25 January, 2021
First-time buyer guide #2: Set a target
So, you’ve decided you want to be a homeowner?
I want you to visualise your goal and get excited about it. Sounds strange? There is lots of evidence to support the theory that if you engage in a goal and visualise the actions you need to take, you're far more likely to succeed.
But if you don’t have a realistic goal that sets you up properly for your objective, you'll make it a lot harder for yourself. So let's take a look at how to set a target.
Setting your target - Getting realistic
I have a confession to make: I just might be too old to write this guide alone.
If you read the first article in this series ‘Should I buy?’, you may recall that my wife Michelle and I bought our home back in 1994.
Although the principles are the same, things were a little different back then. Our 3-bed house cost £43,000 and the mortgage covered £40,850 of it (i.e. a 95% loan to value or LTV).
Rising house prices and the impact of the pandemic mean that things have changed and my experiences (while still valid) need to be supplemented with a younger person’s experience.
Lucky for me, I can introduce you all to Dan Lock. Dan is a valued member of the Multiply Advice Team and has extensive financial planning experience. Dan bought his first home back in 2014 and more recently moved in 2018.
His first pointer was that first-time buyers today need to get realistic early on about what they can afford. This comes down to:
- How much you can borrow
- Where you want to live
- The size of your deposit
- The extra costs
- Your emergency fund
Another important factor at this early stage is not to worry about whether the markets are about to go up or down. You're buying a home, not some shares in a FTSE 100 company, and things can change a lot while you're saving up.
How much you can borrow
For most people, the majority of the property is likely to be funded by a mortgage. So, our recommended starting point is to get an estimate of your borrowing capacity.
Once you know this, the other parts are more under your control - for example the size of your deposit.
At this stage you can go by a rough rule of thumb, and get a more accurate figure when you get nearer to buying.
This rule of thumb is to take your gross income (for couples just add them together), deduct the annualised amount of any loan or credit repayments, and then multiply that by 4.5.
For example, Ben earns £40,000 a year before tax. He has a car loan for £300 per month and a credit card with a £50 monthly minimum payment.
Ben could borrow £161,200, calculated as follows:
The annualised debt repayment (car loan plus credit card) is £4,200:
(£300 x 12 = £3,600) + (£50 x 12 = £600) = £4,200
So the calculation is 4.5 x (£40,000 - £4,200) = £161,200
Ideally, you should clear short term debt before buying. In the example above, if Ben were to clear his debt before applying for a mortgage, he would be able to borrow £180,000 - an extra £18,800.
Lenders will usually only lend up to a certain value of a property, known as the maximum loan-to-value (LTV). This percentage has changed a lot over the last year.
Traditionally you needed a 5% deposit as a minimum. Now, most lenders want you to have 10%, although some specialist schemes such as the Help to Buy Scheme make it possible to buy with a 5% deposit.
We typically recommend that people initially aim to own 100% of their home, but I'll dive into the reasons why in a separate article on Help to Buy and other ‘shared ownership’ type schemes.
In our example, if Ben were to clear his debt and borrowed the maximum £180,000, he would be looking at properties costing around £200,000. Of course, it's always good NOT to borrow the maximum.
Where you want to live
I’m afraid we can't do this bit for you, but we can suggest a process to follow.
Create your ‘wishlist’ on a piece of paper. Divide it into four boxes and in each box list out:
- Types of property
- Features wanted
- Features not wanted
The next step is to start getting realistic. Against each type, location or feature, mark up whether or not it’s a ‘must have’ or ‘nice to have’, ‘must not have’ or ‘prefer not to have’. Spend some time thinking about this because it may become important when assessing if your goal is realistic.
Finally, you may need to consider if you can’t meet all your objectives, so decide whether location trumps property type or vice versa. My tip is that your gut/initial reaction is generally the right choice, but do justify it to yourself.
Ben decided that he wanted a 2-bed house on the outskirts of Canterbury in Kent. He would be prepared to look within a 10 mile radius, but did not want to look at smaller properties or flats. He must have a driveway or parking for 2 vehicles, would be happy with or without a garage, but doesn't want a large garden.
