Buying a home: Part 3

18 How Much To Save@4X

Buying a home is one of the biggest financial decisions most of us will ever make. And
because it’s not something we do every day, the home-buying process can be daunting for
both first-time buyers and existing homeowners alike. Poor decisions could cost you thousands of pounds and good decisions save you similar sums.

If buying a home is right for you (whether you’re a first-time buyer or you’re moving home),
it’ll be easier and less stressful if you follow a sensible process.
In a series of 5 guides we set out all what you need to know and do to help you on this

Part 1 - Four things to consider about buying a house
Part 2 - 12 things to consider in choosing a home
Part 3 - 3 steps to financing your home
Part 4 - How to negotiate the purchase of your new home
Part 5 - The mechanics of buying your new home

Buying a home - Part 3: 3 Steps to financing your home purchase
This articles covers:

  • Get your deposit together and work out how much you can borrow
  • Consider the government help schemes Help to Buy: equity loans
  • Factor in your other costs of home buying


This section is for first-time buyers who need to get a deposit together. If you’re an existing
homeowner looking to move but have little or no equity in your current property, you’ll need
to find a new deposit too. You won’t be able to access the special ‘bonus’ ISAs for saving –
but if you’re buying a property jointly with someone else and they are first time buyers, they
can save through these bonus ISA plans (more info below).

The importance of your deposit

In general terms, the bigger your deposit, the less risk you pose to mortgage lenders, so,
you’ll be able to access a wider range of mortgages and lower interest rates.
Having a deposit of 10% of your home’s purchase price could give you access to a much
lower interest rate than if you only have a 5% deposit. And that difference is worth checking
with your mortgage provider.
You could side-step the need for a larger deposit by using the Government’s Help to Buy:
Equity Loan scheme. But there are risks as well as benefits with that scheme that we outline
in this blog. So, look carefully before leaping into it.

Build a deposit with a 25% free bonus

Whether you’re saving on your own or with help from your family, it could be worth saving
your deposit money in one of the two special ISA savings products outlined below:

Help to Buy or Lifetime ISA
Both of these products will give you a free 25% (government) bonus on your savings when
you buy your first home.
The Lifetime ISA allows you to save more – and therefore enjoy more free government
bonus. You just need to be aware that there’s a c.6% penalty on your funds if you need to
access your money early – and not for a house purchase.
Because of this government-imposed penalty feature, very few banks or building societies
offer this product and the interest rates on them are not always the best. Your capital go up
and down in value if you invest in stocks and shares, rather than cash.
The Help to Buy ISA has a lower limit on what you can pay in. But it offers penalty-free
access to your money for any reason and there’s a wider choice of these products on the
market. So, they tend to offer slightly better interest rates. You can learn more about both of
these products here.

Cutting out wasteful spending

If you’re saving on your own – or with a partner – for your deposit, the task can seem
daunting at first. But if you can find just £6.60 per day (the price of two take-away coffees)
you could save £200 per month.
If you can afford to save more than that amount, you might want to consider the Lifetime ISA
And, with a modest amount of interest paid on your account plus the free government bonus
of 25%, you could look forward to having a deposit fund of £16,000 over 5 years (Or £32,000
if you’re saving with a partner).

Work out how much you can borrow

Unless you have the cash (or equity* in your current home) to buy your new home outright,
you’ll need to know how much you can borrow on a mortgage before you go looking for your
home. Estate agents are unlikely to let you view properties unless they know that you have
the capacity to buy.
* Your equity in your property is the excess, if any, of your home’s value above any
outstanding mortgage or other loans.

The amount you can borrow will depend on various factors including:

  • The amount you have available as a deposit (or, for existing homeowners, the equity
    in your current home)
  • Your income, or incomes if you’re buying with another person. (The self-employed
    may also have to provide three years’ worth of accounts, certified by an accountant)
  • Your regular bills and other outgoings (including lifestyle expenditure) and how these
    could change in the future
  • Your credit history
  • The value and type of property you want to buy
    The type of mortgage you want (fixed or variable, the interest rate and term)
  • Any other assets you could offer as security (like another property or investments)
  • The lending criteria of the mortgage lender you approach – which can vary quite a

Use an online calculator like this to get an initial estimate of how much you could borrow.
And then search online and seek advice from an independent mortgage broker to
understand your mortgage options.
A good mortgage broker should be able to find the best mortgage terms for your personal
situation and obtain competitive terms for any associated buildings, life and health insurance
policies you’ll need alongside.
Find out more about the insurances you might need and the best way to buy them here.
Habito provides mortgage advice from the whole market. You could also consider the HomeOwners Alliance which offers all sorts of home-buying guidance for a modest fee.
Your aim at this stage is to find the best terms (for your situation) on a mortgage that you
could comfortably afford. And then, to obtain a Decision in Principle (DIP) (or Agreement in
Principle (AIP) or Lending Certificate) to confirm the amount you can borrow. This is what you’ll need to show to estate agents.
More details on mortgage affordability can be found here.


