The housing market appears to be booming at first glance: ‘for sale’ signs are being replaced by ‘sold signs’ at a faster rate than ever before, estate agents are reporting an increase in the number of would-be buyers signing up, and property prices are continuing to rise.
Things could slow as areas of the country are placed on lockdown, and housing markets are essentially shut down, but record low interest rates and a stamp duty holiday are pumping money into the economy.
The amount of money anyone can be approved for depends on how much deposit you have, how much you earn and what debts you have. There is no “one size fits all” so best speak with an adviser who can give you an idea.
How much can I borrow as a first-time buyer?
According to market research, the average loan amount for first-time buyers is £176,693. Your ability to borrow money will be determined by your existing debts, outgoings, and incomings. Lenders consider the following factors when determining your salary:
They usually lend four and a half times your annual salary to single and joint applicants.
However, lenders now take into account your personal expenses, such as bills, loans, and childcare, as part of the Financial Conduct Authority’s Mortgage Market Review.
This means they’ll have a better idea of how much you can afford, because the more of these recurring expenses you have, the less you’ll be able to borrow. Lenders want to know that you can pay back the loan.
How long can I borrow for?
Mortgages are available in a variety of terms, ranging from five to forty years, but 25-year mortgages are the most common. The most common mortgage term for first-time buyers is between 21 and 30 years.
Long-term mortgages typically mean lower monthly payments but be careful if thinking about taking a mortgage over a longer period than you can afford because the payments may be lower but you will be paying it for longer therefore it becomes more expensive by taking it over the longer period.
If your mortgage allows overpayments, this could work in your favour.
You’ll be able to overpay when you can, shortening the term of your mortgage.
How much deposit do I need for my first mortgage?
Lenders usually consider a deposit of 5% of the property’s value as a minimum. These are known as 95 % mortgages, and your options could be restricted if you want one.
This is due to the fact that most lenders want a deposit of at least 10% of the property’s value. The average deposit for first-time buyers, on the other hand, is £50,174, or about 18% of the purchase price. The more you’re able to save up, the more – and better – mortgage deals you’ll have to choose from, with lower interest rates available in return for larger deposits.
Coronavirus and getting a mortgage
Getting a mortgage is complex, and it’s been even more challenging after the coronavirus outbreak.
The principles of this guide remain valid, but keep in mind the following when deciding how much you want to borrow on a mortgage:
- Many lenders have withdrawn from the 95% mortgage market (although these deals are slowly making a comeback). This means it’s rough out there if you just have a small deposit, so your options are limited compared to before the pandemic.
- Payment holidays will hurt your chances of getting a mortgage. Even if coronavirus-related payment holidays aren’t listed on your credit report, lenders will find out about them.
- Fewer lenders are encouraging homebuyers to use furlough income or self-employed income support scheme (SEISS) grants to help them qualify for a mortgage. In fact, if you’re a furloughed employee or self-employed but unable to trade and therefore dependent on SEISS grants, you need to wait until your income is no longer reliant on one of these programmes before applying for a mortgage. In other words, you will need to be back at work before applying for the mortgage because the unfortunate reality is the lender assumes the worst case and assumes you may not go back to work,
Lenders check how much you can afford
To calculate your maximum mortgage size, lenders used to simply multiply your income by up to five times. It’s now a lot more difficult because the lender must check the mortgage’s viability, which simply means whether you can afford the payments now and over the term of the mortgage.
But, once again, it’s not that straightforward. Lenders must also follow stringent criteria to determine if a borrower can afford their mortgage repayments, not only at current interest rates but even if rates rise to 6-7 %.
In addition, with the global economy having been turned on its head because of coronavirus, lenders want more evidence than ever of your profits and creditworthiness.
Be prepared for the mortgage assessment
Mortgage assessments have become more difficult.
Typically, lenders would enquire about salaries and big expenses such as electricity and debt. Lenders would almost certainly consider the following costs:
- Gym membership
- Car costs
- Eating out
- Weekly shop
- School fees
They are assessing your ability7 to afford the mortgage now and throughout the term of the mortgage and will assess if you can afford the mortgage if interest rates rise to around 6%., s
All lenders look at your commitments. If it’s your first mortgage, save as much as you can for the deposit because borrowing less means less risk for the lender and, ideally, less scrutiny of your finances.
If you receive bonuses, commission, overtime or other irregular income, lenders can take it into consideration but some may take all of it, but others may only take 50 or 60% of that income when assessing affordability. However, since this differs by lender, it’s best to double-check with them or your adviser will be able to advise you.
I’m self-employed. How difficult is it to get a mortgage?
Getting a mortgage is not difficult if you’re self-employed. Whatever income you declare to the Inland Revenue and pay tax on is the income we can use. In some cases, if you are a limited company the lender can use your share of net profit from your company minus corporation tax plus salary. This can benefit people who do not draw all of the profit out of their company and only take whatever income they need to survive where the lender can see the company produces enough income for the director to take a higher salary or dividend so can borrow more money.
As a result, be ready to show proof of your company’s income or your personal income. You will also need to demonstrate:
- Business accounts. Three years of accounts are preferred, but two years can suffice depending on the lender, and must be signed off by a chartered accountant.
- Tax returns. If you don’t have access to corporate accounts, two- or three-years’ worth of tax returns are the next best thing.
