How much can you afford as a First Time Buyer?

If you’re a first-time buyer looking to get your foot on the property ladder, it’s natural to feel slightly daunted by the seemingly complicated process ahead.

The first big question that you as a prospective buyer will need to ask yourself is how much you can actually afford.

Buying a property is a big step involving a substantial long-term financial commitment, so you will need to consider the assets you have – like savings – as well as the money that’s coming in and going out.

Chiefly, you’ll need to work out how much you can borrow from a bank.

Every lender has different ways of calculating how much they will lend to you, or even whether they will lend to you at all. It includes criteria such as your income, the size of your deposit, your regular expenditure, and your credit rating. These will be considered for both of you if you are making a joint application.

For example, based on our mortgage calculator (which can be found here), if you are buying by yourself and have an annual gross income of £30,000 and a deposit of £15,000, you might be offered a mortgage of somewhere between £96,000 to £135,000. This would equate to monthly repayments of around £510 to £710 per month – based on an annual rate of 3.90% over 25 years – and would mean you could afford a property in the range of £111,000 to £150,000.

Lenders typically require a deposit of at least 5% of the property price, and the higher percentage a deposit you can save up, the better mortgage rate you will be offered. Your deposit of £15,000 represents 10% to 13.5% of the illustrative property price, or an LTV (loan to value) of 86.5% to 90%.

But there are also a few other financial factors to consider when working out what you can afford.

If the home you’re buying is in England, Wales or Northern Ireland and costs over £125,000 you will need to pay Stamp Duty. It was scrapped for most first-time buyers in November 2017 as part of first-time buyers’ relief.

In order to qualify for first-time buyers’ stamp duty relief under the new rules, which came into effect on 22 November 2017, the following conditions must be met:

·         You, and everyone you’re buying with, must have never had an interest in a residential property anywhere in the world. Whether it was bought or inherited.

·         You must be buying a property in England or Northern Ireland. The rules are different in Scotland and Wales – you’ll pay land and buildings transactions tax in Scotland and land transaction tax in Wales.

There’s no first-time buyer relief in Wales, but if you’re buying your first property in Scotland your zero-tax threshold will be raised from £145,000 to £175,000.

·         You must be buying the property to use as your main residence.

·         The purchase price of the property must be less than £500,000.

When you get a mortgage, the lender will require that you take out buildings insurance to cover the property.

You should also factor in the cost of moving from your current home, estate agency fees, solicitor’s fees, potentially paying for a surveyor, and charges associated with getting a mortgage, such as arrangement and mortgage adviser fees.

These additional costs may seem nominal compared with a deposit and mortgage repayments, but they soon add up.

Finally, when you’re working out what you can afford remember that the unexpected can happen and things can go wrong. So, it’s a good idea not to push yourself to your spending limit.

(Source: Rightmove, 2020)