Financing your first home can be confusing, thanks to the multitude of options available. As your first home purchase, it’s easy to be overwhelmed with excitement yet a nervous wreck.
Do you take advantage of a Government scheme? Buy with friends or family? Or go it alone?
Complicating the issue is the hoops are different for each option. So how do you decide how you will finance your first home?
There are 100s of ways to start saving a deposit and just as many ideas to boost your savings once you’ve started. Our favourites include buying and selling on eBay, freelancing and opening an Etsy store.
What many first-time buyers get wrong is they try to hit the bare minimum deposit requirement. Usually, this amounts to 5 or 10 % of the property’s sale price.
By only having the minimum saved, your at the mercy of the lenders. As this section of the mortgage market lacks competitions, lenders don’t have to give you a good rate or even beneficial terms.
A bigger deposit usually means you’ll be offered a more favourable rate with better terms. However, it can be hard to save 30%. Let alone 60%, when the best rates and terms kick in.
So don’t aim for a 5% deposit. Think big and set a goal of 25 or 30%.
There’s a mortgage product for just about every property imaginable. You could be looking for a first-time buyer’s mortgage, a loan to buy a farm or a creative solution which enables you to buy with your friends.
You can access the mortgage in two main ways. The first option is to talk to your local bank. They won’t offer the widest range of products or even the best option for your situation.
Using a mortgage broker is your other option. A broker can search the whole of the market and find you the best deal for your deposit, income and property. However, they might not have access to your bank’s latest deals.
They’ll also look at your credit history and score, and the value of the property you intend to purchase.
The best options to finance your first home
As there are hundreds of mortgage products available, it’s easy to get confused, especially as a first-time buyer.
However, even if you have a small deposit and are desperate to get on the property ladder, then here are your 4 best options to finance your first home.
#1 Buy with friends or family
Friends and family can be a fantastic way to get on the property ladder, especially if you’re buying your first home.
Together you’ll have a larger deposit, which potentially could enable you to get a better mortgage rate. You also might be able to buy a bigger property or in a nicer area.
Buying with others will help ease the financial burden and therefore might provide you with a better quality of life.
There are some downsides to buying with friends or family. What happens if you fall out? If the property no longer works for one party, what can the others do?
On average we move every 8 years, so it’s worth considering if you can see yourself living with these people for at least 5 years. You may love them now, but the story might be different after living with them for a few years.
Before deciding on this option, it’s best to write down a list of potential issues and how you will solve them. It’s also worth seeking legal advice and getting a contract drawn up which covers how problems will be dealt with and what each part is responsible for.
A good solicitor will be able to talk you through your options and explain how to solve any problems without resulting in legal action.
#2 Shared ownership
In the last 10 to 15 years, we’ve seen the rise of shared ownership schemes. It’s become so popular that most housing associations now sell a large percentage of their new builds using this option.
The idea is quite simple. You buy a chunk of the property and rent the rest. If you want to increase your ownership, you can usually purchase more chunks.
Buying a percentage of a property is very similar to purchasing the whole thing. You’ll still need to save a deposit, take out a mortgage and jump through the usual legal hoops.
You’ll still need a lawyer, although your contracts will be different from if you were just buying a house.
The amount of cash you need upfront is significantly lower. Your mortgage will also be smaller, but you will have to pay rent.
Because the upfront costs are reduced, shared ownership enables those who might take years to save a deposit, the chance to own a home today.
While you might purchase 25% of the property today, you’re not limited to this percentage forever. For example, you could get a pay rise in the next year and therefore have the cash to purchase another 25%.
As you rent a percentage of the property, you’ll have to pay rent each month and may have to follow certain rules. Again, this is no different from renting from any landlord.
Be wary of using the housing association’s lawyer as they may hide something from you (such as your buying a leasehold property and not the freehold). Instead, pay for your own independent advice.
It’s quite likely you’ll have to deal with the housing association to sort issues or get permission to carry out certain jobs. This may frustrate you as it will take longer to solve issues.
#3 Government schemes
You might be able to get help from the government to purchase your first home.
The current flagship scheme is Help To Buy and is available nationwide. as long as you have a 5% deposit, the government will loan you 20% interest-free for 5 years.
As you now have a 25% deposit, you’ll be able to get a better mortgage deal. Plus many property developers are building smaller homes which are easy to fund using the scheme.
Your local government may operate several schemes to help people get on the property ladder. These could include making starter homes available at a discount to the open market price or cash incentive schemes.
You might not have to pay any stamp duty, which could save you thousands and help you to finance your first home.
Who doesn’t like free money from the government?!
Unfortunately, schemes vary by area. For example, Help To Buy is available through the UK. However, the rules are different depending on what country you live in. You might not be able to get the same deal in Wales as you would if you lived in Scotland.
Also, some schemes are only open to certain groups. If you’re a nurses or teachers, for example, then you might be able to access certain opportunities, not open to the rest of us.
As governments like to interfere in the property market, they could change a scheme without warning, leaving you high and dry.
#4 Guarantor mortgages
Imagine saving for years and smashing your deposit goal, only to realise your salary isn’t enough to cover the mortgage on paper. You’d be rightly disappointed.
You might be able to convince a close family member or friend to vouch for you and promise to pay up if you’re ever short. They’ll be acting as your guarantor.
Guarantor mortgages aren’t for everyone but can be a cost-effective way to get on the property ladder and stay there. They are also a suitable solution if you have a less than perfect credit history.
As long as you keep up with repayment, your guarantor doesn’t have to pay out a penny. However, fail to keep up with your repayments then they are liable to pay on your behalf.
Having a guarantor is a fantastic way to build trust with a lender as they know they’ll get paid regardless.
Once you’ve built trust with your lender and increased your income, you can re-finance to a more traditional mortgage product.
Your mortgage rate might be higher, which means you’ll pay more over the loan’s term.
Miss a payment or two and you could see your relationship strained. Not great if your guarantor’s your parents.
Don’t struggling to finance your first home
Regardless of which option you feel is right for you, it’s worth taking some time to research each option.
Talk with friends and family about how they managed to finance their first home. Also, talk with a local mortgage broker as they’ll be able to give impartial advice.
The best single thing you can do is understand and know your figures. Most first-time buyers don’t have a clear understanding of the cost involved with moving and buying a property.
Our top tip to finance your first home is to start today.
If you haven’t started saving a deposit, that’s your goal. Close to reaching your goal? Then start researching your options.
Had a mortgage application declined? It’s time to talk to a mortgage broker and do some research.
Don’t wait for a perfect storm, get started now!