How to buy your first home – and what it will really cost you

Buying your first home is a major financial milestone. Becoming a homeowner means you can start accumulating the property wealth that will provide you with a financial bedrock for the future and help you move further up the ladder.

But taking out a mortgage has become more expensive since rates rose last year. After more than a decade of record low interest rates, the average cost of a five-year fixed-rate mortgage has risen to 5.05pc in April 2023, up from 3.01pc in April 2022, according to data from Moneyfacts.

The increase in borrowing costs has also had a cooling effect on the housing market, with house prices falling as a result – which could be an advantage to buyers.

So, before you buy your first home, read Telegraph Money’s guide on how much buying your first home will cost you.

How much can I borrow?

As a rule of thumb, mortgage lenders will let you borrow up to 4.5 times your basic salary.

A couple jointly earning £80,000 would be offered a mortgage of up to £360,000. Professionals, such as doctors, solicitors and dentists, can sometimes borrow up to six times their salary. 

If you’re self-employed, however, lenders take a different approach by looking at your earnings to gauge whether you have a reliable income. You’ll commonly need to provide two or three self-assessment SA302 forms showing annual tax calculations.

The cost of your monthly household bills and regular credit commitments will also form part of the assessment, and can reduce the amount you can borrow.

Once your bank has assessed your income and outgoings it will often issue an ‘agreement in principle’, which states how much it is prepared to lend you. It’s up to you to decide if you can afford to take the maximum offer.

Nicholas Mendes, of mortgage broker John Charcol, said: “I always advise first-time buyers not to overstretch themselves, and to draw up a realistic monthly budget for life in their new home – allowing for unexpected repairs, bills and home improvements when they move in.”

How much will I need for a deposit?

Generally speaking, you will need to save a deposit of at least 5pc of the purchase price, and then borrow a mortgage of up to 95pc of the property’s value.

With the help of a guarantor, some banks will offer a mortgage of 100pc – meaning you won’t need a deposit at all. However, this involves a relative or friend putting up their own property or savings as collateral should you fall behind on repayments. If opting for savings, they must deposit savings equal to 10pc of the purchase price with the mortgage lender for around three years. 

Lenders such as Barclays, Family Building Society and Lloyds Bank offer family mortgage options.

Boost your deposit savings

The average UK home costs £287,880, according to the Halifax data for March 2023. To buy a property at this price, you will need savings of more than £14,000 to put down the minimum deposit of 5pc.

“The good news is that savings rates have increased substantially since the Bank of England began raising the base rate from December 2021, so now is a good time to be saving,” said Anna Bowes, of website Savings Champion.

If you’re aged between 18 and 39, you can deposit up to £4,000 a year into a Lifetime Isa and you will receive a 25pc government bonus on each deposit, up to a maximum of £1,000. Your savings can only be withdrawn to buy your first home or when you turn 60-years-old, otherwise you will face a penalty that could leave you with less than you put in.

A first-time buyer who saves £4,000 a year for five years at 3.5pc will have a deposit of £27,750, made up of £20,000 in personal savings, £5,000 government bonus and £2,750 gross interest - and all growth is tax-free.

If you want to save more than £4,000 a year, or you’re not eligible for a Lifetime Isa, instant-access savings accounts offer rates of around 3.5pc, while regular savers offer rates of up to 7pc for the first 12 months.

Are any Government schemes available to help?

Since the Help to Buy scheme has closed, the main government-backed housing scheme is shared ownership.

Under the scheme, buyers can take out a smaller mortgage to purchase a share of a property, usually 25pc, and pay rent to a housing association on the remaining share. 

You can gradually increase your share in the property over time, known as staircasing, until you own 100pc of the property.

“There are drawbacks as well as benefits to this scheme so seek independent advice from a mortgage broker first,” said Mr Mendes.

The First Homes scheme is available in England. It offers first-time buyers a discount of between 30pc to 50pc of the market value of new-build homes, but only with participating developers. Take up to date has not been widespread. You’ll need to check out developers’ websites in your area to find out whether they are part of the scheme.

How much is stamp duty?

Most first-time buyers will be exempt from paying any stamp duty, thanks to first-time buyer relief.

In England and Northern Ireland, first-time buyers pay no stamp duty on the first £425,000 of their purchase price. A 5pc levy is payable on the portion of your purchase price from £425,001 to £625,000.

A first-time buyer purchasing a property in England for £550,000, for example, would pay 0pc on the first £425,000 and 5pc on the remaining £125,000, resulting in a stamp duty bill of £6,250.

If you are buying a property worth more than £625,000, you lose the first-time buyer relief entirely and standard stamp duty rates apply.

From March 2025, the threshold at which first-time buyers start to pay stamp duty will fall from £425,000 to £300,000.

This tax is devolved in Scotland and Wales, where you’ll pay land and buildings transaction tax (LBTT) or land transaction tax (LTT) instead.

In Scotland, first-time buyers pay no LBTT on values up to £175,000; above this, 2pc is charged on values between £175,001 to £250,000, and 5pc on £250,001 to £325,000.

There’s no first-time buyer relief on properties in Wales, but LTT only kicks in at £225,000, so you might still find there’s nothing to pay. It’s charged at 6pc on values from £250,001 to £400,000, increasing to 7.5pc for properties valued between £400,001 and £750,000.

What other costs are there when buying a house?

First-time buyers in England pay £2,198 on average on extra costs and fees required for their home purchase. This includes conveyancing fees, a homebuyer valuation report and removals costs, according to moving services firm Reallymoving.

Some mortgages also carry fees of up to £1,000. It is advisable to use a whole-of-market mortgage broker to help you find the best deal, and their fees can range from £500 to £1,000. Some are fee-free, and get paid by the lender. 

Rob Houghton, of Reallymoving, said: “It is possible to reduce costs by shopping around, using a comparison site and checking reviews as well as quotes. If you can, plan ahead to try to move during quieter periods when there’s less competition for services, rather than at the busiest times, such as during August.”

Is buying still better than renting?

The upfront costs of renting are cheaper than buying. Tenants must pay a security deposit, which is commonly around five weeks’ rent (though it can be more) – which is far less than a property deposit. Renters may also have to hire a removal firm if they have a lot of large items to move. 

On a monthly basis, renting can also work out cheaper than buying, even with rents reaching a record high of £1,172 outside of London, according to Rightmove.

However, over the long term, the benefits of owning a home outweigh those of renting. Analysis by estate agent Hamptons found that if you had been renting your home for the last 10 years, you would have paid £105,907 in rent. A homeowner over the same period would have paid £75,686 in mortgage payments and fees, of which £43,738 would be interest.

Not only is the total cost lower, the homeowner will repay tens of thousands of pounds off their mortgage debt.

Mr Mendes said: “Buying is better than renting for the majority of households, so if you have the ability to get on the property ladder it is a wise decision, because you can start to build up equity in your home.”