How to afford a house

Last updated: May 2024 | 3 min read

Wondering how to afford a house? This article will take you through all the steps of how to prepare, how to save, and how to borrow for a successful pathway to owning a house. Find out about the schemes available for first-time buyers and other possible ways to reach your goal of owning your dream home.

Are you about to begin your home-buying journey? This article will take you through smart mortgage planning and effective deposit-saving strategies. It's all about turning your aspirations of owning a home into an achievable plan.

Preparing for the buying process

How much should I aim to borrow for a mortgage?

Mortgage lenders set the limit on how much they'll lend, largely based on your annual income. Generally, lenders offer between 3 and 5 times your salary.

For example, an income of £25,000 might secure a mortgage between £75,000 and £125,000. But interest rates, other debts, and living expenses also affect this amount.

Exploring how mortgages work can help you estimate the sum you might borrow for your property purchase.

How to assemble a solid house deposit

Entering the property market starts with saving for a deposit.

Traditionally, you'd aim for at least a 10% deposit, but a larger deposit increases your buying power.

Saving habits, like setting aside a fixed amount monthly, help accumulate funds.

Consider the Lifetime ISA where the government adds a 25% bonus to savings.

Assessing the real price of homes in your area

House prices can be elusive, with some properties seeming out of reach. However, websites like "Rightmove" or "Zoopla" display current listings, giving insights into local prices.

Filter results by property type, number of bedrooms, or other criteria to refine your search. Negotiating can sometimes lead to better deals.

Boost your borrowing potential

Mortgage lenders view your credit report to assess risk. Ensuring it's accurate, boosts your chances of approval. Improve your credit score.

Secure a free copy of your report from agencies like Experian or Equifax, checking for errors.

A consistent income enhances lender confidence.

If you're self-employed, lenders might ask for additional documents to verify your earnings.

Proof of Funds

Proof of funds, in property transactions, are documents showing that a would-be buyer has the means to afford the purchase. They may vary based on how the buyer intends to finance their new home.

This evidence might include:

  • A bank account statement showing the funds.

  • A mortgage agreement from a lender.

  • A deed of gift proving the money has been gifted to you.

  • Dividend certificates.

  • Pension statements.

  • Documentation providing a source of funds for cash buyers.

What costs await when buying a house?

There are many expenses associated with buying your new home.

Land transaction tax and stamp duty

In England and Northern Ireland, when you buy a house, you might have to pay stamp duty. The amount depends on the property's price, with different bands imposing varied rates.

First-time buyers receive some relief, paying reduced rates.

In Scotland, it's termed "Land and Buildings Transaction Tax", while Wales labels it "Land Transaction Tax".

Each region has distinct rate structures.

Mortgage arrangement and account fees

When you secure a mortgage, there are often associated fees. These include charges for setting up the mortgage and potential account maintenance fees.

Shop around, as lenders offer varied fee structures.

Telegraphic transfer and valuation fees

The telegraphic transfer fee covers the cost of transferring the borrowed amount from the lender to the solicitor.

Lenders usually require a property valuation to ascertain its worth, incurring valuation fees.

Conveyancing and solicitor's fees

Buying a house involves legal paperwork, necessitating a solicitor or conveyancer. Their fees cover property searches, legal checks, and handling contracts.

They also aid with the property's registration.

Insuring your investment

Before deciding on a property, you will go through the routine of surveys and legal checks. To protect your investment at this pre-decision state, we recommend that you take out a Buyer's Protection Insurance.

Once you commit to a property, protecting it becomes necessary.

Home insurance, comprising buildings and contents insurance, shields against unforeseen damage costs.

Lenders typically demand this insurance before approving a mortgage.

Moving and potential renovations

Towards the end, on the day of completion, come the costs of the physical move.

Hiring removal vans or services incurs costs.

If the property needs immediate renovations, budgeting for these changes is essential to avoid financial strain.

What every first-time buyer should know

Mortgages, in simple terms, refer to loans specifically for purchasing property. They're what many lean on to make the dream of homeownership a reality.

Choose the right mortgage lender for your needs

Different lenders cater to varied needs. Research widely, comparing rates, fees, and reviews. A favourable rate can save you thousands over the term of your mortgage.

First five years: understanding mortgage repayments

In the early years, most of your mortgage payment tackles the interest, not the principal amount borrowed.

Over time, this balance shifts.

Aim to overpay when possible; it reduces the amount of interest paid over the life of the loan.

Optimising your mortgage application for approval

Tidy finances make for a robust mortgage application. Get bank statements in order and maintain a credit file.

Limit your outstanding debts, ensure your credit rating shines, and avoid sudden large expenditures.

Lenders want confidence in your ability to pay back the loan.

Engage a mortgage adviser

To obtain the best rates and terms, engage a mortgage adviser. They offer you a wealth of knowledge. They're experts in finding deals you might miss, often accessing exclusive offers.

Yes, there's a fee, but the potential savings usually outweigh the cost.

Supportive schemes for first-time buyers

For many, the gap between income and property prices seems insurmountable.

Luckily, numerous schemes cater specifically to first-time buyers, easing the ascent up the property ladder.

There are also some assistance programmes, to help enable more people to step onto the property ladder, in the UK, which offer financial support to first-time homebuyers.

