Getting onto the Property Ladder: A Mortgage Guide for First-Time Buyers
Christopher Melville is a mortgage advisor at Direct Financial Management UK. He explains the need-to-knows about financing a property purchase, including steps to improve your chances of securing a good mortgage deal.
Buying your first home and getting onto the property market today seems more overwhelming than ever before and we are forever hearing property prices keep rising. What are we to do, as first-time buyers, to prepare ourselves to buy a home?
First, it is important to know how to plan your finances to afford a property. In today’s financial marketplace, banks and building societies issue mortgage products to enable buyers to afford the property and complete the purchase. These financial institutions are selling a financial product (in this case a mortgage) which will allow you access to a large sum of money to complete the house purchase.
However, a mortgage cannot be sold to just anyone: banks and building societies (referred to as ‘lenders’ in this instance) have certain criteria that you, as a borrower, must meet. This process is called underwriting of a mortgage contract. The underwriter’s duty is to check that the information you submit in your application is correct and fits the lender’s criteria, before they will offer a mortgage to you.
Criteria are the lender’s standard for evaluating you as a potential borrower. For example, a common criterion for most banks and building societies today is: are you employed or self-employed?
Other criteria examples are:
- minimum age to apply for a mortgage is 18
- acceptable and unacceptable income types i.e. employed income is acceptable, however the bank will not accept bursary income or jobseekers’ income
- acceptable and unacceptable sources of your deposit. For example, savings or a gift from family are common acceptable sources of deposit, but most banks will not accept a gift of a deposit from a friend who will not be named on the mortgage.
If just one criterion is breached the bank will decline your mortgage application.
You may find it interesting to note that there is no such thing as a self-employed mortgage. There is however, such a thing as a first time-buyers (FTB) mortgage. The only difference for second time buyers is the latter is called a home-mover mortgage and is usually lower loan-to-value (LTV).
Loan-to-value is an important term which shows, as a percentage, the total mortgage balance divided by the property value. For example, someone with an outstanding mortgage of £100,000 whose property is valued at £200,000 is borrowing at 50% loan-to-value.
The LTV is one factor lenders consider when designing mortgage products. This is because the LTV acts as a risk factor for pricing a product: the higher the LTV, the higher the risk for the lender, therefore the higher the interest rate on that mortgage product (and vice-versa). The higher the loan-to-value, the higher the interest rate, the more you will pay every month for your mortgage. The highest LTV product available today is a 95% LTV first-time buyer’s mortgage: this effectively means you would need to put down a deposit of 5% of the property value in order to purchase your first home.
However, lenders must determine whether you can afford a mortgage, and if so how much. They will carry out a mortgage affordability assessment. This takes into consideration all your allowable incomes and outgoings to establish your disposable income – essentially the remaining income you have every month once you have covered your outgoings. Not all expenses are included in the assessment; the main outgoings considered are your credit card, any personal loans, car finance, store credit and student loan repayments. Plus if you have any children, this will also be taken into account.
As an example of mortgage affordability, a newly employed person with no children and an annual gross salary of £30,000 (gross means before you pay income tax) and no monthly credit expenses could currently borrow around £134,000. If this same individual received a bonus, overtime, or commission from their employer, this may be used to increase the mortgage amount.
Four Steps to Improve Your Chances of Getting a Mortgage Today
- You will need an income. Good news, those who are employed can apply for a mortgage straight-away. Those considering starting a business or the self-employed must have two-years of declared income (HMRC self-assessment) to apply successfully for a mortgage.
- Be disciplined with your outgoings and keep credit payments to a minimum. This will boost your maximum mortgage affordability, giving you more options when searching for property.
- Credit history. There is a common misconception that if you do not have (or have never had) a credit card, your credit score should be good. This is not the case. You can only have a good or excellent credit score by demonstrating that you are a responsible borrower. This means showing you can use credit and pay it back on time every month. That does not mean you should apply for a personal loan to boost your credit score – a simple credit card or mobile phone contract that you pay monthly will do the same job.
You can show you are a responsible borrower by having a credit card, that perhaps you use just once a month and pay-off in full. If you do this, you will not get charged interest and you can sit back and watch your credit score increase.
- DEPOSIT!! This is a biggie when it comes to getting a mortgage. The minimum deposit you will require is 5% of the property’s value. You can use your savings and, if you are fortunate, a gift from family can also be used, even if you have no savings. However, not everyone is lucky enough to have a family member gifting them the monies for their deposit.
But, there is help out there to encourage you to start saving up for a deposit. The most interesting of these is the LISA (Lifetime Individual Savings Account), which is a flexible, affordable way to save and invest in your first home. You can open a LISA if you are aged between 18 and 39.
Help To Buy and other affordable home ownership government schemes to boost first-time buyer mortgages are available, however most of these still require you to have a 5% deposit.
My advice is to get real, get saving, start now, get it into your mind that you are saving for a deposit to get a mortgage to buy your own home. And remember, there is power in planning!
Find out more:
Buying a Home
A helpful guide for first-time buyers, to explain the process from sorting your finances, to finding your ideal home, then making an offer through to exchanging contracts & completion