Thinking about getting a mortgage? No doubt you have a lot of questions!
While there’s a lot of jargon and many new concepts to get used to, mortgages don’t have to be confusing. This guide explores various aspects of mortgages and will equip you with information to make the process easier.
This guide includes the following:
- Definition of first-time buyer
- Mortgage jargon buster
- How to find the property of your dreams
- Pros and cons of new builds
What Is A First-Time Buyer? Who Qualifies And Who Doesn't?
On the surface it looks self explanatory, but the term ‘first-time buyer’ has a few caveats.
It is worth knowing whether you are a first-time buyer for various reasons, including the potential to enjoy stamp duty reductions. If your property costs up to £500,000 you pay zero stamp duty on the first £300,000, and 5% on the remainder. (If your property costs more than £500,000, you are not able to take advantage of this exemption).
What defines a first-time buyer for stamp duty purposes?
The UK Government definition is "an individual or individuals who have never owned an interest [freehold or leasehold] in a residential property in the United Kingdom or anywhere else in the world and who intends to occupy the property as their main residence".
Confusingly, first-time "buyer" refers to ownership, which can occur through means other than purchasing.
Property which was inherited is included, so if you or anyone else who will be named on the deeds has inherited property, you do not qualify as a first-time buyer. This is true whether you lived in the property or not, so even if you inherited and immediately sold a property, you are not a first-time buyer.
It's worth paying attention to the "residential property" clause: you can still be considered a first-time buyer if you own commercial property.
It's also worth paying attention to the "as their main residence" clause: if you are looking for buy-to-let property, you cannot benefit from first-time buyer exemptions.
How do lenders know if you are a first-time buyer?
Some people ask on property forums how claims of being a first-time buyer were verified, often with an undertone of wondering whether you could claim to be one and get away with it.
An HMRC spokesman told This is Money that "HMRC targets Stamp Duty Land Tax returns for enquiry if it looks like the wrong rate has been paid", and that "deliberate incorrect returns, such as claiming first-time buyers relief which you know you do not qualify for, will attract the most serious penalties."
Our advice? Don't risk it. If you aren't a first-time buyer, don't lie. If you're not sure whether you're a first-time buyer and the information above doesn't answer your question, get a definitive answer.
We have also seen people ask whether you can be a first-time buyer again.
Sadly, the answer is no. If you have ever owned an interest in a property, you are not and can never again be a first-time buyer.
First-time buyer jargon buster
There’s a lot of jargon associated with buying a house. If you don’t know your arrangement fees from your equity, this section of the guide is for you.
Deposit: Payment made on exchange of contracts; a percentage value of the house, not part of the mortgage.
Equity: The value of the home minus outstanding mortgage repayments; the amount you own.
Loan to Value (LTV): The ratio of money borrowed to value of the property; a lower LTV ratio means better mortgage deals.
Mortgage: A loan taken to cover the cost of the house minus your deposit. Repayments made over an agreed term, at agreed interest rates.
Types of mortgage
Each of these are covered in greater detail in our ultimate guide to mortgage types.
Guarantor mortgage: An arrangement where someone close to the borrower (the guarantor) takes responsibility for some cost and risk of the property.
Property as security: The guarantor’s home is used as mortgage collateral.
Savings as security: A cash lump sum is used.
Joint mortgage: An arrangement where 2+ people take out a mortgage together.
Rates: The amount of interest you pay, calculated as a percentage of the mortgage amount.
Capped rate: Interest varies but may not increase beyond an agreed amount.
Discount rate: Interest is reduced for an agreed period.
Fixed rate: Interest stays the same for the duration of the mortgage.
Variable rate: Interest changes during the mortgage.
Self-certification mortgage: Now-defunct type of mortgage where the borrower stated they could afford to pay, rather than proving it with documentation.
Types of ownership
Commonhold: A group of people form a company and take joint ownership of a building.
Freehold: You own the property and its land in perpetuity.
Joint tenancy: Multiple owners, each legally considered single owners with equal rights in the equity and ownership.
Leasehold: You own the property and its land for the term outlined in a lease agreement. At the lease end, ownership reverts to the freeholder.
Tenants in common: Multiple owners sharing equity and ownership, but not necessarily equally.
Arrangement / booking / completion fee: An administrative charge from the lender for arranging your mortgage.:
Advisor fee: Payment for your mortgage advisor’s services.
Estate agent fee: Percentage commission of the property value, taken on completion.
Legal fee: Payment for your conveyancer’s services.
Local authority search fee: Payment to determine whether there are restrictions on the property (listed, under compulsory purchase order, etc).
Mortgage account fee: Payment covering lender’s admin costs.
Stamp duty: Percentage fee charged on properties over £125,000.
Telegraphic transfer fee / CHAPS: Payment covering lender’s transfer to conveyancer.
Valuation and survey fee: Payment for valuation of the property.
More information on government schemes, including eligibility criteria, can be found in our guide to deposits for first-time buyers.
Help-to-buy: Government scheme to help first-time buyers more into a new-build property.
Right-to-acquire: Help for housing association tenants who have had a public sector landlord for 3 years to buy their home.
Right-to-buy: Similar to right-to-acquire but for council house tenants.
Certificate in Mortgage Advice & Practice (CeMAP): A qualification allowing mortgage advisors to advertise themselves as licensed.
Deed of trust: Outlines distribution of equity between tenants in common.
Key Facts Illustration (KFI): Provides information about a particular mortgage, tailored to your terms.
Agreement in principle: Indication of interest in moving ahead with a deal outlined in a KFI.
SA302: Evidence of earnings document, useful for self-employed people looking for a mortgage.
People and organisations
Conveyancer (solicitor): A legal professional trained in buying and selling property.