You’ll be assessed on net income rather than turnover. If this is going to be complicated, a mortgage broker will help because they’ll know which lenders need which types of evidence.
While this could work for those in existing companies, it is possible that those who have newly started their own company may be unable to obtain a mortgage. If you’re self-employed but your wife isn’t, your mortgage may be based solely on her earnings. The minimum time you need to be self-employed for is at least one year, but this provides a lower number of lenders who will consider your application.
Self-cert mortgages, which were common in the mid-noughties and allowed you to report your own income without providing proof to the lender, are no longer available.
Get in touch with of our mortgage saving experts today.
Can I get an accurate maximum loan figure?
You won’t know the exact amount before you apply for a mortgage, but you should be able to get an estimate from a lender or a mortgage broker. Then you should come to us to get an Agreement in principle (AIP). An AIP is a mini application to the lender in which it requests some personal information and conducts a credit check to determine if it will be able to lend to you, subject to additional checks. It will also inform you how much money it is willing to lend you. You’ve already won half the battle if you’re approved for the AIP. It indicates that the lender has examined you and determined that you are someone to potentially lend to
Should I take the max I can borrow?
If you’re buying, figure out how much you can borrow before you start looking for a home, but be realistic about how much you can spend.
If you’re Remortgaging, figure out how much you’ll need before seeing what a lender can give. When the lender is willing, it’s tempting to increase the loan amount, but don’t go beyond what you think you can afford.
Making an offer: how to boost your chances
Prepare documents before speaking with the estate agent to increase the chances of a competitive offer. How do you ensure you make the right decision about a property before you’re ready to offer and have a fair chance of having your bid accepted when you’re ready to buy? Since you don’t have a chain, you have a good buying position as a first-time buyer.
Here are some tips on how to improve your chances:
Before you start looking at houses, make sure you’ve figured out your finances and have a mortgage “agreement in principle” in place. Have proof of this before beginning any property negotiations, as it will further demonstrate your good buying credentials.
Get a conveyancing solicitor who will represent you. We have loads we can recommend so we would be happy to put you in touch with one or even give you a quote.
Many people would take an estate agent’s word for it when it comes to the price, you’ll have to pay to secure a home. It’s important not to lose sight of the fact that the agent is representing the seller. There are resources available on the internet to assist you in determining a reliable property value, such as past sales data for identical surrounding properties and go onto any online property selling platform to find out other prices for the same or similar properties as near to the property as you are buying.
Don’t be afraid to walk away if you’re being asked to pay over the odds on the purchase price. Competitive bidding situations are common, but they are nothing to be afraid of. As a first-time buyer with no chain, sell your status. Prove to the estate agent you can move quickly and provide the seller with the assurance of a smooth transaction; this could be more important to them than simply having the best price.
TIP: As the financial year draws to a close, developers may give discounts or bonus packages on completed properties that haven’t yet sold.
You’ll boost your mortgage chances if you’ve got at least a 10% deposit
Once you decide how much you would be able to borrow, you need to figure out what you’re able to provide as a deposit (or equity if you’re Remortgaging).
In recent years, a first-time buyer has been expected to put down a 5% deposit. However, with the introduction of the coronavirus, 95 % of mortgages have effectively vanished from the market, ensuring that if you have a 10% deposit, you’ll have a much better chance of having a mortgage (though 95 percent of loan-to-value mortgages are slowly making a comeback). In any case, you’ll need to provide irrefutable evidence that you can afford to repay a loan.
As previously stated, the larger the deposit/equity, the lower the mortgage rates will be, and the more likely you will be accepted by a lender because you will be considered a lower risk. If you’re unsure whether you can afford it, putting down more money can convince the lender to accept your application.
- In a nutshell, because the coronavirus, a 5% deposit is often the bare minimum.
- You can get a lower rate if you put 20% to 25% down.
- You will get the best rates if you put down 40%.
So as a rule of thumb, the more you can save up, the better – the bigger your deposit, the cheaper the mortgage deal.
How much will my first mortgage cost?
The cost of your mortgage is determined by the amount you borrow, the interest rate you pay, and the length of time you borrow. Our mortgage calculator will help you figure out how much your mortgage would cost.
What is a loan to value (LTV)?
Simply deduct your deposit/equity as a percentage of the property value from 100 percent to arrive at this figure. So, if you put down £20,000 on a £100,000 house, you’ve put down 20%. This means you owe 80% of the money, so the LTV is 80%.
Why isn’t an agreement in principle binding?
When it comes to converting an AIP into a complete application, the lender then assesses your mortgage application by looking at your income and outgoings and looks at your bank statements in some cases to see how you run your finances and carry out a valuation on the property you are buying. The lender then offers you a mortgage and gives you a formal mortgage offer.
The lender will not lend to you if it sees anything that it does not like.
Mortgage lenders will only lend on standard or certain types of property. Some lenders would not lend on flats above shops or properties made of uncommon materials.
Why are low-deposit mortgages more expensive?
However, if you borrow 95% of the property’s value, the lender is taking a bigger risk. It would only take a 5% decrease in value for the property to be at risk of losing money. It can’t be certain that it’ll get all of its money back. Therefore, the rates for 95 percent mortgages would be much higher than rates for 60 percent mortgages – you’re paying a premium for risk.
I’ve only got a small deposit – what help is there?
Which one is better for you depends on your financial situation and whether you want to buy now or later – it’s always best to discuss your options with a broker.