Financial planning for a new home should begin even before you start looking through the property pages. In this article Wesleyan Medical Sickness gives you guidance on how to plan for your first mortgage.
Before you buy
The property market has suffered a slump during the economic downturn. According to the most recent Land Registry House Price Index, the average house price in England and Wales is still falling, with a 2.6% drop in the 12 months to September 2011 to £162,109.
While this may seem like good news for first time buyers, the downturn has also meant lenders are expecting buyers to put down a much larger lump sum than they would have done a few years ago. Over the past two decades, the average deposit has risen from an average of £6,700 to more than £65,000*.
First time buyers moving into a starter home generally won’t be faced with a deposit that big, but the fact remains that you will still be expected to find a sizeable deposit of about 15-20% of the property’s value, so it’s important to work out how much you are able to save towards it and other associated costs.
Effective budgeting will be vital: By making a note of your income and expenditure, you will be able to highlight areas where you may be able to cut back and save. When you put money away, try to find a savings products with a good rate that will help your savings grow quickly. A Cash ISA is a tax efficient option.
Finding the right mortgage
How much you need to borrow will depend on the value of the property, the deposit you’ve accumulated, your income and other expenditures.
Getting the right mortgage is crucial as it will impact on long term financial planning. There are a variety of options available, with two of the most common being variable rate and fixed rate mortgages. A variable rate mortgage is linked to the rise and fall of the Bank of England base rate, while a fixed rate mortgage provides a set level for a designated period of time.
For many first time buyers, a fixed rate mortgage will help them budget better. Payments can be fixed for a set period of time such as two, three or five years to provide certainty. Others, with the ability to absorb increases and cope with varied payments, may decide they would be better off with a variable rate that usually fluctuates with the base rate but is generally cheaper than the fixed rate option. The base rate has been at 0.5% for the past two-and-a-half years and will inevitably rise, although when that will be is impossible to say.
Also gaining in popularity in recent years has been guarantor mortgages where, if you don’t earn enough to buy a property, a parent can step in and act as guarantor for the shortfall. Although with most guarantor mortgages your parent’s name does not have to appear on the mortgage agreement or the property deeds, they will still be liable for the loan if you do not keep up repayments.
Once you have decided on the kind of mortgage you will be having, you need to consider how you will re-pay it. The two main ways are repayment or interest only. A repayment mortgage means that over the length of the loan you will eventually pay off the full amount, plus interest. An interest only mortgage means you are only paying off the interest accrued every month. The payments will be lower, but at the end of the loan period you will still owe the amount you originally borrowed.
With so many mortgage providers and deals out there, it is advisable to talk to a financial adviser who can search the whole of market to find the best deal to suit you.
Other expenses to consider
The deposit and mortgage repayments will not be the only expense. You will need to pay for a solicitor to approve the paperwork, carry out land searches and arrange the contracts to exchange. In addition a survey is required to check the physical condition of the property.
Stamp duty, a government tax paid when you buy a property over a certain amount, may also be applicable. The amount of tax is a percentage of the property value, although first time buyers don’t have to pay it on a home under £250,000.
After the move
Once you have moved in, you will need to review your budget again as you shift from saving for a new home to living in it. Council tax and any ground rent and service charges will have to be taken into account, as well as shopping around for the best deals from energy suppliers.
Protecting the property will also be important. Building insurance is a compulsory requirement for home owners and covers any damage to the property. Content insurance for your possessions will need to be considered.
This is also the right time to review whether you’ve got the right protection in place for yourself, as well as your property. Arranging cover for death or critical illness is important, as is payment protection for your mortgage. Also review your income protection, which should already be the cornerstone of your financial planning.
Buying a home is most probably the largest financial commitment and investment you will make. By talking to a financial adviser with expert knowledge of the medical profession you can ensure you get the deal that is best suited to you.
The above information does not constitute financial advice. For more information or for specialist financial advice contact Wesleyan Medical Sickness on 0808 100 1884 or visit the website at www.wesleyan.co.uk/doctors.