First Time Buyer Mortgages

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First Time Buyer Mortgages

Richard Campo talks all about mortgages for First Time Buyers

How is the mortgage process different for First Time Buyers?

There is no difference whatsoever. Legislation that came in, in 2014 called the Mortgage Market Review which made lending fairer. Prior to the financial crisis the market favoured people with bigger deposits and people who had property previously.

The Mortgage Market review introduced things like stress tests and affordability, and for First Time Buyers that means you are simply taken on your merits. Lenders now look at your income and your outgoings and it doesn’t matter whether you have bought before. The actual mortgage process itself is exactly the same for everyone.

It also doesn’t matter if you have a smaller deposit. From an affordability point of view it’s irrelevant if you’ve got a 5% deposit or a 50% deposit – you can afford what you can afford.

Have you noticed any changes in recent years with First Time Buyers?

What people in London used to do was buy small one bedroom flats at an early stage of their careers. Then later they buy a property together with a partner and hold on to the flats as investments.

Now people more commonly don’t bother with that first step. At the end of 2021 some First Time Buyers I was working with bought at £900,000 to £1.4 million. So many people are renting for longer, saving up more, skipping the first smaller purchase to go straight to buying a family home.

What is an Agreement in Principle?

The Agreement in Principle or AIP is effectively a promise to lend. It’s probably one of the biggest areas where mortgage brokers can add value. We do all the research and get the lending agreed for you before you ever find a property or apply for a loan.

There’s two key parts to an Agreement in Principle: credit and affordability checks. When you then look for a property you can take the Agreement to an estate agent as proof that you’re ready to go – which means your offer is seen in the best light possible.

It’s important when you come to buy a new property but also important when you come to refinance as well. Don’t go to various different banks and get declined when we can do all the research on your behalf, and not adversely affect your credit score.

How much can a First Time Buyer borrow and what sort of deposit is needed?

Typically you can borrow about 4.5 times your income and the smallest deposit you can get away with is 5%. But on top of that, there is a dynamic in mortgages where the more you earn, the more you can borrow.

If you’re earning over £100,000 or so you could borrow around six times your income. The reason is that whatever you earn, your baseline costs are broadly the same. And so the higher your income the greater your capacity to borrow money and pay it back affordably.

Banks can also be more liberal if you’re a young professional with good career prospects. The highest you can borrow up with a 5% deposit is now £3,000,000 with some private banks.

But higher earners often have more complex incomes where you might have a cash bonus, investments and shares, which means you might need to seek out a specialist lender. And, if you’re deemed a high net worth individual, with an income over £300,000 or assets worth £3million, the affordability rules don’t apply.

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Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.

How can you help clients who aren’t from the UK originally or who now live overseas?

Brexit had a material impact on this in recent years. If you’re not from the UK originally you will find the process of buying property in the UK quite strange. I have many clients who have lived in America and they find our system very backward. In the US, when a property goes on the market it already has a survey and legal work done. You agree on a price and move in within a couple of weeks.

Here, you can get gazumped, legal work might be an issue or the vendor might change their mind. It boils down to property law in the UK being hundreds of years old.

So it really helps these clients that we know the system, we can explain it in plain English and hold your hand through the process. Most of our clients are financially astute enough to understand what they’re doing, but they’ve got better things to do with their time than look up conveyancing law.

Equally, if you’re not in the UK right now there are certain restrictions around Brexit so talk to a broker as soon as possible. The rules have changed so you will probably need more help than you suspect.

 

How do I know what my credit score is and how do I improve it?

This is one of our big bugbears. Credit reference agencies aren’t always that credible and your credit score doesn’t really impact how you get a mortgage.

Your credit score is principally a representation of your ability to get unsecured credit. With mortgages it’s very different, because you’re putting a deposit down and loans are underwritten.

