6 steps to buy your first home sooner

Buying a home, especially for young first-time buyers, can be challenging. Our friends at Klink show you how to achieve home ownership and the money moves that matter.

December 16, 2024

Buying a home, especially for young first-time buyers, can be challenging. Don’t make the mistake of diving straight into property viewings. Proper preparation is essential to avoid costly mistakes, secure a mortgage, and ensure long-term stability. Without it, you risk overextending your budget and delaying home ownership.

Here's our checklist to guide you to becoming mortgage material

1. Do a Financial health check

Credit Scores

• Access your credit reports from multiple providers (Experian, Equifax, TransUnion) to check what information they have for you. They could give you an indication of how a lender may view your eligibility for a mortgage. So make sure the info they have is not incorrect and dispute any false information you might see. This is important information and you have a right for it to be accurate!

• Use less than 30% of your credit card limit, potentially making multiple monthly payments to do this. Approaching it this way demonstrates to lenders that you can act responsibly, which could also boost your credit score.

Debt and income ratios:

• First, you need to understand your likely mortgage costs. To estimate your potential mortgage costs, consider using trusted UK comparison sites like MoneySuperMarket, Compare the Market, and GoCompare. These sites allow you to compare various mortgage deals tailored to your financial situation.

• Calculate your Debt-to-Income Ratio (DTI) by dividing total monthly debt payments by gross monthly income. Your goal is to reduce debt as much as possible, but aiming for less than 30% is ideal to start with – including your future mortgage payment.

• Improve your debt situation quickly by combining your high-interest debts into a single lower-interest loan if possible. This means you pay less interest on existing debts and you may be be able to pay it off faster.

2. Saving Techniques for Home Buyers

• You’ll want to aim to save 10% – 20% for a mortgage deposit. There are some mortgages available at a lower deposit, but these usually carry higher interest rates and will cost you more each month. Remember, the higher the deposit, the higher your chances to get a mortgage.

• In essence, saving for a home requires a planned approach. The Lifetime ISA (LISA) offers an opportunity for first-time buyers as it gives a 25% government bonus on annual savings up to £4,000 – effectively giving you additional funds towards your home purchase.

• Use cashback credit cards and reward programs to build additional savings. Some platforms offer up to 5% cashback on initial spending, transforming your regular purchases into potential property deposit contributions. Remember, don’t get into more debt, only use this for money you need to spend normally like groceries.

3. Ready for Mortgage Readiness?

• Structure your finances to appear more attractive to lenders by:

• Keeping 3-6 months of mortgage payments in savings.

• Avoiding gambling transactions.

• Showing stable income.

• Reduce unnecessary credit commitments.

• Avoid overdrafts and short-term high-cost lending.

• Mortgage stress testing is something lenders do to understand if you can still keep up payments if costs increase. You can calculate your true disposable income by subtracting all essential living expenses from your net income. Include potential future costs like childcare. You will then have an understanding of how much ‘runway’ you have in your payslip in the event of a shock like costs increasing across the board or an increase in interest rate.

• Calculate your mortgage readiness score with free tools like Klink.

• Explore lender-specific requirements by researching eligibility criteria and affordability calculators. Use Klink’s affordability calculator to input your income, expenses, and deposit to see potential borrowing limits.

4. Budget – The Cost Breakdown

Break down your expenses into key categories such as: – Rent Payments – Household Bills – Groceries and Essentials – Shopping and Subscriptions – Transport and Travel – Entertainment and Leisure

5. Consider First-Time Buyer Schemes

• Rent-to-own schemes, like Keyzy, provide a flexible route to homeownership, allowing you to rent a property while building the option to buy it later, often at a pre-agreed price. This scheme is helpful for first-time buyers who need time to save for a deposit or improve their financial situation. By combining renting with the potential to purchase, it bridges the gap between renting and owning.

• The First Homes scheme provides new-build properties at a 30-50% discount to first-time buyers, local key workers, and those with local connections. The discount is preserved for future buyers, creating a perpetual affordable housing option.

• Shared Ownership schemes provide a more affordable way to step onto the property ladder, allowing you to purchase a percentage of a property (usually 25% to 75%) and pay rent on the remaining share. Over time, you can buy additional shares, gradually increasing your ownership. This is a practical option for first-time buyers who may not have the deposit or borrowing power to buy outright.

6. Set Realistic Goals

Remember all good plans start with a goal in mind. When buying a home, it’s important to be clear and set your home-buying goal. Our Home Goal feature allows you to set your home goal, work towards it, and see how fast you can get there.

• Understanding your borrowing power is crucial before entering the property market. Use our Mortgage Borrowing Calculator to know your loan limit.

• Home affordability calculators are essential for giving you a full view of your buying power. Use our home affordability calculator to know what you can afford to buy today.

There’s obviously lots more to say when it comes to personal finances, but we hope the tips and tricks above can get you motoring on your journey towards home ownership.

Article from Home Owners Alliance Online