5 September 2024
Margo Lestz
Head of Communications
Buying a home is a big deal. It’s a significant milestone in your financial journey and an important personal achievement. It's also probably one of the biggest purchases you will make in your lifetime.
Proper financial planning is crucial to ensure that your home purchase is a source of joy and stability rather than stress and financial strain. This guide will walk you through the things you need to do and plan for when getting ready to buy a home.
Take a Look at Your Current Financial Situation
First things first, before diving into the home-buying process, take a look at your current financial health.
How's your credit score looking? What about your debt? Do you have any savings stashed away? These are all things you'll want to know before you start house hunting.
Your credit score plays a crucial role in determining whether you'll be approved for a mortgage and the interest rate you'll be offered. If your score is low, consider taking steps to improve it before applying for a mortgage.
Figure Out How Much House You Can Afford
Now, let's talk about your house: How much house you can actually afford? Just because the bank says they'll lend you a certain amount, that doesn't mean you should max out your budget. In the UK, lenders typically offer mortgages of up to 4.5 times your annual income*, but this doesn't mean you should borrow the maximum amount.
Think about what you're comfortable spending each month. Consider using online calculators or speaking with a financial planner to help you determine a realistic budget. Remember to factor in other home ownership costs such as maintenance, repairs, and potential service charges for leasehold properties.
Save for a Deposit and Other Costs
Time to start saving! In the UK, the minimum deposit for a house is typically 5% of the purchase price**, but putting down a larger deposit can help you secure a better interest rate and more favourable mortgage terms. Aim for a deposit of 10% or more if possible.
In addition to the deposit, you'll need to save for other costs associated with buying a home, including stamp duty, conveyancing fees, surveyor fees, mortgage arrangement fees, removal costs, etc.
Start saving early and consider setting up automatic transfers to a dedicated savings account.
Get a Mortgage in Principle
Before you start falling in love with houses online, get yourself a Mortgage in Principle (also known as an Agreement in Principle or Decision in Principle). This is a statement from a lender stating how much they would be willing to lend you based on some basic information.
A Mortgage in Principle gives you a clear idea of your budget and shows estate agents and sellers that you're a serious buyer.
Choose the Right Mortgage
When it comes to picking a mortgage, you've got options. There are several types of mortgages available in the UK, each with its own pros and cons:
Fixed-rate mortgages offer a consistent interest rate and monthly payment for a set period (typically 2-5 years).
Variable rate mortgages have an interest rate that can change over time, often tracking the Bank of England base rate.
Tracker mortgages follow a specific financial indicator, usually the Bank of England base rate, plus a set percentage.
Offset mortgages link your savings to your mortgage, potentially reducing the interest you pay.
Think about what works best for your situation. Consider your long-term plans, risk tolerance, and financial situation when choosing a mortgage type. Don't be afraid to ask questions to lenders or mortgage brokers about the details of each option.
Plan for Home Ownership Costs
Owning a home isn't just about paying the mortgage. You've got bills, repairs, and maybe even some new furniture to think about. Budget for everything, so you're not caught off guard.
Be sure to budget for: council tax, buildings and contents insurance, utilities, maintenance and repairs, ground rent and service charges (for leasehold properties), furniture and decorating expenses, etc.
A good rule of thumb is to set aside 1% of your home's value annually for maintenance and repairs. For a £300,000 home, that's £3,000 per year or £250 per month.
Maintain an Emergency Fund
Even if you have prepared for all the expenses listed above, unexpected ones can still pop up. Maintain an emergency fund of 3-6 months of living expenses to cover unforeseen costs or to help you make mortgage payments if you experience a loss of income.
Consider the Impact on Other Financial Goals
Remember that, while buying a house is wonderful, it shouldn't mean giving up on all your other goals. Keep saving for retirement, paying off debt, adding to your children’s education fund and maybe a little treat for yourself once in a while.
If necessary, adjust your home-buying budget to ensure you can maintain a balanced financial plan.
Understand the Tax Implications
We can never escape taxes! There are several types of tax connected with home ownership:
Stamp Duty – Paid when purchasing a property.
Council Tax – A yearly tax which can be paid in instalments.
Consult with a tax professional to understand how buying a home might affect your tax situation.
Plan for the Future
When buying a home, think about the future: Is this your forever home or just a starter pad? Make sure your house fits your plans:
How long do you plan to stay in the home?
Does the location align with your career and lifestyle goals?
Is the home suitable for future family plans?
What is the potential for appreciation in the area?
These factors can influence both your choice of property and your financial planning strategy.
Protect Your Investment
Once you've purchased your home, protect your investment with adequate insurance coverage. Buildings insurance is typically required by mortgage lenders, and contents insurance is highly recommended.
Consider life insurance to ensure your family can keep the home if something happens to you. Think about income protection insurance which can help you make mortgage payments if you're unable to work due to illness or injury.
The home-buying process is complicated, but by considering the above topics and being prepared, you can approach it with confidence.
Owning your own home can be very rewarding but remember that home ownership is just one part of your total financial plan. Keep an eye on the big picture and make sure home ownership fits in with all your other financial goals.
*Money Helper
**Home Owner Alliance
Your Genistar representative can help you get ready for home ownership with our complimentary Financial Plan. Then we will refer you to our trusted mortgage provider to guide you through the mortgage process. Contact your Genistar rep or our Support Centre.
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The information provided on this website is for educational or informational purposes only. Please refer to our legal disclaimer for further information.
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