The government schemes that aim to help people buy their own home include:

  • The Right to Buy/Acquire scheme for council tenants who qualify to buy their home at
    a discount
  • The shared ownership schemes for those wanting to buy a share of their home – who
    might want to buy the remaining share in the future.
  • The Starter Home scheme – which makes new-build homes available to first-time
    buyers under 40 years old with at least 20% off the market price
  • The Help to Buy: Equity Loan scheme – which offers a 5-year interest-free loan to
    both first-time buyers and existing homeowners buying a new-build house that is
    priced below a regionally based maximum amount (between £186,000 to £600,000)
  • The availability and terms of these schemes vary across the UK and some are only available
    for a limited time. So, check out the scheme details here and check your eligibility here. And
    consider these schemes carefully, noting the risks as well as benefits in each – like those we
    outline here for just one of these schemes: the popular Help to Buy: Equity Loan scheme.

Help to Buy: Equity Loans - Taking a closer look

The benefits of this scheme

  • You only need a deposit of 5% of your home’s purchase price. So, you can buy a
    home more quickly with less saving
  • The government provides an equity loan of 20% (or 40% in London) of the purchase
    price and you borrow the remainder from a mortgage lender
  • You might access a cheaper mortgage rate than if you were taking out a mortgage
    for, say, 95% of your home’s value
  • Your equity loan will rise and fall with the value of your home. So, if your home price
    falls – so will the amount you owe the Government
  • You pay no interest for 5 years on your equity loan from the Government
  • In the sixth year, you’ll pay an interest fee of just 1.75% on your equity loan

The risks with this scheme

  • Your home choices are limited with this scheme as it’s only available on new
    properties – and only with some developers.
  • You’ll have a restricted choice of mortgage lender. They don’t all offer Help to Buy
    mortgages and some charge more than on their standard mortgages, because they
    have to deal with an additional party (Homes England).
  • There’s a risk that you’ll pay over the odds for a new home on a Help to Buy
    development when compared to comparable homes in the area, because of the
    increased demand for homes generated by this scheme.
  • If you overpay for a home, there’s an increased risk of finding yourself in negative
    equity* if home prices fall. There are also concerns that when the scheme stops (in
    2023 or earlier if the funding is used up) this could add downward pressure on home
    prices. *Negative equity means the sale value of your home is less than you might
    need to repay your mortgage.
  • The sudden start of fees on your equity loan (after 5 years) could come as a shock
    unless you plan for it. And your equity loan interest fee will rise every year – after
    year six.
  • The fee will increase by any increase in the Retail Price Index (RPI) plus 1%. So, for
    example if for the first year of increase, the RPI increases by 3%, your fee will
    increase by 4% (3% + 1%) to 1.82%. This is still a competitive rate for borrowing –
    but it will continue increasing each year, even if there’s no inflation.
  • Your equity loan is quite unlike your mortgage debt which, if you pay interest due,
    remains fixed in value. Your equity loan will rise and fall with the value of your home.
    So, if your home price increases, so will the amount you owe the Government.


On top of your mortgage deposit, you’ll need money for the other costs of buying your home
such as:

  • Home valuation and mortgage arrangement fees
  • Solicitor fees, Land Registry fee and local authority searches
  • Stamp Duty - this is a tax paid on homes costing £125,001 or more. But note, first-
    time-buyers do not currently pay Stamp Duty on the first £300,000 for properties
    worth up to £500,000. To work out how much
  • Stamp Duty you’ll need to pay – use
    this calculator
  • Buildings, contents, life and protection insurance
  • Decorating and furnishing costs
  • Moving costs

This list only covers the big, upfront costs. You can find a more complete list here.
Try to cover these expenses with your savings (rather than adding them to your mortgage),
but if you don’t have the funds for all of them upfront, aim to overpay your mortgage in the
early years to avoid long-term interest costs on them.
In the next blog in this series we explain how to negotiate the purchase of the home you
want to buy, click here to read.

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