Things You Should Consider When Buying Your First Home
As a first time buyer, buying your first home can be nerve-wracking, as you are inundated with horror stories about how difficult finding your perfect house can be. Whether that be finding the right mortgage protection insurance, a home without hidden problems such as mould or scraping the funds together to buy your house or flat, it’s safe to say that house hunting is not easy, let alone creating happiness at home.
An entirely different ball game to renting, buying your own home takes a great deal of preparation, as you work out how to save up for a deposit, choose a location that matches your monthly budget and work out how to make your transition into buying as stress-free as possible. As someone who will be moving into a home with my partner next year, I know all too well just how much planning house buying takes.
This time next year I will be moving in with my partner on quite possibly the most exciting adventure of my life. Because guess what, we will buying our first home together and I can’t wait! After five years of renting in London, it’s time to say goodbye to terrible landlords who take months to fix repairs in your home and hello to a new beginning where you have a space to truly call your own.
The thought of transitioning into becoming a first time buyer can be stressful, which is why I have put together this comprehensive guide to buying your first home, to help you just as much as me. Buying your own home can be incredibly scary, but it does not have to be. From determining what you can afford to spend on a home, to getting homeowners insurance here are the things you should consider when buying your first home.
Determine What You Can Afford
Buying your first home might be one of the most expensive purchases that you make in your life, so it’s important to get it right the first time. Whether you are looking to buy a house, flat or bungalow, you need to figure out what you can afford to buy.
Just like you would budget your travel, food, rent and bills, buying a place takes a lot of careful thought and planning to ensure that you have your finances in check. Not only do you need to consider the pros and cons of renting vs buying, but you also need to decide whether it makes financial sense and suits your emotional needs enough to make such a huge change in your life.
In my case I moved to London in 2015, and not only have I moved house 5 times in the last 4 years, but I have also been renting in the most extreme environments, with everything from being in a house fire, to bed bugs, aggressive housemates. faulty houses, terrible landlords and everything in between.
Let’s put it this way, name all the negative things you can imagine with renting a room in London and I’m pretty sure my housing stories would have covered them all…
Which is why the idea of buying my first home with my partner speaks volumes to me, because I just want to be able to settle down, in my own place and truly feel like I have a home to call my very own. I want to stop dealing with landlords who take months to fix any issues in the house, I want to be in a place that evokes sunshine and happiness not despair and fear. Most of all I want contentment in my new abode.
Buying your own home might seem hard, and as a first time buyer this is new to me too, but one of the most important things to consider is to work out what your budget allows you to afford.
In order to determine how much you can afford, you need to evaluate the following factors:
To determine how much house you can afford, most financial advisers agree that people should spend no more than 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debt — that includes housing as well as things like student loans, car expenses and credit card payments.
So let’s say that you earn 25,000 a year which is roughly 400 a week and 1600 a month. You then multiply 1600 by 28 which equals 44800. You then divide that total by 100 which gives you 44,800 ÷ 100 = 448.
Your partner on the other hand might earn 35,000, which using the rule above would be around 2916 per month and 729 per week. So 2916 x 28 = 81648 divided by 100= 816.48 . Now if you put the 448 and 816.48 together, this equals 1264.48, which shows what the combined ’28 % gross monthly income’ would be, giving you an idea on how much money you would need to spend each month between you two on housing.
In this instance, you would probably want to look at buying a flat, as opposed to a house as your first home, because it is what you would be able to afford based on what you earn each month. Another important factor to consider when buying your first home is location, as location has a big impact on how affordable or expensive housing is.
For example, I live in London, where the average price for a Flat is 77,330, a Terraced House is 91,157, a Semi Detached House is 104, 696 and a detached house is 160, 155. So in other words, to buy a flat in London your annual salary after tax needs to be 28,000, and for a house your salary needs to be in the 50 K-75 K bracket, which seems extremely pricey. In other words if you are on 25,ooo trying to buy a home in London it might be very difficult to live well, when the cost of your flat is so expensive.
In contrast, the cheapest area is Burnley, which for a flat is 10,622, for a terraced is 13,089, for a semi it is 19,164 and for a detached it is 29,251, making it affordable for those who earn 25,00o or less per year.
So you see, determining your monthly gross income, your expenses and the location you want to live in has a real impact on deciding what you can and can’t afford. Let’s put it this way, I would find it pretty hard to afford buying a home on my own on the income that I earn now, because in comparison to the area that I live in, it is not enough to live well, with pennies left to save after.
Other Key Budget Factors
– What are your ‘regular’ expenses per month? Factor this into your housing budget to see if you can realistically afford to buy a home. For example this can include things like a food shop, phone bill, blogging costs, travel costs, housing bills or anything else.
