Top Mortgage Tips for First Time Buyers
So, after years of renting and squirrelling away money for a deposit, you’re finally ready to take your first steps onto the property ladder. You’ve already scouted out a few neighbourhoods and identified your must-have features in a home (generous garden, check; wooden floors, double check). Now it’s time for the boring part, and the reality check: the conversations with mortgage brokers and banks, about what you can afford and how much it will cost you to borrow.
Despite the high cost of housing, and a market cooled by Brexit jitters, more first-time buyers exchanged contracts on homes in 2017 (the last year for which data was available) than any other year since the financial crisis in 2008. And many of those lucky 365,000 new homeowners pulled it off by being savvy about borrowing: understanding what mortgage products they could qualify for and what that meant for their home search, how to make their application as waterproof as possible, and what help they could find.
The following tips can make the process of applying for your first mortgage as pain-free as possible, so you can focus more on your move and plans for renovating your new home than serial applications and endless phone calls with brokers.
- Be realistic about what mortgage you can qualify for—and what you can afford
Don’t set yourself up for heartbreak by fixating on a property outside of your price range. Use a mortgage calculator to determine the maximum you can borrow from lenders. 4 to 4.5 times your salary—or your combined salary, if you are applying for a joint mortgage with a spouse or partner—is standard, although recently banks have begun extending mortgages at 5 and 5.5 times buyers’ salaries, for the first time since lending was restricted after the financial crisis.
(The loan to value (LTV) ratio is the most important key factor when you deciding what interest rate the mortgage lender will provide you. Experts depict that if you have a low LTV, no doubt then you will get a significantly lower interest rate, which might be equals to tens – even hundreds – of thousands of pounds saved throughout the mortgage. So, you can use this LTV calculator to determine first, second, and third mortgage Loan to Value (LTV) ratio, total amount owed, and also CLTV.)
But although you might be able to borrow 5.5 times your salary, should you? Calculators can also tell you what your monthly mortgage payments would be, with a stated principal and interest rate. Work out your budget to ensure you can comfortably make those payments.
- However, the bigger the deposit, the more options you have
Although there are some mortgage products available for buyers with just 5% deposits, the larger deposit you can gather, the greater number of mortgage options when will be available to you and at better rates. Mortgages with the best interest rates are usually reserved for buyers who can put down at least 40% of the purchase price of the property.
- Be aware of and make use of government schemes for first-time buyers
If you’re cash-poor, however, and only have a 5% deposit, don’t despair. The government’s Help to Buy scheme can help first-time buyers top up their deposit with an equity loan up to 20% of the value of the property, making them eligible for more mortgages with better rates. Be aware that Help to Buy equity loans can only be used on new build homes, however, which start at higher prices than fixer-uppers.
- You’ll need proof of income (or accounts, if you’re self-employed)
Mortgage lenders will require proof of your earnings before extending you a loan. If you’re employed, they’ll generally be satisfied with the P60 form you receive each year from your employer, showing how much you’re paid and what tax is deducted. If you’re self-employed, the process is more complicated: you’ll generally need to show three years of full accounts or a SA302 form from HMRC covering the last three years.
In both cases, you’ll need also to show evidence of your outgoings, so lenders are assured you can afford any repayments—and aren’t regularly blowing your entire salary on expensive holidays and handbags. This can be accomplished with three months of bank statements.
- Don’t change job for a last-minute salary boost
If you’re contemplating applying for a different, higher-paid job at a new company to dial up your salary on your mortgage application, you might want to close that LinkedIn tab. Mortgage lenders like to see that you’ve been with the same employer for a while when extending you a loan. Three to six months is the minimum period, and they might be cautious about lending to anyone still in a probationary period at work. So if you do switch jobs, it might push your home purchase back a few months.
- A good credit score helps
All those times you kept up with your credit card payments in the past will be rewarded now, as a good credit report can make you eligible for more mortgages at better rates.
Alternatively, missing several mobile phone bills or loan repayments a few years ago could now come back to haunt you. Don’t be caught unaware by a mortgage application scuppered by a poor credit score. Obtain a copy of your credit report from a credit reference agency before applying for a mortgage and see for yourself what lenders will see when they review your application. There are also some quick fixes you can make to boost your credit score, including getting on the electoral roll.
Image by Nattanan Kanchanaprat from Pixabay