What to know before getting your first mortgage

If you’ve ever discussed the merits of education around the dinner table with a few good friends, you may have …

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you’ve ever discussed the merits of education around the dinner table with a few good friends, you may have touched on topics such as ‘why didn’t we learn about taxes?’ or ‘they should have prepared us better for mortgage applications.’

As far as taxes are concerned, I’ll leave that to a colleague who can take you through the ins and outs. I’m here to take the guesswork out of your first mortgage, and tell you what you need to know before you sign the loan acceptance letter.

I’ll take you through the tough stuff in a mortgage application that often only lands on your lap once you’re already midway through it. It’s important to know what you’re getting into before you’ve gone that far.

A mortgage loan can be a means to afford your dream home, but it can also be a serious expense (in addition to your repayments!) if you don’t pay attention to the fine print.

A lot of your past spending behaviour and financial management will come into play during your mortgage application, so it’s best to be prepared. For first-time buyers, there are many products that can ease you into the process and even the mortgage itself offers different options.

The surveyor is not going to inspect every nook and cranny

While you may feel at peace that the property you’re buying is priced right because a property surveyor approved it, you could still find yourself in a tight spot months or years down the line. Crumbling foundations, faulty structures, rotten timbers, and pest infestations might not be noticed at first glance and can be problematic down the line.

The assessment done by the property surveyor is purely for the sake of confirming value, not finding fault. If you have any doubts about a property, it’s important to request a full survey. There are five different surveys to choose from that will be payable from your own pocket.

  • Condition report (around £250) – usually done on new properties and properties that are in a seemingly good condition.
  • Homebuyer report (around £400) – suitable for properties that are in reasonable condition, offering detail about possible damage or issues that may arise.
  • Building survey (around £400) – ideal if you’re looking at larger or older properties.
  • Full structural survey (around £600) – the best option for buildings that are clearly in need of repair.
  • New-build snagging survey (around £300) – important if you’re buying a new-build. Highlights potential issues to developers.

Read up on government initiatives to help with your deposit

In the UK, lenders typically grant loans of up to 90% of the value of the property. However, some factors may influence lenders to offer a loan of less than 90%, such as the condition of the property or your credit profile.

In such a situation, when a lender feels that the risk of the loan is not high enough to turn down, but high enough to warrant a higher deposit, they may request an additional 5% to 10%. This means that 10% should be considered the minimum deposit required. 

If this seems unmanageable, it may be worth considering help currently on offer from the government. For example, if  you’re hoping to buy a new build, it could be a good idea to look into the Help to Buy Equity Loan.

With this loan, the government lends you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home.

As a result, a seemingly unaffordable deposit could be within reach. As always, it’s important to run the numbers and make sure that such an approach is right for you.

For more information on this and other Help to Buy products currently offered by the government, visit the Help to Buy website.

Have money set aside for extras

When you purchase a property, there are a number of other fees that come along with the purchase. Stamp Duty Land Tax is one of the higher fees to consider. Buyers usually pay Stamp Duty Land Tax on increasing portions of the property price above £125,000.

The good news for first-time buyers is that there is some exemption. There is no Stamp Duty Land Tax on properties under £300,000, and you only pay 5% on any portion from £300,001 to £500,000. Properties over £500,000 don’t qualify for the Stamp Duty Land Tax exemption and the standard duties apply.

Another fee to be aware of is the lender’s application fee, which is often referred to as a booking fee. While some financial institutions don’t charge this fee at all, those that do usually charge around £99 per application. This is an automatic fee that is charged even if you don’t finalize the application for any reason. 

Costs that tend to creep up and eat away at the budget are usually the small things, such as ensuring there are curtains for all the windows, doing minor renovations, or buying those first few essential pieces of furniture.

It’s important to find out the estate agent’s fees upfront, and which property inspections are covered by the seller. If additional inspections are required, these might be paid for from the purchaser’s pocket. The final cost that you need to be aware of is the fee for the solicitor that is handling the legal side of the transaction.

It’s also wise to keep an eye on choices that could affect your overall repayment, such as adding fees and costs to your loan amount or extending your term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »