Your guide to buying your first house in 2017

Your guide to buying your first house in 2017

October 6, 2017

Your Guide to Buying Your First House in 2017

Owning your own home is one of most people’s top ambitions, and one which is becoming seemingly harder and harder to achieve. With house prices rising and the economy fluctuating from week to week it can seem that the goalposts are always moving, and home ownership is a distant dream. However, we believe that everyone should have the opportunity to buy their own property, and with the right preparation we think that most people can take the first step into home ownership.

This guide is for anyone who wants to buy their first home but doesn’t know where to start. We’ll cover the options available to you, and how to prepare for the process of purchasing your first home.

The Stages of Purchasing a Home

Knowing how a purchase progresses is important before leaping into a home purchase. Because of the huge sums involved in buying a house it’s crucial to understand how the process works from start to finish:

  • Know what you want
  • Know how much it will cost
  • Work out your budget
  • Secure a mortgage
  • Look at properties
  • Make an offer
  • Negotiate and complete
  • Finalise paperwork, pay final costs
  • Collect keys and move in

In this guide, we’ll take you through steps 1 to 4, the preparation stages. In furutre guide we’ll cover the second half of the purchase process, and you can also find many useful articles on our blog, dealing with the other areas of property ownership.

Stage 1 – Know What You Want:

The home that you end up with should fit your needs, not be dictated by the constraints of your budget. The first consideration to address is what your new home should be; where it’s located, and what the property is like.

Location

Where a property is located is as important as what the property is – even if a house ticks every other box, it’s no use to you if it makes your commute too long, or doesn’t have any nearby services. Choosing where to live should be your first step – if you’re moing for work, of course, this decision will be an easy one, but if you have more choice in the matter you might find it worthwhile to spend a weekend in the area to get a feel for it. Somewhere that seems quaint and homely for a few hours might start feeling constricted after a few days, and it’s best to know the area ahead of time.

When working out what your local area should be like, create a list of “Wants” and “Needs”, and note down what your ideal property must have, and what you would like it to have. Similarly, create a list of negative aspects, divided according to whether you could live with them or not. The idea here is to work out where you can make compromises – maybe you could do without living by a park, but if your commute was more than 45 minutes the house isn’t for you.

The Ideal House

Different types of houses suit different people, and the better an idea you have of what you want the better. When you start house hunting, you want to know what sort of property is worth looking at. This will save you spending valuable time looking at property that’s never going to suit you.

Just like with the location, you should work out what your new home will have to have, and what you’d like it to have. If you find a house that satisfies almost every one of your criteria, it’s very helpful to know which ones you can live without.

Step 2 – Know How Much it Will Cost

So you’ve established what your new house is likely to be, now you need to find out how much it’s going to cost A real estate agent is invaluable for this, as their local knowledge will help you get a clear idea of what the local property market is like. In addition to this, you can look at past sales records online – you can work out how quickly house prices are rising by examining past sales in the area, and many online real estate portals can help you research local property prices.

This stage is somewhat of a reality check – you know what you want, and now it’s time to find out how much that will cost. For now, don’t worry if the ideal home is hugely expensive, just note down a few options that fit the bill and save them for later.

Step 3 – Work Out Your Budget:

Now it’s time to establish what your personal finances are, and how far they’ll be able to stretch. This is a fairly straightforward process, but it’s crucial to get this right. If you over or under-budget you’ll end up with a property that isn’t right for you, and could have to make big cutbacks to afford your mortgage.

Calculate Income:

The amount of money you can reliably count on every month is what you’ll use to pay off your mortgage bills. Your household income should contain your salary, interest payments, dividends, and any other regular income. Don’t count windfalls in this amount, as you won’t  able to rely on them in the future.

Calculate Outgoings:

Now that you know how much you’re making, you need to know how much this tallies up with your monthly expenses. These should consist of council tax, rent, utilities, insurance, travel costs, childcare, entertainment. Food and so on.

Find the Difference:

Now you need to subtract your monthly outgoing from the total income you’re receiving each month. This is your current net income, the money which you can contribute to savings or to investments.

Adjust for New Circumstances:

When you move, it’s likely that your situation will change. Maybe you’re moving for a new job with a higher salary, or your travel costs are expected to change. Incorporate this into your budget for the future; this will tell you how much you can afford to spend on a mortgage when you’re in your new home.

What Mortgage Can You Afford?

Now that you know how much you can afford to spend on a mortgage, you can look at mortgage prices. There are many handy mortgage calculators online which can take your monthly budget and your deposit, and tell you how much it will cost you to take out different-sized mortgages.

