Buying your first property is a big step that cannot be taken without considerations. The main things which you need to consider include:
- Initial Deposit & Costs
- Source of Funds
- Type of Ownership
- Relevant Taxes
First thing you need to check is whether you can afford the property. As you will need the proof of income to secure the mortgage. Mortgage broker or financial advisor will help you work out how much lenders can offer you, but it is usually 4.5 times your yearly income.
Initial Deposit & Costs
Building a big deposit will reduce the mortgage and is more likely to secure one as it will be less risky for the lender. Initial deposit is not just for your mortgage, but you also need to consider other upfront costs such as;
- Mortgage arrangement fee
- Legal fee
- Valuation fee
- Cost of Surveyor
Source of Funds
Lifetime ISA – Tax-free way to save funds for initial deposit is my putting money aside in a Lifetime ISA (Individual Savings Account). You must be 18 or over but under 40 to open to open a Lifetime ISA.
You can save up to £4,000 per year until you are 50 and government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. If you are buying with someone else, they can use their Lifetime ISA too.
There are four conditions which needs to be met in order for you to use your savings to buy your first home;
- Cost of the property is less then £450,000
- Buy the property at least 12 months after you have open Lifetime ISA
- Solicitor or Conveyancer to be used for the purchase – as ISA funds transferred to them
- And you are buying as a mortgage
Equity Loan Scheme – If you’re buying a new build which you can’t afford, you are eligible to get low interest loan for your deposit as long as the property value is less than £600k (£300k in wales). But you must buy the home from Help to Buy Agent (for England) or Housing Association (for Wales).
You still need to arrange at least 5% of the deposit and the government can offer you 20% as equity loan, it can be up to 40% if the property is in London and you can then get the mortgage on the remaining balance.
Type of Ownership
Buying property own your own can be quite tough. There are few alternatives such as buying with someone else or shared ownership.
Tenants in Common – You can buy the property with anyone you want to get your foot on the property ladder e.g. Friends, Family or Relatives. You need to have an underlying agreement with regards to ownership percentage and associated costs.
Joint Tenants – This is suitable for cohabiting partners and their families as each of the joint tenant has the full right to the ownership. If any of them dies, then the other gets the ownership of the whole property automatically.
Shared Ownership – This is most suitable for low income individuals. You need to buy this through a housing association, and you can buy 25% to 75% of leasehold property and pay the rent on the rest. You can even increase the percentage of ownership over time by process knows as staircasing. The deposit requirement is generally 5%-10% of your percentage of ownership. To be eligible for shared ownership, you need to met eligibility criteria.
If you do not have any other property and this is going to be your only property and your main home, then you are unlikely to pay any further taxes.
Stamp Duty Land Tax (SDLT) – For first time buyers there is no SDLT up to the property value of £300k. Over £300k up to £500k will have 5% SDLT.
Income Tax – Provided that you live in the property and decided to let a room. You can get up to £7,500 tax free income (Rent a Room Relief) from a lodger as rent if you let it as furnished accommodation. If the income is more than £7,500 then you need to prepare the property accounts and pay the tax on excess rent. If the property is shared the tax-free rental income will be apportioned accordingly.
You might need to get permission from your mortgage advisor and home insurer if you decide to let out.
Capital Gains Tax – If in future you decide to sell the property and the property has increased in value then you will probably qualify for Capital Gains Tax exemption under private residence relief but as long the property is your main family home from the time you bought it.