How to be a first-time home buyer

If you are only buying your own home to “invest” in property you may find the next couple of years a little disappointing.

Most predictions for house prices for 2011 are that they will be lower by the end of the year than the beginning.

I do not see any sustained house price growth re-emerging until 2013.

If you are buying a home to make money over the short term then do not buy at the moment.

If, on the other hand, you are buying a home to keep you warm and dry, and to give you privacy and self determination, then any time is a good time.

How much to borrow?
In the past this was an easy issue – lenders simply offered a multiple of your income, for instance two and a half times your salary.

Now, because of the level of unsecured debt many of us carry, and the information available from credit agencies, most lenders use credit scoring and affordability techniques that make this calculation more opaque.

If you have little debt then up to four times your salary might be available.

As a first step, look at a lender’ s website and search out their affordability calculators and see how you fare.

This simple task might remove all hope of buying at the moment, or confirm that you can make the sums work.

Getting help
If your income does not appear high enough to buy the sort of home you want, you could consider involving a parent.

They may be as keen as you are to help you move out and could become a joint borrower or a guarantor for your mortgage.

Alternatively you could pool resources and buy with a friend or partner, which could help you move or get a property of an appropriate size.

Make sure you have a robust legal agreement in place to cover what happens if you go your separate ways.

This can be difficult to negotiate when you end on less than friendly terms.

How much deposit?

Clearly this will depend on the price of the property you find, but for the most attractive rates you would need to put down 30% of the purchase price.
The higher a loan as a percentage of the purchase price, the higher the interest rates will be.

For instance, today a 70% two-year fixed interest rate loan would carry interest charges ranging from 2.8% to 4.5%.

Whereas, if you could qualify for a 90% loan – which are few and far between – the interest rate would range from 5% to 7%.

So, based on a typical UK mortgage of £150,000, the monthly cost could vary from £700 to £1,070 depending on the deposit you have available.

Other costs

Do not forget that the monthly charge will not be the only expense involved.

Stamp duty is normally charged on purchases above £125,000 at 1% of the purchase price.

This is currently suspended until 24 March 2012.

If you buy for more than £250,000 you will need to fund a 3% stamp duty payment.

You will also need to pay for a valuation, and ideally a survey, for the property you buy as well as paying for legal fees and removal costs.

All this can add up to thousands, or even tens of thousands, of pounds.

So you must have access to funds beyond the deposit itself.

Shared ownership

What if you simply do not have access to that kind of deposit?
You have a choice – wait to build up a larger one or considered a “shared ownership” purchase.

Typically under such schemes, housing associations allow you to buy 25% of a property and rent the balance until you can afford to buy the rest of it in stages.

The level of deposit required will come down and be closer to 5% of a full purchase price.

Repayment or interest only mortgage?
Assuming you can afford it, the safest way ahead would be to take a repayment mortgage in which you steadily pay off both the interest and a small chunk of the loan each month.

Most lenders of high percentage loans will insist that you take such a route.

For lower percentage borrowers, lenders might offer you the choice of an interest-only loan.

This will be easier on your cash flow and has been favoured by many buyers in the past but is also a riskier choice.

It is also one that is generally frowned upon by the Financial Services Authority (FSA) so it is becoming more difficult to obtain.

Overall, buying a home for the first time will be a fraught and stressful process, as will future moves.

So do not lose sight of your original motivation and do not expect to make a profit on buying in the short term.