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Graduating? Give yourself the best chance of buying a home Image

20th June 2019
Graduating? Give yourself the best chance of buying a home

1. Get a job

If you are going to qualify for a mortgage you will need to show that you have a regular income, so the first step towards realising your homeowner dream will be getting a job.

While it may be tempting to hold out for a position in the career you want to pursue over the long-term, if your goal is to buy a property, you need to get some money coming in, which means starting work as soon as possible, even if it is not your ideal role.

Not only will getting a job quickly put you on the right road to being able to buy a property, but mortgage lenders are also likely to view your application more favourably if there are no long gaps in your employment record.

2. Pay down debt
Once you have a job and money coming in, your first real priority is to pay down debt.

One of the things lenders look for when they carry out an affordability assessment is how much you spend on unsecured debt repayments, such as credit cards, loans and overdrafts each month. It's a way of assessing the kind of mortgage payment you can afford.

It is important to pay down debt in the right order, reducing the borrowings that have the highest interest rates first, which is usually credit cards.

It is worth looking for ways that will enable you to reduce your debt faster, such as taking advantage of 0% interest balance transfer offers on credit cards or taking out a debt consolidation loan so that you are paying a lower interest rate.

If you do this, it's important to be disciplined and cancel your old credit cards so that you do not end up running up more debt.

Loan debt will need to be addressed. Many graduates are likely to have one or more student loans, and while owing a large amount in this area will not automatically exclude you from getting a mortgage, lenders will take into consideration how much loan debt you have to repay each month in their affordability calculations.

The rate at which student loans are repaid is linked to your income. For example, you do not start making loan payments on loans taken out after September 2012 until you are earning more than £25,725, at which point 9% of your income above this amount will automatically be deducted from your salary for repayments.

As a result, if you are earning £27,000 a year before tax, you will have just £9 a month deducted for loan payments. So, while your loan balance won't go down quickly, it will have minimal impact on your cash flow.

Interest rates on student loans are set at inflation measured by the Retail Prices Index (RPI) plus 3%, giving a total rate of 6.1% in April, so it is likely to be lower than other unsecured debt. Because of this, it often makes sense to focus on clearing other debts first.

3. Get saving
The average first-time buyer puts down a 15% deposit according to Zoopla estimates, while average UK property values in the last 12 months stand at just over £300,000. That equates to a deposit of around £60,000.

Raising that kind of money may sound like a daunting or, more likely, impossible task – particularly when you are just starting out on your career. But don't let that put you off starting to save. Plenty of properties are, of course, much cheaper than the average and you can get away with a minimum deposit of 5% (although interest rates will be higher).

Keeping your cash flow realistic, draw up a budget that enables you to save a set amount of money each month, and stick to it. With interest rates remaining close to record lows, it is also important to be smart about where you put your money. For example, you can save up to £20,000 a year into a Cash ISA and any interest earned is also tax-free.

But there are ISAs specific to first-time buyers too. The Help to Buy ISA for example, allows you to save up to £3,400 in the first year and £2,400 in subsequent years. The Government will top this up with a 25% bonus up to a maximum of £3,000 when you buy your first home.

But you will have to move fast, as it will no longer be possible to open one of the accounts after November 30 this year.

An alternative option is the Lifetime ISA into which people aged under 40 can save up to £4,000 of their annual ISA allowance each year. The Government will add a 25% bonus or £1,000 a year, but the money must be used to buy your first home or save for retirement.

4. Start nurturing your credit score
Alongside reducing debt and setting up a separate savings pot, you should also take steps to improve your credit score.

A credit score, contained in a credit report, details any outstanding credit agreements you have, including credit cards, loans and mobile phone plans, whether you make repayments on time and in full, and if you have any County Court Judgements CCJs) against you.

Lenders use these reports to determine how risky it is to lend you money. The two main credit reference agencies are Experian and Equifax. You can access your credit score, and in some cases your entire credit report, free of charge.

It is worth doing this to see what your credit report looks like and ensure there are no factual errors. You can improve your score by making sure you do not miss any debt repayments and repaying more than the minimum each month on outstanding credit card balances.

It is also important to be registered to vote, even at your parent's address, as it is harder to obtain credit if you are not listed on the electoral roll.

While it may seem counterintuitive, your credit rating may be lower if you have never borrowed any money. If this is the case, it's worth considering taking out a credit card and using it to pay for some of your regular outgoings, such as groceries, to build up a track record with credit.

If you do this, be sure to clear the balance in full each month. Student loans are not factored into your credit report.

5. Do your research
If you're keen to get on to the property ladder it's worth spending time doing some research on where the best place to buy is for your budget.

If your job is one that could be done in several locations, such as being a teacher or doctor, you may want to base yourself in a location where property is cheaper. You can use Zoopla’s house price tool to explore property costs in different areas.

At the time of writing for example, it showed the average flat costs £633,955 in London but just £189,491 in the north east.