For example, if you can afford £900 per month on your mortgage, and have a deposit of £15,000, you can find out how much it would cost you to take out a mortgage on a house worth £300,000. Since your deposit is only 5% of the property value, you’ll be taking out a mortgage with a Loan-to-Value (LTV) ratio of 95%; this typically means you’ll pay high interest rates, which might make the monthly mortgage payments too expensive.

From this, you can work out what combination of deposit and interest rate will suit you, and whether the houses you identified as perfect for you are reasonably within reach. If your ideal home costs £300,000 but you can’t afford to take out a 95% LTV mortgage, you might find that increasing your deposit to 10% brings it within reach. Alternatively, you may decide that spending £200,000 instead is the better option, and you can then hunt for properties in this area that tick the “must-have” boxes you identified earlier, even if they leave some “like” boxes unticked.

Step 4 – Secure a Mortgage:

So, you’ve worked out how much you’ll need to raise in order to purchase the right property. Now it’s time to secure funding from a mortgage provider, to ensure that when you find the ideal home you can confidently make an offer for it.

When you apply for a mortgage, you’ll want to become “pre-approved” for the mortgage. This means that the provider has evaluated your claim in detail and has, decided to approve your application. This differs from “pre-qualification”, which is the first initial estimate that a mortgage provider will give you. Pre-qualification is designed to give you an idea of the sort of loan you’re likely to be approved for, whereas pre-approval is a green light for the loan. However, banks can and do change their mind, and pre-approval is not a binding contract; there’s nothing to stop them re-evaluating your application at a later date and either changing their requirements or withdrawing the offer.

Types of Mortgage:

Your mortgage payments consist of a repayment of the initial loan along with monthly payments towards the interest on the loan. There are two main categories into which a mortgage rate can fall, a variable rate and a fixed rate. In addition to this, there are several other varieties of interest rate, all of which offer a different combination of flexibility.

A fixed rate mortgage means that your payments remain at the same level from year to year. Even if market conditions change, you’ll always pay the same rate – this means that you can reliably predict your costs and budget accordingly, but if interest rates fall you could end up paying over the odds. Some mortgage providers offer a fixed rate for a limited time, after which the loan defaults to a variable rate. This can provide useful stability

A standard variable rate (SVR) mortgage allows the lender to alter interest rates from year to year. Because interest rates generally rise or fall across the entire market, this means that you’ll usually have a competitive interest rate. However, you won’t have the stability of a fixed-rate mortgage, which allows you to predict your annual expenses.

In between the standard and fixed rate mortgage sits the “tracker” mortgage, which exactly follows the Bank of England base rate. Because the base rate is generally more stable than the going rate of interest, this offers better predictability than a standard variable rate, while still allowing borrowers to benefit from a fall in interest rates. Many lenders offer a limited tracker period for a mortgage, after which time the standard variable rate will apply.

Getting a Good Mortgage Deal:

Actually applying for a mortgage is a little more complicated than you might imagine, since the state of your credit history plays an important part in determining whether a bank will approve your application or not. Understanding what contributes to your credit score is important, and the following factors bear consideration:

  • Your Credit History – Do you have a long “track record” of reliable borrowing, or are you an unknown quantity? Many mortgage applicants who’ve never been in debt are surprised to find out that never having borrowed money is actually a negative in the eyes of some lenders. Taking out a credit card is a good way to develop a credit history, and by linking this to your current account you can eliminate the risk of defaulting on a payment.
  • Black Marks – Any blemishes on your record in the past seven years will count against you, and any unpaid bills or debts can make you less appealing as a borrower. The negative effects of these marks decrease over time, and any defaults within the past 12 months will weigh most heavily against you. You’ll need at least a year of perfect credit for a decent chance of securing a mortgage, so plan ahead.
  • Soft Checks – Whenever you apply for credit, a note is made on your record. Too many applications within a short space of time is a warning sign to borrowers, and if you apply for too many loans too quickly you could find yourself being turned down because of it. You can use online mortgage estimators to run a “soft check” on your credit to give you an idea of whether you’ll be approved or not, and although these aren’t 100% accurate they’ll let you know which applications are worthwhile, and which are not.

 

Moving Forward:

You’ve now got all the information you need to find the right home; you know what you’re looking for, and how much you can spend on it. The next step is to get out there and start hunting. We’ll cover the next stage of your journey to home ownership soon; until then, happy planning!