– You also need to budget what you are already spending money on, and figure out what is a neccessity and what is a luxury, to help you save money on a deposit. For example an Amazon Prime Account as wonderful as it is, is not as important as paying your rent.
– What do you absolutely need in a property? Make a list of neccessities and add ons that would make a home appeal to you.
For example for me that would be a good location in East London, preferably near to where I am living right now, with a large bedroom with furniture and wardrobe space. It would also need to have local amenities close by including supermarkets, shops and resturants, and be within a short walking distance of the station. It would also need to be pet friendly, as we both want to adopt an animal together.
My partners needs are pretty similar, except he does not mind about the size of the room and also wants a living room if possible. So you see, you have to establish what you and your partner both desire and/or need in a home together. After all,when you are buying a home with your partner, it’s important to consider buying a home that you both could live in happily, without much ado.
Because a happy home is where the heart lives.
Invest In Mortgage Protection
Before I started researching how to buy a home, I had no clue what mortgage protection was, let alone know why investing in protection can help house buyers out in tough times. But that’s all changed now, and I like to think i’ve become pretty clued up on the major pros of mortgage protection. From offering your family financial support during difficult circumstances, whether that be the loss of the main earner, losing your job or having unexpected costly expenses to pay out for, to giving you the peace of mind when finances are rough, invest now!
First off, what is mortgage protection? Put simply, it covers the cost of your mortgage each month should you lose your job or become unwell. Many policies will pay out for a maximum of a year.It is usually less expensive than life insurance, although unlike life insurance, protection insurance is designated for mortgage payments, while life insurance doesn’t have any restrictions.
Mortgage repayments are one of the most expensive bills that people face, and as a first time buyer the statistics can be a daunting read. After all, it takes around 18% of your combined household income each month, or 24% if you live in London like myself. So going back to earlier, let’s say your combined household income is 60,000. 24 % of 60,000= 14400, which split between the two of you would be 7200 per month.
That’s a crazy figure, so you can only imagine how much it would be for a single person household. Let’s say you are on 25,000. 24% of 25,000 is 6000, which I am telling you now is far more than I earn in a month. Which is why protection insurance is a big help for those who are on a budget because it could pay you a certain amount each month.
Amazing mortgage protection insurance companies like LifeSearch are ideal for couples or families who want extra protection. It can be enough to cover your mortgage or you can choose a policy that will pay out 125% of your mortgage costs to cover other bills too. In LifeSearch’s case, they offer different types of protection including Critical Illness Cover, Life Insurance and Income Protection.
The pay-out amount depends on the type of mortgage protection cover you choose, and the best cover type for you depends on your personal situation. So although it can be difficult to gather together the initial deposit for a mortgage, using mortgage protection can help you when you need a helping hand.
There are also many different types of mortgages that you need to consider when buying your first home. These include fixed-rate, tracker, discount, standard variable rate, guarantor and offset mortgage which you need to think about before you invest in insurance.
Fixed Rate Mortgage means that the interest rate will stay the same for a particular length of time. However fixed-rate mortgages tend to be more expensive than mortgages pegged on variable rates because you pay a premium for that extra peace of mind. In contrast a Tracker Mortgage follows the Bank Rate, the benchmark interest rate set by the Bank of England, for a certain period.
Discount Mortgages are tracked at a discount to the lender’s SVR for a particular length of time, Standard variable rate mortgage doesn’t have any deals or discounts included and tends to be a more expensive way to clear your mortgage and a guarantor mortgage is lenders offering mortgages that allow parents to contribute.
For first time buyers this might be a viable option as it allows parents or family members to cover repayments if you are unable to. Finally an Offset Mortgage allows you to link your current and savings accounts to your mortgage. So you see, the type of mortgage that you have determines how much protection cover pay out you are eligible for. You need to think carefully about which plan matches your needs.
Being a first time buyer can make getting a mortgage difficult which is why it is so important to not only build a good credit score, but to also have enough money for a deposit, cancel any unused cards and show that you are earning a steady income each month. If you are freelancing then a steady income is not always viable, so make sure that you at least have a good credit score.
Check Your Credit Score And Credit History
Speaking of credit score, it’s important to know your financial footprint. It pays to know your credit score, because a good rating comes with a whole variety of benefits including being more likely to be able to have a mortgage and generous credit limits. When landlords can see that you are financially responsible, buying a house will become a lot more easier, as the trust is there.
If you have a low credit score this will effect your capabilities as a first time buyer. According to Barclay UK, there are three main credit reference agencies, who determine what good and bad credit scores look like. These are Experian, Equifax and TransUnion. A good credit score is dependant on the reference agency but as an example for Transunion it is in the 604-627 region.
