Looking for a mortgage?
When you’re looking for a house, the fun part is trying to find the home to suit you. However, figuring out where to start when you’re looking at finance options can seem like a daunting task. With so many differing schemes, mortgages and housing options out there, it can be hard to narrow down exactly where you should start if you want to buy a property. To help you on your path, we’ve put together this guide to give you an idea of where to begin and what to do when you’re looking to buy a home.
Look at your finances:
Purchasing a home and taking on a mortgage is primarily a financial endeavour, so you might want to begin by looking at your financial situation and find out what costs come with buying a house. You might be expecting mortgage repayments to be a factor, but what else do you need to do? This again can seem daunting, so we’ve broken it down into questions you might want to look at to get a better understanding of your finances, and what steps you can take to make affording your dream home a reality.
How much do you have saved?
To get a mortgage on a property, you’ll usually need to put down a deposit. Some mortgages are available with as little as 5% deposit (5% of the total value of the home you wish to purchase) but due to the financial impact of coronavirus, lenders have temporarily withdrawn many 95% mortgages, meaning you’ll likely have to look towards saving a deposit of 10% or more. There’s a chance that 95% mortgages will still return to the market, but saving a larger deposit usually results in lower mortgages repayments (as you are borrowing less, which also results in lower interest repayments as opposed to borrowing a larger percentage of the value of the property) and access to better deals and rates -lenders view larger deposits as a less risky lending decision and are more likely to offer the better available deals.
What are the other fees that come with purchasing a property?
You’ll also need to consider the other costs that come with buying a property, such as;
- Booking and arrangement fees
- Valuation and survey fees
- Legal fees
- Stamp Duty
- Land registry
- Furniture transportation
Read more about the costs of moving house here.
Look at your finances outside of savings:
To understand what you need to look at, you should understand how a lender views approval on a mortgage. The lender is taking a risk when they decide to lend to you and want to be sure that they’re making a safe lending decision when granting you approval for a mortgage.
It’s a common misconception that lenders only look at your credit history when making a lending decision. This can be a factor, but lenders are taking a far more flexible approach in their decision making — looking at several factors surrounding a potential borrowers financial situation and not just the credit report.
Credit report
Your credit report will show your borrowing history, which will include things like credit cards, personal loans, payday loans, catalogue accounts and most forms of credit agreements registered against your name. It will also display any missed payments, defaults, CCJ’s, bankruptcy and so on. However, some of these will drop off your credit record after 6 years.
As well as your credit limit (which isn’t the amount of credit you have taken, it’s the amount that is available to you) and the amount of open accounts you have, your credit report shows lenders what your borrowing history is and how likely you are to repay.
Typical High Street lenders often look adversely on a bad credit history: however specialist lenders — like the ones our brokers at Clever Mortgages have access to — consider a variety of credit histories, understanding that we can’t always control a bad-credit situation and considering applicants from a different perspective.
It’s often said that it’s better to have a few, well managed credit accounts than many, poorly used accounts. Closing any unused accounts could help boost your score and make you a more attractive borrowing prospect.
Income and expenditures:
If you want to take out a mortgage, you need to be sure you have the regular income available to take on that credit commitment. Again, another misconception is that only applicants in full-time employment can get a mortgage, but with modern lenders recognising the increase in self-employed, freelance and contract workers they have adapted to this change and offer more products for a changing market. This means that as long as you can prove you’ve got a consistent taxable income to meet the lending requirements and any other criteria, it’s likely there’s a mortgage product suited to you.
Your income will dictate how much you can borrow for your mortgage. Lenders often place a cap of around 4-4½ times your annual guaranteed income, but they may also take into account any bonuses, commissions or Government benefits you receive. Your credit history might play a part in deciding how much you can borrow, and any other expenditures will be accounted for and considered when determining affordability. When making a mortgage application you’ll need proof of income, through wage slips (if employed, accounts if self-employed) and bank statements so it might be worth considering collecting this documentation as you prepare for buying a home.
You need to be living within your means to be a viable prospect to a lender. This means your income should cover your outgoings with a surplus. This is because a lender will need to be sure you can afford a mortgage now and to continue long term, even if rate increase.
