First-time buyer in 2021? Here’s how to avoid rookie mistakesSubscriber only
How to sort the financial side and anticipate hidden costs
If you want to buy your first home this year, careful planning will be key to success. These guidelines will help get you across the threshold of the right house with the least heartache.
Show me the money
If you’re serious about buying in 2021, then you’ll already have savings. The fact that you couldn’t buy an avocado toast even if you wanted to for most of the past 12 months will have accelerated your efforts. Moving in with Mum and Dad will have provided a boost too. But before casting the net for a house, you need to know your budget. How much could or should you borrow, and how much in savings will you need?
The Help to Buy (HTB) scheme has been a game changer for those whose high rent made them unable to scale the first hurdle of a deposit. It allows those eligible to claim back tax they have paid in Ireland in the last four years of up to €30,000, or 10 per cent of the purchase price of a property, up to a ceiling of €500,000, to help fund a deposit. It’s important to note that this incentive is restricted to both first-time buyers and new homes.
Revenue has now updated its records with the tax you paid in 2020, so it’s a good time to revisit the scheme to see if you qualify for more based on last year’s earnings. “You might have qualified for €20,000 in 2020, but you might qualify for €25,000 or €30,000 now,” says Michael Dowling of Dowling Financial.
If you have set your sights on a €380,000 house, the 10 per cent deposit of €38,000 is mostly covered by the HTB. “So you don’t need a huge deposit anymore – however most banks expect you to have money saved,” says Dowling. “They need to see six months’ evidence of savings and paying rent. They want to see that you are not entirely reliant on the grant to make up the difference.”
When it comes to how much you can borrow, proving repayment capacity is the biggie. “Gone are the days of saying ‘I earn €50,000 and my partner earns €40,000, we can borrow 3.5 times that’,” says Dowling. “If you haven’t been saving or paying rent or doing both, you haven’t proven your repayment capacity.”
Not only must you prove you can pay the monthly mortgage repayment, you must show you can pay it at a stress-tested level. This is where a lot of first-time buyers fall down. Some online mortgage calculators fail to factor in this buffer. “They say they are saving €1,000 a month, paying rent of €500 and the mortgage would cost them €1,500 and I’ll say no, the stressed repayments would cost you €1,800. You need to demonstrate you can repay the mortgage based on the mortgage repayment being stress-tested at up to 5 per cent.” Showing repayment capacity for six months preceding your loan application will affect how much you can borrow.
The next question is the type of mortgage to choose. The vast majority of new mortgage borrowers choose fixed rate – this means your monthly repayments stay the same until the fixed period ends.
“The cheapest rate for a first-time buyer, who is typically borrowing 80 to 90 per cent, is 2.35per cent on a three-year fix or 2.5per cent on a five-year fix,” says Dowling. The cheapest variable rate however is about 3.15 per cent. Traditionally the advantage with a variable rate is that you get more flexibility to pay extra off, extend the term or top it up without penalty – but this is unlikely to be a priority in the early years of your mortgage.
“With your first mortgage, it’s very important that you have a degree of certainty around repayments. You know for the first three or five years, that’s what you will be paying, you don’t have to worry about rates going up.”
The typical term among first-time buyers is 30 years, though some borrow for 35. While borrowing over a longer period makes monthly repayments lower, you’ll pay more in interest in the long run. Obviously, the less you borrow and the shorter the term, the less you pay to the bank for using their money.
Live a little
Borrowing to the hilt may get you the house, but you need to live too. The bank doesn’t care if you are sitting in the dark with no telly, so long as the mortgage repayments are made. You’ll need to have sufficient remaining income each month, however, for running your new home. The cost of light and heat, connecting and running TV and broadband and a TV licence may have been shared when you were renting. Now it falls to you. As a renter, you probably didn’t pay directly for house maintenance, refuse collection or chip in for grass cutting. If having children is part of the plan, think about whether you or your partner may want the financial flexibility to take a period of unpaid leave. Childcare costs, typically most expensive up to the age of three, are another factor to consider.