Not only do lenders look at your credit score, but they also examine your income, savings and expenditure debt, in order to see whether they should risk lending money to you. This is why it is so important to stay on top of your payments, because it will show that you can manage your finances and that you are a reliable customer. In turn this will determine whether they will give you a mortgage or not.
However, don’t be too put off if you do have bad credit history, or if like me you have no credit history at all because there are options out there. For example you can look for lenders who might work with those who are self-employed who struggle to meet the requirements. This is because when you are self-employed (which I was), your income varies each month and it’s hard to determine your average income.
There a number of ways that you can improve your credit score. These include the following:
- Register on the electoral roll. You might find it harder to get credit if your name is not there.
- Pay your bills on time and clear any outstanding bills.
- Check for fradulent activity
- Staying in one place for extended periods of time. Lenders feel more confident when you have lived at the same address.
Equally, having an initial deposit of over 10% will work in your favour, or assistance from a Help To Buy Scheme.
Check Out First Time Buyer Schemes From The Government (Stamp Duty)
Let’s face it, as a first time buyer, adding up all the financial costs in my head is a little nerve-wracking to say the least. But you are not on your own, and there are a number of first time buyer schemes from the government to lend you a helping hand. These include Help To Buy and Right to Buy/ Right to Acquire.
Help to Buy is available to first-time buyers and existing homeowners who want to buy a ‘new build’ house. The purchase price must be no more than £600,000. This scheme will be extended until 2023, but from 2021 here will also be new regional price caps which could reduce the maximum value of home that can be bought through the Equity Loan Scheme.
In contrast the Right To Buy/ Right to Acquire Scheme is for tenants in England, Wales and Northern Ireland who rent their home from their local council.It allows tenants who qualify, to buy their home at a discount.
For those who live in London like myself, there is ‘Homes for Londoners‘ which seeks to help low or modest income earners buy or rent at an affordable price. Please note that you can’t buy a home on the open market and there are eligibility criteria based on earnings.
There is also a new scheme called the Starter Home Scheme, a new government plan where 200,000 new build homes are available to first-time buyers under 40 years old with at least 20% off the market price. Although the scheme hasn’t started yet, you can register your interest.
As a first time buyer you should also learn more about stamp duty tax. Stamp Duty Land Tax (SDLT) is a tax paid when you buy property or land over a certain value in England, Wales and Northern Ireland.
Luckily, for first time buyers like myself, pay no stamp duty on the first £300,000 (of homes worth up to £500,000). For homes costing between £300,001 and £500,000, a rate of 5% will apply – but only on a fraction of the purchase price.
Different rules apply if you are not a first time buyer of course. Tax is paid on homes worth 125,000 or more, at the rate of 2% tax paid on properties worth between £125,000 and £250,000 and 12 % on luxury homes worth more than £1.2 million.
Make Sure You Get Homeowners Insurance
Last but not least, like mortgage protection, homeowners insurance is vital for lending you a helping hand. But what is the difference between the two? While homeowners insurance covers you if something goes wrong with your home, mortgage insurance protects the lender if you’re unable to pay your mortgage.
If you run into a situation where you can’t make your mortgage payments, the mortgage insurer will take over, which guarantees that the loan gets paid.Homeowners insurance provides financial protection for your home and personal property. By paying monthly premiums to an insurance company, you are essentially paying to protect the home and its contents from adverse events covered by the policy.
It is important that you invest in your future, to prepare for any event that might happen, for peace of mind. Granted that homeowner insurance packages vary depending on the company but generally speaking it should cover more than just the physical structure of your home. From your personal belongings or even medical bills, it can include several types of coverage including personal property coverage.
Personal property coverage helps to replace certain belongings such as electronics that are stolen or damaged by a covered loss. Additional living expenses coverage is to protect you when you can’t stay in your home due to adverse conditions i.e. a fire and this coverage may pay for temporary living costs.
Dwelling coverage is for when your home and any attached structures such as a garage are damaged by a covered peril. Costs are calculated based on the square footage of your home and what it would cost to rebuild your home.
Having a homeowners insurance policy won’t prevent damage to your home or belongings, but it may help provide a financial safety net if the unexpected occurs. As a first time buyer you have to prepare for any eventuality so it’s important to be protected against extra costs.
What Are Your Tips For When You Are Buying Your First Home?
Please note this is a collaborative post but all thoughts are my own and are not affected by monetary compensation. There are of course more factors to take into consideration when buying your first home, but these are the key points that I wanted to highlight.