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Are you looking to buy your first home? Welcome to an exciting (yet complicated) new chapter of your life! Getting a mortgage is one of the biggest commitments you are ever likely to make, apart from perhaps getting married or having children. Getting the decisions right about which deal and property to go for, therefore, are very important.
In this 2022 guide, our team outlines four tips to help first time buyers navigate the property market effectively and find good mortgage deals. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
#1 Be wary of low-deposit deals
Most people need a mortgage to buy a property. This means putting down a deposit, which is a percentage of the loan. The cheapest (but rarest) deals are 5% mortgages. For instance, if you wanted to borrow £100,000 for a mortgage on a flat, you’d need to put £5,000 as a deposit. This might sound great, and it is certainly more achievable for many first time buyers. However, you need to bear in mind the strain this is likely to put on your finances later.
As a general rule, the smaller your deposit is the higher your monthly mortgage repayments are likely to be. You might be comfortable with this now, but consider what might happen if you lost your job and needed to take a new, lower-paying role. In this scenario, you could end up failing to keep up repayments on your mortgage – likely losing the home. So, take care to ensure you can comfortably afford the repayments.
Moreover, if you put down a small deposit, you are more likely to end up in negative equity if the property loses value (not a good situation). Borrowing a large amount also means that you end up paying more interest to the bank over the mortgage lifetime – putting more strain on your finances in later life.
#2 Don’t wait for the biggest deposit
On the flipside, take care not to fall into the trap of assuming that a bigger deposit always results in a better deal for your finances. For instance, you might assume that a 30% deposit will lead to a better interest rate, and smaller monthly repayment, compared to a 25% deposit. However, this is not always the case. In fact, the figures can sometimes end up looking quite similar. In which case, why wait years longer to save up a bigger deposit? Rather, you could put down the 25% deposit and commit the rest of the money you would have saved towards investing (e.g. for your future retirement).
#3 Consider the Lifetime ISA
The Lifetime ISA (or LISA) is a powerful tool to help boost first time buyers’ savings towards that first property deposit. In 2021-22, you can put up to £4,000 into a LISA each tax year and the government will “top it up” by 25% up to a maximum of £1,000.
If you maximised this every year over 5 years, say, then you’d eventually end up with £25,000 – setting aside any investment growth achieved along the way. If your spouse or partner also did the same with his/her LISA, moreover, then this figure could even be doubled.
This is a great route for first time buyers but be aware that you must use any funds to buy your first home (or, for retirement after age 60). Using the money for another purpose will result in a punitive tax charge. You can open a LISA between the ages of 18 and 40, and the government will top up your contributions until you reach age 50.
#4 Boost your chances
Since buying your first home involves taking out a special loan (a mortgage), it is a good idea to ensure your credit score is as good as it can be. A strong credit score helps reassure lenders that you are reliable and trustworthy to make your monthly repayments. If you have a history of unpaid debts, however, then this will seriously undermine your applications.
It can take time to improve your credit score. So, it can be wise to improve it gradually as you save up for your deposit. Some steps are fairly easy, such as registering on the electoral roll for your area (which helps lenders do checks on you). Consider also approaching the three main credit reference agencies – Equifax, Experian and TransUnion (previously called Callcredit) – and asking for their information on you. Take note of any incorrect information and ask this to be updated so lenders do not get an inaccurate picture of your application.
Also, you may need to make some difficult decisions about parting with past relationships which may affect your credit score. For example, if you had joint finances with an ex partner (even if it was years ago), then his/her financial behaviour may still reflect on you now. Ask the agencies to de-link you from these people if they are undermining your credit score.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk