Simple steps for first-time buyers

It’s easy to make mistakes when buying your first home, so What Mortgage has some tips to smooth your journey on the road to homeownership

Buying a home for the first time is a daunting experience. The house price boom faded away toward the end of 2004 but over 2005 house price growth has steadily continued and is still expected to reach 3 or 4 per cent this year.

In the UK, the average first-time buyer spent £128,842 in total on his or her first home, or an average of £211,345 if they bought in London, says Nationwide Building Society.

Widespread first-time buyer (FTB) hopes that prices would plummet, bringing prices down to more affordable levels, have therefore faded away, but affordability is just one of many factors for first-time buyers to consider, and What Mortgage offers a few more to think about.

1. Deposit

Although, despite government warnings UK citizens are failing to save, buying a first home has clearly focused the minds of first-time buyers, who are scrimping and saving in a way that puts the rest of the UK to shame. According to Abbey, nearly half the 1,000 buyers-in-waiting asked said they planned to save a deposit of more than £13,000 before buying. Only 8 per cent of respondents said they had no plans to save a deposit.

Abbey spokesman Gary Hockley-Morley says: “Saving the deposit required for a first home is one of the biggest hurdles faced by first-time buyers in today’s market. Even with a 95 per cent mortgage, the deposit required on an average first-time buyer property is around £6,400.” The hard fact is that the more you save, the better and cheaper your mortgage choices are.

2. No deposit

Research has shown many graduate first-time buyers still rely heavily on the ‘Bank of Mum and Dad’. A Scottish Widows study revealed 39 per cent of university graduates were either given their deposit or borrowed it from family or friends. For would-be homeowners without this sort of luck, guarantor mortgages may well be the next best option – this is where a lender offers a mortgage but only if another family member agrees to take full legal responsibility for repayments if problems arise.

So what about borrowing the money for a deposit? Not a good idea, says Peter Donovan, spokesman for Mayfair-based financial adviser Bestinvest. “Lenders don’t like people taking out unsecured loans for their deposit,” he says. “A substantial loan brings down the amount of mortgage you can afford to borrow, and if you try to get an unsecured loan without telling the mortgage lender, you are deliberately misleading your lender,” says Donovan.

3. 100 per cent mortgages

Don’t despair if you haven’t got a deposit, or only enough cash to cover the mortgage fees.

Several banks and building societies will lend you the full property value, but because lenders consider you a higher risk, the interest rates are less competitive. Also, be aware some lenders will charge you a ‘higher lending charge’ on top of that, so it really pays to put down even a small deposit if you can.

Leeds Building Society is offering a 100 per cent mortgage at 6.5 per cent, although the loan offers 1 per cent cashback, has no higher lending charges and, unusually, no early redemption penalty, although the cash back has to be repaid if you remortgage before three years are up.

Coventry Building Society’s MorEgage offers first-time buyers a combined mortgage and secured loan with no higher lending charge. Coventry lends up to 125 per cent and has just launched a three-year fixed rate at 5.50 per cent with the option to overpay 5 per cent per annum and no valuation charge.

Abbey has also just launched a range tailored for first-time buyers, including a two-year tracker rate at 4.74 per cent and a five-year fixed rate at 5.34 per cent. The loan only needs a deposit worth 3 per cent of the property price, although there is a higher lending charge.

Charcol spokesman Ray Boulger suggests that some of these deals will be better for the lender than they are for the borrower. “You have to look at how competitive these loans are,” he says Boulger. “People who walk into branches will be sold them but would be much better off getting a 100 per cent loan with no higher lending charge. The cost of borrowing that extra percentage is huge.”

4. Affordability

Mortgage lenders have traditionally looked at income multiples to decide how much to let you borrow. Al-though now due to lifestyle, some borrowers may be able to get a little more.

According to Moneyfacts, 25 lenders lend on your ‘ability to pay’ instead of income multiples like 2 times joint income or even 3.5 times single income. But if, for example, you have a clean credit record, no children and two incomes, some lenders may be willing to lend a little more. Alliance & Leicester, Standard Life, Halifax, Norwich & Peterborough and Nationwide are among them. Incidentally, lenders are often prepared to offer you a little more if you choose a five or ten-year fixed rate mortgage, because the monthly repayments stay the same for a long time, and so feel like less of a risk to the lender.

5. Higher lending charges

Abbey, Halifax, Portman Building Society and Alliance & Leicester are just some of the lenders who charge you an extra fee because you have a smaller deposit, so always ask about higher lending charges.

Sarah Gwilt, mortgage adviser at Dickson Lishman Prince, says: “No matter how good the interest rate, a higher lending charge will always outweigh it.

Any savings you make on low-interest-rate two-year deals are wiped out with a £2,000 charge.”

6. Mortgage fees

First-time buyers can often be caught out by all the extra fees that come out of the woodwork when buying a property. Mortgage application fees, lender valuations and stamp duty alone can start at anything from £2,000 depending on the property price, and that’s before you move on to the survey and solicitor’s fees. Research from Abbey shows fewer than 10 per cent of FTBs put cash aside for these fees, so many dip into their deposit, which constricts the number of best-value mortgages they can apply for. Several lenders offer cashback or fee-free mortgages to first-time buyers which provide some welcome cash at a financially tricky time. However, rates are likely to be higher on these loans and so may cost more in the long run.

7. Shared homeownership

Part-buy, part-rent schemes have strong appeal for first-time buyers because they only need to find a fraction of the deposit and mortgage amount needed to buy a similar property on the open market. But for a percentage of the cost, you only buy a percentage stake in the property, usually 25 to 50 per cent – from a social housing landlord – and so miss out on some of the equity growth as well.

You can, however, ‘staircase’, which means buying another portion of the property later on.

Many of these schemes, which often offer properties at a discount, are open to all comers through housing associations. The government’s much-publicised – if complex and unfinal-ised – plans for the expansion of shared homeownership schemes – are largely aimed at those with social housing needs.

This avenue is popular with first-time buyers, suggests Abbey, with some 70 per cent of its shared homeownership mortgages going to novice homeowners.