or Mortgage Guarantee. The former, the Equity Loan, is limited to new-build homes under £600,000 and available until 2020. The purchaser has only to raise 5% of the value as a deposit and the government provides a further 20% opening-up access to a wider range of competitive mortgage deals with participating lenders.
The government’s 20% contribution, moreover, is interest free for the first five years and then interest payments rise at a controlled and discounted rate thereafter. Special provisions also apply for repayment of the equity loan at any time without penalty.
With the latter option, the Mortgage Guarantee, the buyer again provides a 5% deposit and the government gives a guarantee to the mortgage lender for up to an additional 15%. Unlike the Equity Loan, the Mortgage Guarantee applies to existing properties as well as new build, but currently the scheme is due to finish at the end of this year. It is possible, of course, that the government might extend it. Help to Buy cannot be used to purchase a second home or for renting out, and the same affordability criteria and credit scores will be required.
At IMS there are a number of questions frequently asked by aspiring first-time buyers in addition to the above information. Here are a few of the most common that we get asked.
What should we do first?
Time in reconnaissance is never wasted. Research the area, (transport, schools, amenities, crime, planning applications etc); look at a reasonably wide range of properties for comparison; scrutinise the structural condition so far as you can, (cracks, plumbing, damp, roof tillers, gutters etc); check the parking conditions, for yourself and others; closely question the estate agent on details; and most especially, have a drink in the local pub, seeking views and advice from the clientele.
What type of rate is best?
This rather depends on your appetite for risk and what you are looking to do. If you have the ability to overpay the mortgage, or save through the term, then an offset mortgage is a good option as it means you can repay earlier.
As already stated, first-time buyers normally opt for fixed rate mortgages as they offer more certainty and stability. The regularity of rate review is conjectural. Five to seven-year fixed rates are more expensive than two to three-year fixes, but it all depends on the view you take of when and in which direction they are going to move. It is likely to be upwards, but it seems to be getting harder to gauge.
Documentation required
Usually, mortgage lenders and brokers will need:
- Identification, by way of passport or driving licence.
- Domicile, in the form of a council tax statement or utility bill.
- Income, your last three to six months payslips or two to three years accounts if you are self-employed. Perhaps your latest P60.
- Credit, at least three to six months previous bank statements.
How long will it take?
It is normally quite a quick process, and if all the necessary documentation is available, we can usually obtain a mortgage offer within two to three weeks for a client.
If the house falls through?
If a particular house purchase fails, then we can usually manage to move the mortgage offer on to a new property.
Is this the time to buy?
Whist we undoubtedly face challenging times over the next few years we, at IMS, believe that once confidence returns to the market, as it surely will, the present pause in transactions and fall in house prices will reverse. There will then be a release of pent-up demand and an uplift in residential property values. If you can afford it, therefore, it is a great time to buy your first home!
Michelle Niziol is the founder & managing director of Independent Mortgage Solutions (IMS) based in Bicester. She has been an independent mortgage broker for 11 years in and around Oxfordshire and Buckinghamshire.
