Getting yourself on the property ladder is an ambition held by most young people, who wish to follow in the footsteps of their parents and generations before who widely regard bricks and mortar as the most solid investment for life savings.
However, a lack of supply of new houses has led to demand for property soaring, and this in turn has driven the average price of property in the UK ever upward. As a result, getting on the property ladder as a first-time property buyer is harder than ever, meaning that first-time buyers must be very savvy to ensure they go about their first property purchase in the right way.
The key issue with all first-time property purchases is affordability. Put simply, affordability is as much about how much you have saved as a deposit, as it is about how much you can afford to repay each month. Typically a mortgage lender will loan around four times the combined income of the applicants (whether that is an individual or couple).
Following recent changes, mortgage affordability has come under new scrutiny, with buyers required to prove not just income but outgoings as well. The aim is to protect mortgage borrowers to ensure they can afford their mortgage and do not lose their home. This is particularly true as interest rates are currently low, and are expected to rise in future, making mortgage repayments more expensive.
At present mortgages are only available for those who have saved a minimum of 5% of the value of the house as a deposit, although it is possible to offer more and if you are able to do this you will likely receive a far more favourable interest rate on your mortgage.
When buying your first home, it is important to remember that there are many hidden costs associated with the property transaction process. For example, in addition to the purchase price for the property your lender will usually charge a mortgage arrangement fee of around £1000. You may also be asked to pay to have your new home valued, and then there are survey costs and finally all the legal fees.
In addition to the clerical expenses, there is the cost of moving, furniture, decorations and the cost of any building or remedial work that might be needed. All of this can add up to make buying your first home more expensive than you might first think.
What is ‘help to buy’?
Help to Buy is a new government scheme to encourage housing market demand by offering an interest-free loan of up to 20% of the value of a property providing the buyer can give a 5% deposit. This allows buyers to put down a 25% deposit.
The loan is interest free for five years, then interest begins at 1.75% per year and rises gradually. When the property is sold, the buyer repays the percentage of the sale price, not the original loan amount.
You wish to buy a property costing £250,000, and have saved a 5% deposit of £12,500. You then use the Help to Buy scheme to borrow a further 20% of the value of the property, £50,000, to boost your deposit to £62,500.
This loan is interest free for five years, then interest is charged at 1.75% per year and rises gradually.
After five years you may decide to sell, and for the purpose of this example, say you have sold your property for £300,000. You would owe the Government 20% of the sale value, or £60,000. Meaning the Government also profited from the rise in the value of your home.
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