Buying your first home is a landmark step, but with property prices on the rise far quicker than the average salary, many young people view renting as the preferable option. However, deciding to buy is a smart move that could ensure your financial security in the future.
Schemes such as the government’s ‘Help to Buy’ have been set up to assist first time buyers who struggle to get a foot on the property ladder. Taking the time to understand the key legal and financial steps involved in purchasing a property will save you plenty of hassle during the buying process, and hopefully allow you to avoid some common first time buyer pitfalls. Here are some of the most important things to consider:
Understand your mortgage
The two main kinds of mortgages are ‘repayment mortgages’ and ‘interest-only mortgages’. Many first time buyers see a repayment mortgage as the safest option, as it involves paying off a portion of the loan and its interest on a monthly basis until the end of the mortgage period, at which point you will no longer be in debt.
If you decide to go for an interest-only mortgage, however, you’ll only have to pay back the interest every month. Instead of paying back the mortgage itself in monthly installments, you’ll need to invest money each month that will then be paid to the lender at the end of the mortgage period.
Many first time buyers are attracted by the sound of this arrangement as it initially involves a lower monthly cost, but Phil Spencer warns that it should only ever be undertaken for a few years, to avoid being saddled with debt you can’t repay in the future. All first time buyers should speak to a financial adviser, who can point you in the direction of a mortgage lender based on your individual circumstances.
Sort out your stamp duty
A centuries old tax that is charged on properties over £125,000, stamp duty can add a significant sum to your final bill, so its important to factor it into your budget from the outset. Changes to the stamp duty system were controversial when they were first implemented last year, but Phil Spencer agrees that although the top level of the property market has been hit hard, for those at the lower levels they have been a great help, which is ‘something that is actually beneficial to everyone’.
For properties worth up to £250,000 you’re now looking at a two percent stamp duty rate, and this is raised to five percent for properties between £250,000 and £925,000. Anything over this, and the stamp duty rate doubles, although most of us won’t need to worry about this top tier bracket! The important thing is to be aware from the start the charges you’ll be facing.
See also: Help Plan Your Local Neighbourhood
Freehold v. Leasehold
More property jargon that can confuse inexperienced first time buyers. Understanding the difference between a freehold and leasehold property is crucial when you begin house hunting. A freehold includes both the property and the land it’s on, meaning that there’s no need to pay annual ground rent or service charges. Furthermore, as the freeholder, it will always be yours, and you’re free to do as you wish within legal parameters.
If you have a leasehold property, however, you only own your home for the period of time outlined on your lease. The freeholder of the property will own the land, and you’ll need to pay them a ground rent and service fee for insurance and upkeep. Many leaseholds will be very long (even centuries long) but short leaseholds aren’t uncommon, so it’s important to think about what you’re hoping to get from your property in the long term if you’re considering one.
Nonetheless, Phil Spencer argues that there are a number of benefits to a short lease property as well, particularly for first time buyers:
‘If you buy a short lease now, then in a few years’ time you can pay more to extend it. And if you buy a short lease in a rising market, you can essentially have it for free,’ he says.
However, lenders will likely be less willing to give you a mortgage on a short lease property, so it’s best to do some research before setting your heart on a short lease property.