The size of your deposit
This is relatively simple but can take some time. It’s simple because the size of deposit you need is simply the asking price of a property minus the amount you can borrow.
It’s time consuming because you need to do a lot of research to get a feel for property types and prices in the areas you're interested in. You're probably familiar with property sites such as Zoopla - these are a great place to get a feel for what's available.
Are they affordable? Within reason, everything is potentially affordable, if you are prepared to save for long enough. So, at this point you need to balance whether you are happy to save for longer to get your ideal place, or if you’d prefer to compromise in order to buy sooner.
For most people, this is where they need to start compromising. Again, we can’t do this for you, but hopefully you can use your ‘must have/nice to have’ assessments to help guide you to the right type of place for you.
Ben realised he couldn’t afford near Canterbury (unless he saved until he was 75) but he found an area nearer to Dover that gave him what he was looking for. A 2-bed house with no garage, but with parking for three vehicles and no garden costs around £210,000. His parents have said they'll help him with £10,000. He's decided to clear his debts and save up £20,000, plus the extra costs.
The extra costs
The easiest way to work these out is to use the calculator in the Multiply app, which will do the heavy lifting for you.
As well as your deposit, you'll need to save for:
- Stamp Duty Land Tax in England or Northern Ireland (or the equivalent in Scotland and Wales)
- Mortgage fees
- Legal and conveyancing fees
- Moving costs
Stamp Duty Land tax
This can be a complex area, but for now let's focus on the basics:
- Stamp duty is a tax on buying property, not selling.
- If you're a first-time buyer and you're buying a home costing less than £300,000, you won't pay any stamp duty
- The higher the price, the higher the stamp duty bill
- Until 31st March 2021, no one will pay any stamp duty on any home costing less than £500,000
Use our in-app calculator if you're in doubt.
Mortgage fees vary depending upon the deal you are applying for. Generally you’re looking at around £1,000 to £2,000.
However, lenders do often allow these fees (or part of) to be added to the loan amount. Remember adding it to the loan means you will pay interest on it.
Conveyancing costs can vary depending upon the area you live, which type of valuation you go for, the results of local searches, or whether you use the mortgage company recommended conveyancer. However, if you budget for £2,000 to £2,500, you should be covered (and hopefully get some change).
Your moving costs can be £0 if you're lucky enough to know the right people, up to £1,500 if you want to just hand everything over to someone else to do it all. We tend to find that if you budget around £1,000, you should be OK.
Ben hadn’t thought about the extra costs! He won't pay any stamp duty, and he's going to look for a mortgage where he can add what he can to the loan. He's decided he needs another £3,000 to cover these extra costs. All done, right? Nearly...
Your emergency fund
When I bought my first home, within 6 months we had to pay for a new boiler and windows. Unlike me, Dan planned in advance and had an emergency fund before he bought.
No one knows if and when an emergency might happen. Although it might mean you need to keep saving a bit longer, good financial planning says never leave yourself too short.
How much do you need? Rarely will two advisers completely agree on this. I’ve seen advisers base recommendations on people’s monthly income, monthly outgoings, net disposable income or just specific monetary amounts.
I like to recommend based upon your expected outgoings. I used to recommend saving enough to cover your costs for 3 to 6 months, but in light of the pandemic I have tended to recommend 6 months. Am I closing the stable door after the horse has bolted? Maybe, but I'm only human too!
Ben has decided that he wants an emergency fund of £2,000 at the point he buys and will look to build this up higher when he has moved in. He now has a savings target of £25,000. He feels in control and reassured that he has considered everything. He knows he still has a lot to learn, but he can start saving straight away with a real vision of where he is going.
The purpose of this section was to make you think about the type of home you want and where you want it to be, and to be realistic about what’s achievable.
We also introduced some of the extra costs of homebuying and the importance of having an emergency fund. I guess we have got you to the starting line and you now realise that homebuying is a marathon, not a sprint.
In the next article, I’ll build on your knowledge and help you get to grips with the high level process.