If all of this is giving you night sweats, slay your demons by using the online household budget tool from the Money Advice and Budgeting Service. It will help you put a figure on these outgoings, easing your mind about what you can afford. It’s not always about borrowing the maximum amount, says Dowling. “If your mortgage is costing you more than 35 per cent of your net disposable income, you could get into difficulty if other things come along that you didn’t plan for. Repaying less than that means you can have a good balance between paying your mortgage and having a life.”
What and where
If you’ve been saving for a deposit, you’ve no doubt been considering locations, specific developments and even house types. Finances mean the average age of first-time buyers has crept up, so a first home these days is less likely a city bachelor/bachelorette pad and more likely a coupled-up starter family home. In any case institutional investors have been routinely snapping up the few new apartments coming on stream.
“Obviously, first-time buyers are older than they were 15 or 20 years ago and they are buying for the longer term. We’d be saying to people, buy for 10 years, don’t buy for two,” says Ivan Gaine, managing director of New Homes with Sherry FitzGerald. “With the macroprudential rules, there is going to be modest price growth, but it’s not exceptional price growth. It will be in the early single digits.”
The pandemic paired with working from home is having an effect too, making even the most ardent urbanites extend their horizons. “North Wicklow, Greystones, Delgany, Enniskerry – I suppose its the lifestyle and now in the second year of a pandemic, a more permanent shift in behaviour. It’s more about the villages than the urban.”
Others are going “home home”, says Gaine. Of course prices there are keener too. “There is definitely a return to the home city where the family are. We sold eight houses this morning off-plan in Galway. There are a fair amount of people gong back to Oranmore, back to Cork back to Limerick. Last year was our best in Cork for more than a decade from a new homes perspective.”
The Help to Buy scheme and improved savings mean first-time buyers are stretching themselves for more space. “Four beds were selling better in the last quarter and in this first quarter than normally. Before it was all about the three-bed semi, or the three-bed terrace, whereas now there is a shift for that extra space and people are trying to get to that highest denominator that they can afford,” says Gaine. “They are thinking longer term and not short term. A four-bed is a three-bed plus study, a three-bed is a two-bed plus study. More people are using their house differently than they ever imagined.”
If you’ve found the house, got the mortgage and paid the deposit you’ll need something left in your coffers to get things over the line. As soon as your offer is accepted, your estate agent will ask for your solicitor’s details so have one ready to go. Shop around in good time, asking for itemised, written quotes including costs of associated Land Registry fees and searches and VAT. Solicitor’s fees can vary widely ranging from €1,500 to €3,000.
You’ll also need to pay stamp duty of 1 per cent up to €1 million. On a new house it is charged as 1 per cent of value of the house less 13.5 per cent VAT. So for a new house worth €300,000 that’s €2,595.
Don’t forget moving costs to get any begged and borrowed sofas and beds in the door
Your lender will want to make sure you are paying an appropriate price for your new home so they’ll request a valuer’s report to confirm the property’s worth – expect to pay €150. Before buying a home, it’s also a good idea to get a professional surveyor to inspect the property and identify any issues. Fees can be around €300 – again shop around and ask for quotes inclusive of VAT.
Most lenders will also require you to take out mortgage protection insurance to pay off the mortgage in the event of your death. Expect to pay around €20-€30 a month for the lifetime of your mortgage. A broker rather than your bank is likely to have the best deals and will be able to advise cohabiting couples of the best course. You’ll need to allow for residential property tax too. This is self-assessed and paid annually to Revenue and is based on the market value of your home. Owners of a house valued at €300,000 can expect to pay tax of around €500 a year.
You will be able to defer some decoration and furniture spending of course, but not all of it. Don’t forget moving costs to get any begged and borrowed sofas and beds in the door. With all that taken into account there might just be enough left in the budget for some bubbly to toast your new home.