First-time Buyer Guide: Introduction
It’s no secret that getting a foot on the property ladder can be challenging. Between navigating the property market, saving for a deposit and securing a mortgage, the reality of homeownership can feel far away for many. However, owning a home is a great way to build a source of wealth, and stepping onto the property ladder remains a key financial goal for many. According to research by Finder, the number of first-time buyers increased almost every year over the past decade, with over 360,000 people in the UK buying their first homes in 2022. Here’s what you need to know to kick-off step 1 of the home-buying journey – saving for your deposit.
Build a financial safety net first
Before you dive into the world of homeownership, it’s wise to have a solid financial safety net. Imagine you’re at a fancy party with a champagne fountain – you should always fill up the first glass before moving onto the next. Think of that first glass as your ‘emergency fund’. This could be around 3 months’ worth of expenses, and will help if you need access to cash quickly thanks to any unexpected surprises. It’s also worth paying down expensive debts, so you’re confident you can afford your mortgage repayments. Finally, contributing to your workplace or personal pension helps ensure you’re not dependent on your home as your only source of wealth.
How much do I need to save as a deposit?
You’ll need to put down a deposit of at least 5% of the property value, but some lenders will ask for 10-20%. You’ll borrow the remaining amount as a mortgage – learn more about mortgages in Step 2 – Calculate how much you can borrow.
Generally, the bigger deposit you can save, the better. Not only will you need to borrow less, but you’ll also be able to access a wider range of mortgage deals, including those with lower interest rates.
What are the other upfront costs to budget for?
Along with the deposit, you’ll need to budget for the additional costs of buying a home. Knowing these costs upfront will ensure they are worked into your budget with no hidden surprises!
Stamp duty – A tax you pay when buying property or land in England or Northern Ireland. Scotland and Wales have equivalent taxes with different rates. Stamp duty is charged in bands, based on the value of the property. As a first-time buyer, you get a discount, so you won’t pay any stamp duty on properties up to £300,000.
Mortgage fees – Your lender may charge you additional fees for arranging your mortgage. Depending on the product, this can range from nothing to £2,000.
Solicitor fees – Your solicitor will either charge a fixed fee or a percentage based on the value of your property, plus disbursements (payments to third parties). Fees can vary around £800–£1,500.
Survey fees – If you choose to have a home survey to check the condition of the property, expect to pay between £300 and £1,000.
Moving costs – Costs will vary, depending on how many belongings you have and the distance you’re moving.
Furniture and decorating – Costs will vary, depending on how much work you want or need to do to the property.
See more details in our blog post – The cost of buying a home.
Government help for first-time buyers
The idea of saving towards your first home can be daunting, but the good news is that you might be closer than you think! Various government schemes and products are available to help first-time buyers get on the property ladder sooner:
Lifetime ISA (LISA) – Labelled a ‘no-brainer for first-time buyers’, this is a product designed by the government to help you to purchase your first home or save towards retirement. You can pay in up to £4,000 per tax year and receive a 25% government bonus on all savings! Moneybox offers both a Cash Lifetime ISA and a Stocks & Shares Lifetime ISA. Eligibility criteria applies.
Shared Ownership – Allows you to buy a ‘share’ of a property, paying rent on the remaining share. Read more about Shared Ownership.
Other options to buy a home sooner
Buy with someone – Joining forces with a friend, family member or partner can increase your borrowing capacity.
Gifted deposit – Around 46% of first-time buyers in 2022 bought their home with financial help from the ‘Bank of Mum and Dad’. If part or all of your deposit is a cash gift, you’ll need proof of funds and a gifted deposit letter.
Time for a check in!
You understand that the value of your home can go up and down, like any investment
You know how much you need to save for a deposit
You understand the range of costs involved in buying a home
You’re aware of the various government options to help you get on the property ladder
Let’s move to step 2, where we’ll break down how much you could borrow.
Your home may be repossessed if you do not keep up repayments on your mortgage.
For the Lifetime ISA, you must be over 18 but under 40 to open an account. You’ll pay a 25% government withdrawal charge on any amount you withdraw, unless you’ve had the account open for 12 months and are using the money towards buying your first home costing £450,000 or less, or you’re aged 60 or over. If your qualifying first home costs more than £450,000, a reduced 20% charge applies.
The 20% charge is designed so you get back what you paid in. It takes back the 25% government bonus rather than some of your own savings. The charge also applies to interest or investment growth, and if your account value has fallen you could still get back less than you paid in.