Financial Conduct Authority (FCA): The regulatory body ensuring best practice from mortgage advisors.
Financial Ombudsman: From their site, “The UK's official expert in sorting out problems with banks, insurance, PPI, loans, mortgages, pensions and other money and financial complaints”.
Financial Services Compensation Scheme (FSCS): A professional body to protect and compensate consumers “when authorised financial services firms fail”.
HM Land Registry: From Wikipedia: an organisation who “register the ownership of land and property in England and Wales”.
London Institute of Banking & Finance: An educational charity who issue CeMAPs.
Mortgage advisor (or broker): a qualified industry expert who acts as an intermediary between you and lenders.
Tips for finding the property of your dreams
A home is where memories will be made, lives will be lived, and years will pass. It should be exactly what you want it to be.
This section of the guide shows you how to find the property of your dreams, and how to figure out how ambitious your dream can be.
The first step?
Know what you're looking for
Before you begin house hunting, outline your deal-breakers: the things which absolutely must be present in your dream home.
This can be small things like a dishwasher or dryer, right up to more discerning design features like a balcony, a breakfast bar, or a knocked-through front room.
Whatever they are, build up a realistic vision of what your dream home will look like, and don't view any houses that don't tick these boxes. This reduces the risk of burnout and keeps you focussed on your dream home rather than a compromise.
Similarly, think about things that are definite no-nos; and then things that are turn-offs but which can be rectified. Think of it as a series of trade-offs: are you willing to put time and effort to fixing problems if a property has certain things you find important?
It's important to not let perfect be the enemy of good. Everyone's real dream home is probably a twenty bedroom mansion with a pool, on its own private tropical island. But a dream within a realistic set of desires and affordable budget is much more likely to come true.
If it's your dream property, other people are probably interested too. Get to know the estate agent, and communicate your dream to them. It's in their interest to match you with your dream property, and they'll be better equipped to do this if they know what you want.
If a property comes along that fits the bill, let the estate agent know you are very interested.
Then try to gleam as much information as possible from them about the seller.
Try to find out why the property is for sale, how much the seller is likely to accept, and whether there are any things that would sweeten the deal. This homework can boost your chances of having an offer accepted.
Remember the outside
Your dream home needs to be in an area you're comfortable living in, otherwise the dream can become a nightmare. Keep in mind the more mundane things when looking:
- What is the area like? Do you feel safe walking around by yourself? Would you be happy for your kids to walk themselves to school?
- Are the crime statistics frightening?
- What are the noise levels like?
- What's the traffic like during rush hour?
Although a home offers a refuge from the outside world, you can't switch it off completely.
Cross your fingers
If you find the property of your dreams, you still have to go through the process of buying it. There are costs to consider, and there is always the risk of being gazumped (read our guide to buying your first house for more information about avoiding this!).
New Build Vs Renovation: Which Is Right For You?
Deciding which house to move into is hard enough without spending time fretting between whether to buy a new build or a renovated old property.
This section of the guide explores the pros and cons of new builds and renovations. After reading you'll be equipped with the knowledge you need to make the right decision about where you’d like to live.
Are new build houses better than renovated old ones?
Each has its advantages.
New builds are often more expensive, which can be off-putting when looking at two properties with similar sizes, locations, and features. But if all goes well with the building, they will come with fewer repair requirements, meaning you stand to save in the long run.
It's also likely that you'll pay cheaper energy bills than you would at an equivalently sized older property. This is because new builds take advantage of developments in eco-friendly design: some by choice, others by law.
In practice this means things like double glazing, insulated walls and loft, and energy-efficient heating will come as standard. As will other nice features to make things a little bit more environmentally friendly.
You may also be able to input on some aspects of the property's design, depending how far into the building process you commit to buy. This could save you having to redecorate rooms after moving in, although be sure you understand whether there are extra costs associated with this, and if so how much they are.
There are some things new builds can’t always capture. Many people feel that new builds lack character or feel a bit generic, but this ultimately comes down to personal preference. New builds do often have smaller gardens and outdoor spaces than equivalently sized older homes, though.
Buying a new build
One factor which makes new builds more appealing is that you become eligible for the Help to Buy equity loan scheme if you're buying one in England, Scotland, or Wales. With this scheme you only need a 5% deposit, and you are entitled to a government loan between 15-40% of the property value.
If you’re buying straight from the developer there won’t be an upward chain to worry about, either. This can make moving quicker and more smooth than buying a renovation that’s part of a chain.
Although the construction of a new build can sometimes be delayed, which is a frustrating and unavoidable way of extending the moving process. In the worst cases this delay can long-eclipse the extra time it would’ve taken for a chain to resolve.
Other things to think about
A new build is often less likely to have a well established community around it. Developers often choose to build on land which might be a few miles outside a town and with not much else going on nearby. If you want to be able to walk to a pub or a high street, check this is a possibility before committing to buy.
It seems unintuitive, but the fact that an older house may not be perfect can work in your favour. Whereas a new build is shiny and fresh, an older house may lend itself particularly well to renovation: a perfect way for you to put your own stamp on the property and make it feel like home.
There are many factors in determining whether a new build or a renovation are right for you. Combine the pros and cons here with how much you like the houses you view, and hopefully the answer will become apparent.
There’s a lot of jargon associated with mortgages, and a lot of concepts to familiarise yourself with. Once you begin to understand what you’re up against, though, it gets easier.
If you are disciplined and willing to put in the effort, there is nothing standing between you and your dream home. Using your energy carefully when viewing properties will help, as will understanding what you can afford to borrow and how to borrow it effectively.
New builds and old houses both have advantages: understanding these will help you choose the right mortgage and, ultimately, the right home.
If you have any questions about mortgages, or any other aspect of the house-buying process, get in touch with our team of experts. We’ll be happy to help.