Common Mistakes Made by First-Time Buyers

Unaffordable Monthly Payments and Insufficient House Deposit

Jul 15, 2009 Asa Ghaffar

The housing market is a perilous place for the first-time buyer. Find out how to avoid the common pitfalls of home ownership.

Home ownership is the aspiration of millions of young people, but it is a dream that holds many potential perils. First-time buyers face considerable barriers to entry in terms of getting a foot on the housing ladder, most notably knowledge and understanding, unsustainable monthly payments on their mortgage and raising a sufficient house deposit.

First-Time Buyers Over-Extend Themselves Financially

According to the June 2009 Halifax House Price Index, property prices have fallen by 15% in the last 12 months. Despite this, the average house price remains at £157,713. Whilst the Bank of England base rate is currently 0.5%, this will rise over the coming months. Once the term of a fixed-rate mortgage ends, a first-time buyer will then pay standard variable rate which means that it will rise in-line with Bank of England base rate, plus a 2% margin on top.

Mrs. Stevens takes out a £120,000 fixed-rate mortgage over 25 years at 4% results in a mortgage payment of £640.11. The Bank of England base rate increases from 0.5% to 6% during the next 4 years. Instead of paying 4%, the rate is now 6% plus a 2% margin. This means that monthly payments have increased from £640.11 to £936.78. If monthly payments are barely affordable now, think carefully before purchasing a property as affordability isn't going to improve.

Low House Deposit

Failing to provide a sufficient house deposit will mean that first-time buyers won't be eligible for the best deals. The best offers are available to those who provide upwards of 25%. This is because, in the event of a homeowner not making monthly payments, the lender is able to repossess and recover any money in-full. Try to save a larger deposit or get parental assistance before buying a house.

Failing to Use a Mortgage Comparison Service

A number of first-time buyers only go to their high street bank to get their loan. This is a mistake as there are literally hundreds of mortgage products available and all offers should to be scrutinised in order to identify the best deal. For example, Lloyds TSB only offers Cheltenham and Gloucester mortgages. A mortgage comparison site, such as charcol.co.uk, searches the entire market for the best deal. A more thorough search can be provided by a mortgage broker, but a 1% fee is charged for this service.

Avoid Mortgage Fees

There are a number of fees and charges associated with home ownership. First-time buyers should always check to see if a loan offer includes any help with legal costs as this could save up to £1,000. As already alluded to, a mortgage broker provides a very useful service, but can add as much as a 1% fee to the loan. An online mortgage comparison service offers a comparable service without the associated advice, industry contacts and help with paperwork.

The housing market is a complex world for all first-time buyers. Whilst home ownership is a creditable aspiration, jumping in without due thought will lead to future problems. The higher the house deposit provided, the better the offer. Always use an online mortgage comparison site to find the best deal.

Sources

Halifax House Price Index - June 2009

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article Common Mistakes Made by First-Time Buyers in Mortgages/Loans is owned by Asa Ghaffar. Permission to republish Common Mistakes Made by First-Time Buyers in print or online must be granted by the author in writing.