Even if you are tied to a particular place, you should still look for pockets of affordability. For example, while the average first-time buyer property in Bristol costs £293,447, the price falls to £216,242 in Avonmouth and £223,342 in Bishopsworth and Bedminster Down.

Knowing how much your first property is likely to cost will also help you to set a savings goal for your deposit. 

6. Consider Government 'leg-up' schemes
The Government has introduced a raft of schemes to help people get onto the property ladder and these are worth looking into to see if they can help you.

Its flagship initiative is the Help to Buy Equity Loan scheme, under which buyers can purchase a new build home with a deposit of just 5%, with the Government offering a five-year interest-free loan for a further 20%.

This enables buyers to qualify for a standard mortgage loan of 75% of the value of the property. The equity loan is higher for buyers in London at up to 40% of the property’s value.

Other initiatives include Shared Ownership, which enables buyers with incomes below £80,000, or £90,000 in London, to purchase a share of between 25% and 75% of a property owned by a local housing association, paying rent on the portion they do not own.

First-time buyers may soon also be able to benefit from the Starter Home scheme enabling people aged between 23 and 40 who do not yet own a home to purchase one at a minimum discount of 20% of the market price.

It might not be necessary to use a government scheme. If you can show the right income ratio to the mortgage loan you need, you could qualify for a standard mortgage deal with a 5% deposit.

Rates on 95% deals can be expensive however, so enlisting the services of a mortgage broker could be a good idea.

Make sure the mortgage broker is independent and does not charge upfront fees. And be wary of extras like mortgage insurance, which can be expensive and unnecessary.

Finally, first-time buyers also benefit from a stamp duty exemption, meaning they do not have to pay the tax on the first £300,000 of their home’s purchase price.

7. See if your parents can help
Many first-time buyers receive help from their parents. In fact, the Bank of Mum and Dad lent an estimated £5.7bn in 2018, according to Legal & General. And, with any, luck your loan payments will be more favourable.

Even if your parents are not able to lend you a lump sum to use a deposit, there are still a number of other ways in which they may be able to assist you.

A number of lenders will accept parents as guarantors on their child’s mortgage, while others will advance joint mortgages between a parent and child.

Another possibility offered by some lenders is to offset parents’ savings against their child’s loan, either reducing the amount of interest they pay or reducing the size of the deposit they need.

Even if your parents cannot assist you in this way, they could still help you to save more by forfeiting potential rental income so you can put your cash towards a housing deposit instead.

8.  Be prepared to make sacrifices
If you are going to realise your home-owner dream you'll need to be prepared to make sacrifices. Not only will living frugally increase the rate at which you can save a deposit and pay down any debt, but it could also increase your chances of getting a mortgage.

Under lending rules introduced in 2014 as part of the Mortgage Market Review, lenders take into account your spending patterns when assessing affordability.

So, if you are buying takeaway coffees and lunches every day or blowing money on nights out two or three nights a week, these could be counted as regular expenses and have a negative impact on the amount you are allowed to borrow.

9. Be creative
A bit of creative thinking can help speed up the rate at which you are able to save money. For example, some people opt to be property guardians while they are saving for their first home to enable them to spend less on rent.

Being a property guardian involves living in an empty building, such as a disused school, and keeping an eye on it for the owners in exchange for lower rent. Six out of 10 property guardians pay less than £500 a month.

Others tap into the gig economy to secure a second income stream. Think about any hobbies you have that could help you make money.

For example, if you are a keen photographer or crafter or like baking and decorating cakes, you may be able to make money from these skills. Even if you do not have a talent you can monetise, you may still be able to earn more money through doing paid overtime at work.

10. Start small
Do not be afraid to start super-small when getting onto the property ladder. Chances are, your first home will not be your dream property. Be prepared to compromise on either the amount of space you have, the location or even the property type.

The average terraced house in the UK costs £235,103, but a detached home is significantly more expensive at £394,083, according to Zoopla data.

Starting small - even just a one bedroom apartment - will enable you to get a foothold on the property ladder quicker, enabling you to start building up some equity, which will help you to trade up at a later stage. Very few people regret buying a home and everyone has to start somewhere.

11. Rent out a room
Once you have purchased a home you could generate some extra cash by renting out a room if you have a bedroom you are not using. Under the Rent a Room scheme you are allowed to make £7,500 a year tax-free from having a lodger.

Alternatively, you could rent out storage space in your property or even your driveway if you are lucky enough to have one and you live close to a railway station. A new property allowance which was launched in 2018 enables you to earn up to £1,000 a year from your home tax-free.

12. Remain realistic
Finally, when trying to get on to the property ladder, it's important to be realistic. The average age of a first-time buyer is 33, according to the most recent English Housing Survey.

If you manage to buy your first home before that age, you are doing well, but you probably should not expect to be able to get on to the property ladder quickly.


Read more at https://www.zoopla.co.uk/discover/first-time-buyers/how-to-own-a-home-after-graduating/#btPh6RpwCgsSDSSr.99

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