First Homes Scheme

The First Homes Scheme by the UK government applies when purchasing a home for the first time. There's a possibility of a 30% to 50% discount.

This offer is limited to England and is valid only if the property is intended to serve as your primary or only residence.

Right to Buy

The Right to Buy initiative, introduced more than four decades ago, is a governmental program allowing council tenants the opportunity to purchase their homes at a reduced rate.

While it has ended in Scotland and Wales and is limited in Northern Ireland, it remains accessible in England. Eligible individuals utilize mortgages to finance their purchases.

In some cases, a deposit may not be required if the discount received exceeds the necessary deposit amount.

For example, if purchasing a £200,000 property with an £80,000 discount from the scheme, this discount can serve as the deposit. This translates to a perceived 40% deposit (without actual cash savings), resulting in a 60% loan-to-value (LTV) ratio for lenders.

Depending on factors like financial status, credit history, and chosen mortgage product, lenders may still request a deposit.

Help to Buy

Help to Buy, a government initiative aimed at assisting first-time buyers with limited deposits to secure more affordable mortgages, officially ended in March 2023. Applications for this scheme are no longer being accepted. (See what it will be replaced with.)

However, it remains operational in Wales and Scotland.

The government offers an equity loan of up to 20% of the house value, interest-free for the initial five years, requiring only a 5% deposit. This arrangement enables buyers to obtain a smaller, less expensive mortgage for the remaining portion of the property, on the condition that it must be newly constructed by a participating developer.

In London, buyers can receive an equity loan of up to 40% of the property's value, necessitating a mortgage of up to 55%. Outside London, the equity loan can cover up to 20% of the property's value, resulting in a mortgage requirement of up to 75%.

First-time buyer incentives in Scotland, Wales, and Northern Ireland

Different regions in the UK offer varied schemes. For example, Scotland has the 'First Home Fund', while Wales offers 'Help to Buy – Wales'.

Always investigate local initiatives—they might provide the boost you need.

Other options for buying

Shared ownership

Shared ownership allows purchasers to buy a share of a property, ranging from 25% to 75%, instead of acquiring the entire property, thus necessitating a considerably smaller deposit.

While having a deposit equivalent to at least 5% of the share is commonly required, some lenders may accept no deposit whatsoever.

The buyer would then pay rent on the portion of the property they do not own and have the option to incrementally increase their ownership percentage over time.

The eligibility is for individuals earning less than £80,000 (or £90,000 if residing in London).

Here's more detail about shared ownership pros and cons.

Joint mortgages: buy with a partner or friend

Pooling resources with a partner or a close friend increase buying power. Joint mortgages allow two or more individuals to combine their finances, presenting a united front to lenders.

This strategy effectively increases the amount you can borrow, as lenders consider the combined income of all applicants.

Even if one of the joint applicants has owned a property before, as long as the other is a first-time buyer, certain benefits, like stamp duty relief, can still apply.

However, tread with caution. While joining forces with someone can boost your ability to afford a house, it's important to ensure clear communication and a well-defined agreement. Clarify responsibilities, like monthly payment contributions, and ensure you're on the same page regarding future property decisions.

Guarantor mortgages: leverage family support

A guarantor mortgage allows a family member to co-sign your loan, essentially promising the lender they'll cover any missed payments.

This boosts your borrowing potential, especially if your guarantor has a robust financial standing.

Buying in more affordable regions

Not all UK regions brandish the same price tags on their properties. Often, relocating to a more affordable area can be a game-changer.

Highlights of the Northeast and East Midlands

The Northeast, known for its rugged coastline and historic sites, boasts some of the most affordable properties in the UK. Towns such as Sunderland and Middlesbrough offer homes that won't leave your pockets feeling pinched.

Equally, the East Midlands, sprinkled with picturesque villages and bustling towns like Derby and Nottingham, provide value for money. These regions offer homes at a fraction of the price compared to London, without compromising on quality or amenities.

Remember, with remote work growing in popularity, living away from big city centres has become increasingly feasible. A move to these regions doesn't necessarily mean sacrificing career opportunities.

Maintaining your new home affordability

When to remortgage

Existing homeowners should know that over time, interest rates shift. After your fixed term ends, explore remortgaging opportunities.

Switching your loan might lead to reduced monthly outgoings. Always weigh potential savings against any remortgaging fees.

Prepare for unexpected house costs

Houses sometimes spring surprise costs. Regularly set money aside. This dedicated fund tackles unexpected home expenses, ensuring mortgage repayments aren't at risk.

Maximise disposable income

Post-house purchase, maintaining financial discipline ensures comfort.

Regularly review outgoings. Cancel unused subscriptions and renegotiate bills.

This approach preserves your ability to comfortably manage loan repayments and other house-related expenses.

Getting into real estate in 2024?

Numerous credible sources are foreseeing a pattern of declining property values this year.

Factors like local house prices, recent sales figures, and overall housing market trends heavily influence how much a property is listed for.

In a seller's market, properties tend to command higher prices owing to heightened demand. Conversely, in a buyer's market, properties may sell for slightly below the asking price, presenting a favourable chance to save money.

Read our tips for making an offer on a house and negotiating a price.

Before beginning your journey, check the pulse of the market and your mortgage options.

Consult professional estate agents. An estate agent can give tailored advice for your specific needs.

© 2000 - 2024 Net Lawman Limited.
All rights reserved