At JLL, we understand that purchasing your first home is both an exciting and nerve-wracking process. It’s likely to be the biggest purchase you’ve ever made, and it’s important to get it right. One of the most significant factors in ensuring a successful home purchase is understanding how to finance it. In this guide, we’ll take you through everything you need to know to finance your first home.
Setting a realistic budget
One crucial first step is setting a realistic budget for your first home based on how much you can afford. This
must take into account your deposit and other initial costs, as well as how much you’ll need for your
monthly mortgage repayments.
If you are currently renting, you might be surprised to find that your monthly mortgage payments will actually be lower than your monthly rental payments for the equivalent property.
Determining how much you can afford
There are a number of affordability calculators online that can help you work out the value of property you could afford. Typically, you’ll need a minimum deposit of 5% to obtain a mortgage. So, if the property costs £300,000, you’ll need £15,000 as a deposit.
Examples of deposit amounts needed at different property price levels:
| Property Price | Deposit (5%) |
|---|---|
| £300,000 | £20,000 |
| £500,000 | £25,000 |
| £650,000 | £32,500 |
Before you buy, it might also be a good idea to analyse your current monthly outgoings, to work out what you feel comfortable spending on your mortgage repayments.
Saving for a deposit
It can be extremely challenging saving for a deposit as a tenant in the private rented sector if your monthly rental payments are high. If you're struggling to save for a deposit, a Lifetime ISA (Individual Savings Account) may be worth considering. This account allows you to deposit up to £4,000 a year until you're 50 years old, with the government adding a 25% bonus on your savings up to £1,000 per year. Your funds can be withdrawn at any time to buy a first home worth up to £450,000.
If you’re lucky enough to be receiving help with your deposit, make sure that you discuss this with your mortgage advisor and solicitor so they can help you fill out the necessary paperwork for a gifted deposit.
An introduction to mortgages
The world of mortgages can seem extremely daunting as a first-time buyer. This is why seeking expert advice is crucial to help you not only understand your options, but to ensure you end up with the best product for your unique situation. A mortgage broker can access the whole scope of the market and the products available.
What is a mortgage?
Essentially, a mortgage is a loan secured against the value of the home you are buying. You pay it back each month, at a rate of interest agreed with the lender where you pay back part of the amount you’ve borrowed (the equity) and some of the interest with each payment, or interest only.
You can secure a fixed rate for a set term, such as two years, three years or five years, which ensures your monthly payments stay the same for that period. Alternatively, you can choose a variable rate or a tracker rate mortgage, which offers less certainty but can occasionally offer more flexibility when needed. Again, an expert will be able to point you in the right direction.
Obtaining a mortgage in principle
The first step to take as a first-time buyer is to get a mortgage in principle, sometimes called an agreement in principle, from a lender. This will involve you providing the lender or broker with detailed information about your finances, so they can give you an indication of how much you can borrow. This may involve the lender running a credit check on your finances.
Having a mortgage in principle not only gives you a very clear idea of budget when you begin your househunt, but it also indicates to the seller that you are a serious and credible buyer.
It is important to note that a mortgage in principle is not a guarantee that you will get a mortgage offer. You are also under no obligation to secure your mortgage through that lender, as products and rates change frequently. A mortgage in principle is typically valid for 30-90 days, but it is normally easy to reapply if you’re still househunting after this point.
Incentives and Financing options for first-time buyers
Although Help to Buy may have ended, there are still several incentives and financing options available for first-time buyers, and most lenders offer specific first-time buyer mortgages. If you're interested in learning more about these options, check out our article on first-time buyer incentives and financing options.
All the costs of buying a home
So you’ve saved up for a deposit, but what else do you need to budget for? Aside from the cost of the
property itself, there are some other necessary expenses to be aware of.
- Stamp duty: When buying property in the UK, a tax called Stamp Duty Land Tax (SDLT) is applied. For
first-time buyers, this tax is only payable on properties worth more than £425,000. For homes worth
£425,001 to £625,000,
there is a charge of 5% on this portion of the property’s value for first-time buyers.
- Conveyancing fees: This is the amount charged by the solicitor or conveyancer to complete the legal purchase
of the property. It will also include the disbursements, or the charges made by third parties for services
including searches. The
amount you pay varies, but can be between £500 and £1,500 on average.
- Property survey: This is carried out by a professional, registered surveyor, who can carry out one of three
surveys: a condition report (the most basic level), a homebuyer report (with more detail) and a building
survey (normally for older
or potentially problematic properties). On average, a survey will cost between £300 and
£600.
- Mortgage arrangement fees: Most lenders charge fees on a number of their products, which can either be paid
upfront or added to your total borrowing - although this means you pay interest on it. Generally, the lowest
interest rate offers will
have the highest product fees, and vice versa, so it is important to check which option will be best for
you. On average, the fee could be anywhere between £1,000 and £2,000.
- Valuation fee: Another charge incurred by the lender, this fee covers the cost of the lender checking that
the home you are buying is worth what you’ve offered for it. This typically costs around
£300.
- Land registry fee: Normally costing up to £500, this is the fee you pay in order for the Land Registry to transfer ownership of the property into your name on their database. The cost varies depending on the value of the home.
*All costs are accurate as of March, 2023.