Over the years I have seen clients with really low credit scores get a mortgage and clients with really high credit scores get declined. So we don’t just look at your credit score, we look at your credit report. With that data, 99 times out of 100 we will get you the right mortgage. So don’t be too hung up on your credit score.

What is the First Time Buyers ISA and is this still available?

This was something really good, so naturally the government has stopped it. The scheme closed for new accounts in November 2019, but if you already have an account it’s still valid. You simply put money into it like any normal savings account, but the government then gives you a bonus of up to 25% or £3,000, whichever is the higher. That can then go toward a house purchase. If you have a First Time Buyers ISA do hang onto it.

What is the Help to Buy scheme?

You’ve got to be careful with this one. Developers will offer you an ‘equity loan’ which goes a large way towards a deposit for the property. You put down 5% cash yourself and get a mortgage for a remainder. You can have up to 40% as an equity loan in London, which means you can buy a property of up to £600,000.

They put down 40%, you put in 5% yourself and get a mortgage for the remaining 55% of the property. That makes your mortgage payments very affordable. But you need to be careful about equity share.

Let’s say the 40% totalled £100,000 loan on day one. If house prices go up by 10 percent that becomes £110,000 – so the amount you need to pay back has grown. If you do hold onto property for a long time, that debt could add up. House prices in the UK went up by 9.8% last year according to the Office of National Statistics, so just be aware of that.

What other schemes are available?

Shared ownership has been around for a long while and I’m a big fan. You buy a share of a property and a housing association owns the remainder, which you rent back from them. You have a mortgage for the portion you own, and again you need a 5% deposit. The smallest share you can buy is typically around 25%. The good thing about shared ownership is ‘staircasing,’ where you gradually increase your share of the property as it becomes more affordable. It’s more expensive than a traditional mortgage but you can buy the whole property over time. It’s much cheaper on stamp duty and it can save you moving.

Joint Borrower Sole Proprietor is effectively a new type of guarantor scheme that is very often used by family members. Let’s say for example, I’m helping my daughters buy their first property. If their income isn’t quite sufficient to get the loan on their own, I can go on the mortgage and use my income to boost their borrowing capacity. But I’m not on the property deeds. That’s really important because it doesn’t trigger any capital gains tax for me or the 3% stamp duty surplus.

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Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.

What fees are involved when buying your first home?

Stamp duty changed a few years back now and it’s effectively tiered, like income tax. There were previously certain thresholds where you paid set percentages which were easy to work out. It’s harder to work out now, but a bit cheaper at the lower level.

You don’t pay stamp duty on the first £125,000 or if you’re a First Time Buyer, up to the first 300,000. Online calculators are a good way to find out the cost. Something to bear in mind is if you already own a property there is a 3% additional charge.

There’s also often a mortgage fee to the bank. Typically it’s around £2,500 and it can be added to the loan. Sometimes there’s a survey fee from the bank as well- they’re often free these days but not always. When we look at a mortgage for you, we look at the interest rate you pay, any associated fees with and the total cost over the term.

In terms of legal fees there will be searches and disbursements plus solicitors’ fees. A solicitor could charge a few hundred pounds up to a few thousand pounds. You get what you pay for and it’s important to choose a lawyer that’s recommended.

An extra cost to factor in is mortgage protection, and we will explore how much you want to spend for the mortgage and everything else on a monthly basis. We’ll then make sure that the mortgage and protection doesn’t exceed that budget.

What advice do you have for First Time Buyers?

As a First Time Buyer you’re probably not familiar with how everything works. And a broker is the one person that can talk to everybody in the process – the estate agent, solicitor, surveyor, the bank. These days 90% of First Time Buyers use a broker to help them with all of this.

But do think about where the broker you’re dealing with works. If they are linked with the estate agents, have they got your interests at heart or the agents’? You might decide it’s better to work with an independent firm like ourselves.

When you don’t have a lot of time on your hands a broker can just save you a lot of trouble and stress. That’s where we add the most value to First Time Buyers.

Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.