Written by: Cally Worden
A steady income and a small deposit used to be all you needed to get a foot on the property ladder. Then the banking crisis hit and all that changed overnight. First time buyers now face bigger challenges than ever before in securing a mortgage, but never fear – the mortgage products are still out there, you just need to learn to think like a lender and you’ll be moving in and choosing colour schemes in no time. Here’s how.
Are you Ready for a Mortgage?
A mortgage is probably the biggest and most significant financial commitment you will make in your life. It is important that your finances are in order before you contemplate taking on such a debt. Be sure you can afford your existing outgoings, including repayments of existing debts. You will need to prove a steady income that, after all your monthly expenses are accounted for, can still cover your mortgage repayments. You will also need to find a deposit of at least 5% of the value of the property you wish to buy.
How Lenders Assess You
The Mortgage Market Review (MMR) is the Financial Conduct Authority’s answer to the mortgage part of the banking crisis. It effectively represents a shift from the old way of assessing applications, which was broadly based on multiples of your salary, and a move towards a more detailed review of your current and potential future financial situation.
Expect to be asked about all aspects of your monthly spending, from gym membership to energy bills. Knowing your finances inside out is vital if you are to demonstrate that you are capable of managing your money. All applications must now by law be made under advice from a mortgage adviser.
As well as a deposit, you will need to account for the purchase fees associated with buying your property. There are a mortgage fee, solicitors fees and taxes such as Stamp Duty to consider.
The size of your deposit will have a direct impact on the competitiveness of the mortgage interest rate you will be able to secure. To have access to the full range of deals on offer you will generally need to be able to place at least 25% of the property value down as a deposit but the very cheapest deals are still reserved for those who can stump up 40% or more.
These figures may sound impossible to reach – it could take years to save up these kinds of amounts. The good news is that the market is finally settling a little, and deals are increasingly available for those with just 15%, 10% or even 5% to play with.
The ‘Help to Buy’ Scheme
This is available to first time buyers investing in a new build home up to a value of ¬£600,000. There are two parts to this initiative. The first offers an interest free loan for the first five years to boost your deposit. This can be up to 20% of the purchase value, and when you sell you must repay 20% of the sale value to your lender. You must be able to stump up an initial deposit of at least 5% yourself.
The second aspect of the deal offers security to lenders to entice them to approve mortgages for borrowers with small deposits. It basically means the taxpayer underwrites up to 15% of the property’s value, making the lender more comfortable about sharing a lower mortgage interest rate with you.
Do your Homework
Being a responsible mortgage holder is partly about equipping yourself with as much information as possible. A mortgage broker can offer you advice on a range of deals from across the market, and a mortgage advisor in a bank can help you arrange your finances in such as way that is clear and understandable for you. Read online about the mortgage market, and familiarise yourself with the different terms, including the range of mortgage types available.
Think about how much you are able to afford to pay each month, and whether you want a Repayment Mortgage that pays off the loan as you go, or a cheaper Interest-Only version where you simply pay off the interest each month, and need to find the equity to pay off the loan itself at the end of the mortgage term. Consider the length of mortgage term you would prefer – 10, 15, 20 years? And get familiar with the differences between base interest rates, fixed rates, standard variable rates and tracker mortgages.
Armed with all of this inside knowledge you will be in a strong position to state your case clearly to any mortgage lender. It will help to assure them that you know what you are getting yourself into, and that you are confident in your ability to meet your future loan obligations. If a lender sees that you are conscientious and careful with regard to your finances they are more likely to look favourably on your application.