Expenditures are any regular outgoings that you pay; this includes your utility bills, rent or current mortgage payments, child maintenance, credit card repayments, loan or debt repayments and any other consistent payments. Collectively, your income and expenditures make up your budget and what you can afford to spend, but more importantly in the eyes of a lender — how much you can afford to repay over the term of your mortgage.
What kind of mortgage?
Mortgage products come in different forms, and one product or deal might not be the best option for one borrower but perfect for another- and vice versa. Mortgage products come in various forms, suited to different financial situations. Again, this can be another point of confusion: with all the different lenders, products, deals and rates available, how do you know you’re getting the best mortgage for you? Mortgage brokers can help you search the market and understand the mortgage options you have available, helping you to make sense of what can be a confusing market.
- Fixed rate mortgage – A fixed rate mortgage is where your interest rate and monthly repayment stays the same for a set time period (usually between 2-5 years).
- Variable rate mortgage – Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage rate. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but sitting a few percentage points higher.
- Discount mortgage – A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years).
- Tracker mortgage – A tracker mortgage is a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they track movements of another rate, the most common rate that is tracked is the Bank of England Base Rate.
- Offset mortgage – Offset mortgages can be linked to a savings account as well as your current account. Your savings will be ‘offset’ against the value of your mortgage, and you’ll only pay interest on your mortgage balance minus your savings balance.
Read more on mortgage types here.
If you have little spare money but want to get a mortgage, you could consider taking out a mortgage over a longer term, risking paying more in interest but perhaps lowering the monthly repayment. Comparatively, if you have a larger amount of disposable income you could consider taking a shorter mortgage term, paying more per month but paying less interest (than on a longer term) and clearing the loan faster.
If you’re an essential worker (including NHS Clinicians Paramedics & Nurses; Teachers Armed Forces Personnel; Army, Navy, Royal Air Force; Firefighters; Police) you could be eligible for the Hero’s Mortgage Range. Click here to find out more.
Decision in Principle
A decision in principle (DIP) is an informal, but often credit checked, quote on how much a lender might be willing to lend you. It’s not an approved mortgage application, nor is it a guarantee that the lender will lend you that amount-but it’s a rough guideline that can help you figure out the price bracket of houses you can bid for. Getting a DIP can make it easier to work out what you’re likely to be able to borrow and can back up a proposed bid on a property, increasing your chances of being accepted by prospective sellers.
Find a property, or get an idea of what kind of home you’d like to live in:
If you’ve got your deposit saved and received a decision in principle, you should have a rough idea of what you can afford to borrow. This means you can start to peruse houses and take a serious look at where you would like to live. It’s likely you’ve already taken a look at the properties in the area you wish to move to or live in, but now you can look towards finding one you want to buy and making a bid.
Can I get help with buying my first home?
If you’re a first-time buyer, you might be wondering if there’s any support available to help you purchase your dream home. Luckily, there are several schemes and programmes designed to help prospective buyers get a boost onto the property ladder.
Help to Buy
Help to Buy is a UK Government-funded project, designed to help people with lower incomes get onto the property ladder. There are several schemes within Help to Buy, focussing on different aspects of the buying process and all created to help as many people as possible secure their own homes.
Read more on Help to Buy mortgages.
Help to Buy – Equity Loan
The Help to Buy equity loan scheme gives you the chance to purchase your home with a small deposit by boosting the amount you’ve saved. You would initially be expected to save up a minimum 5% of your deposit, then using the Help to Buy equity loan, the Government would grant you a loan of up to 20% (of the property’s value) — giving you a 25% deposit and access to far more mortgages and better deals.
The Help to Buy equity loan is available to first-time buyers and current homeowners. However, the property must be a new-build and can’t exceed the value of £600,000. The Government also provides a slightly altered scheme in London for prospective buyers, offering an equity loan up to 40% of the property’s value, reflecting the increased property costs that London dwellers face.
If you have more than 5% saved, don’t worry! You can save up to 65% of your deposit and still be eligible for this scheme — if you use a minimum of 10% Help to Buy equity loan and a minimum 25% mortgage.
