If you’re a first-time buyer, you probably will have been saving for a deposit to help you get on the property ladder. If so, the next step would be to find out how much you can actually borrow. This will give you an indication of the type of property you can afford, when looking for your first home.
What is a deposit?
Your deposit will be the contribution you make towards purchasing your first home, and will also establish how much you would be required to borrow as a mortgage.
The greater the deposit you have, the less you would need to borrow from a lender. A higher deposit contribution will also give you access to much more competitive mortgage rates.
When saving your deposit you may also want to give some consideration for other fees that may be applicable when purchasing your first home. Fees such as surveys, property searches, solicitor fees, mortgage arrangement fees, stamp duty and other costs need to be thought about.
Mortgages for first time buyers
When applying for a mortgage, the lender will conduct an affordability check where they will access your income which in most cases will be your annual salary against your outgoings. This would include outgoings such as credit cards, household bills, loans, travel costs, childcare costs and living costs.
Lenders will also check your credit history to ensure there is now adverse history and that you are a credible borrower. Along with the affordability check, this will determine how much the lender would be willing to let you borrow.
The lenders will typically provide a maximum LTV (loan to value) they’re willing to offer you. This is the maximum mortgage loan value you can borrow as a percentage of the property value.
For example if a property was valued at £160,000 and a lender offered you a mortgage of £136,000, the LTV would be 85%. Your deposit required would then make up the 15% difference which would be £24,000
When should you apply for a mortgage?
Once you have started to arrange viewing properties, it’s a good idea to look at getting an agreement in principle (AIP) from a lender. This will give you a guide on how much you can borrow and will also show the estate agents you are in a strong position to buy.
When applying for an agreement in principle, some lenders will carry out a hard credit check. This will then appear on your credit file, so it’s worth keeping in mind, just in case you decide to get more than one AIP from different lenders. Other lenders will use a soft search and this will not affect your credit score. It’s always a good idea to check with each lender before applying.
Once you receive an AIP they should last between 30 – 90 days depending on which lender the AIP is with. It’s also worth bearing in mind that the AIP is only an estimate and is not a guaranteed mortgage offer.
Applying for a joint mortgage?
A joint mortgage allows two or more people to be listed on the mortgage agreement. This allows you to share ownership of a property with a partner, friends or family members who could be living with you, or have helped you get on the property ladder.
Going down this route not only means the joint applicant can add to your deposit, their income will be added to yours when the lender runs the affordability checks.
You should consider seeking independent legal advice before taking out a joint mortgage to ensure all parties involved know what is expected from the agreement. The main question being, what happens to the property if a joint holder decided they want to leave or sell the property?
What is a guarantor mortgage?
A guarantor mortgage would help you take out a larger mortgage for your first home, as a guarantor, likely to be a parent or close family member legally agrees to cover any missed mortgage repayments if you can’t afford them.
Even though a guarantor’s name will not be listed on the mortgage, you should still seek independent legal advice before asking someone to be your mortgage guarantor to ensure everybody knows what is expected from the agreement.
Types of monthly mortgage repayments?
Your monthly mortgage repayments will all depend on the type of mortgage you take out. The main types of mortgages are listed below
Fixed rate mortgages – A fixed rate mortgage means your monthly repayments are set at the same amount for the period of the fixed rate. This is typically two, three or five years however some lenders do offer longer fixed rates. Once the fixed rate period ends your mortgage will move onto the lenders standard variable rate (SRV) which is unlikely to be competitive. At this point it would be worth considering switching mortgages to obtain the most suitable deal for you.
Tracker mortgages – A tracker mortgage tracks the Bank of England’s base rate, resulting in the amount of interest you pay each month could differ, depending on what the Bank of England base rate does. If you decide choose a tracker mortgage, you would need to take into account affordability should the interest rates rise.
Offset mortgages – if you have a savings account with your bank and you also decide to take out a mortgage with that bank, you could be able to offset the amount of interest you pay on your mortgage. So instead of your savings earning interest, you wouldn’t be charged interest on that same amount of your mortgage.