Another huge benefit of this initiative is the interest — or lack-of. You won’t be charged any interest for the first five years of taking out your equity loan. After that you’ll only be charged a fixed fee of 1.75%, which rises each year following the increase of the Retail Price Index, plus 1%.
The Help to Buy equity loan scheme has been extended to 2023, meaning there is still time to save up a 5% deposit and take advantage of this offer, However the scheme is being amended from 2021. This scheme is available in England – and although there Help to Buy opportunities in Scotland, Wales and Northern Ireland, the terms are slightly different, so it’s worth looking this up if you want to buy a house in any of these areas.
It’s important to be aware that you can’t use the Help to Buy scheme to buy a second home or property to let.
Help to Buy – ISA
Unfortunately, the Help to Buy ISA scheme ceased accepting new applicants November 2019, if you’re eligible you can still apply for a Lifetime ISA.
Help to Buy – Shared Ownership
The Help to Buy shared ownership scheme is, a combination of buying and renting. Often aimed at first-time buyers and low-income households, this initiative allows you to buy a share, usually around 25% — 75%, of a resale or new-build home. You would own some of the house and pay a reduced rent for the rest.
This allows prospective buyers on a lower income to access the property ladder, as your deposit would be a percentage of the share being purchased as opposed to the overall cost of the property, meaning you would need a much smaller deposit and mortgage than with full ownership.
Shared Ownership properties are always leasehold, meaning you’d own the properly for a pre-agreed span of time but not the land. It’s possible to renew leases. You do have the right to buy additional shares in the property, if your share reaches 100% equity, the property would no longer be shared ownership. It’s important to check if there’s a cap on the number of shares you can purchase in the property as this may hinder those who aspire to full ownership.
Right to Buy
Right to Buy is a Government initiative aimed at helping local authority tenants to buy their council homes with a substantial discount.
The discount you get is based on the:
- Market value of the property
- Type of property, for example house, flat
- Amount of time you’ve rented and lived in the property
There is a limit on the discount you can receive but the savings are still substantial, making this a great solution for council tenants to get onto the property ladder. If you’re purchasing a property with a Right to Buy mortgage and you’ve lived in the property for 3-5 years, you could be granted a discount of 35%. After that the discount increases 1% for each additional year you’ve been a council tenant.
To qualify, you must have been a council tenant for a minimum of 3 years. This doesn’t have to be a consecutive 3 years, so, if you had a spell of renting privately in between living in a council home, then you could still be accepted.
You’ll still have to provide a deposit and take out a mortgage with the Right to Buy scheme, but if you’re struggling to save enough for a deposit, some lenders may allow you to put your discount towards the purchase price, meaning you wouldn’t need the initial lump sum.
If you were renting a council home before it transferred to another landlord (such as a housing association), you might still be eligible to buy your home with the Preserved Right to Buy scheme.
Lifetime ISA
A Lifetime ISA is a savings account designed to help people aged between 18-39 buy their first home or save up for retirement. Using a Lifetime ISA, you can put in up to £4,000 per tax year, which leads on to one of the most attractive features — the bonus.
The Government will pay a 25% bonus into your Lifetime ISA account, up to a maximum of £1,000 per tax year. This bonus would be paid in monthly so you’d benefit from compound growth — plus, any interest you earn on what you save would be tax-free.
So, if you save £2,000 in a tax year, the Government would pay you a bonus of £500.
It’s important to remember that you can’t just withdraw the money from your ISA to spend on whatever you like without facing a penalty — unless it’s to help buy your first home. After you turn 60, the money can be used as you like to support your pension. If you withdraw any before you’re 60 though, you could face a 25% penalty on the total amount in your account.
At Clever Mortgages, we have access to a wide range of mortgage solutions. Get in touch now and let’s discuss your lending requirements.
How can we help?
Clever Mortgages could help you find your perfect mortgage, specialising in helping people with bad credit. With access to over 100 lenders and 1000s of products, we could help find the right mortgage solution for your financial situation. Get in touch with one of our expert brokers and get the ball rolling on moving into your dream home!
