It’s essential that first time buyers get up to speed with the financial realities surrounding home ownership. Almost as important as finding the right property in the right location is getting the right mortgage. You certainly need to think about your budget before you allow yourself to fall in love with a dream property.
Here’s our guide to what a mortgage is and how to go about getting one…
In simple terms, a mortgage is a loan that allows you to buy a property. In essence this means the lender holds the title to your house as security while you pay back your debt to them. If you don’t make the repayments the lender takes possession of your home and gets their money back by selling it. These loans are typically paid back over 25 or 30 years – although this can be shorter or longer depending on your circumstances. It’s a long-term commitment to pay back what will be one of the biggest purchases you will ever make.
The scale of the cost means that you must work out what you can afford right at the start of the mortgage application process. This means a rigorous – and honest – assessment of your outgoings. Go through two or three months of bank statements and work out what you spend on average, being careful not to aggregate out bills that you pay quarterly for example. You will need to provide proof of your income and outgoings as part of the process so ensure that you have all this to hand at the very start.
Use an online calculator tool to give yourself a basic idea of what sort of figure you could borrow – and how that might translate as a monthly repayment.
Remember, at this stage this is only a very basic outline. In rough terms you do not want to pay more than 40% of your net monthly income on mortgage repayments.
The deposit is the amount of money you pay ‘up front’ for your property, with the mortgage covering the rest of the price. This is vital to the application process for two reasons.
Firstly, the higher the deposit the smaller the mortgage you will require. This is known as the ‘loan to value’ ratio, which is typically represented as the percentage of the value you need to borrow. For example, if you have a £15,000 deposit for a £150,000 home you require 90% of the cost to be covered by a mortgage. The lower the percentage, the better the mortgage deal you’ll be able to get.
The deposit is also important to bear in mind because, as it’s an up front cost, it typically has the biggest impact on the price first time buyers can afford. Many buyers may find they are told by lenders that they could actually afford the mortgage repayments for a property that is more expensive than they expected. But, without a deposit of 10% or more, this does not mean that such a property can be afforded.
Where to go
You can go to a bank or building society and go through the whole process with them, choosing from their range of financial products. It’s best to shop around before you get to this stage though, and be fully aware of what the bank offers before you begin. If you need guidance you can call on the services of a broker who can assess the market and your needs and suggest the best options available to you at that time.
House Simple has joined forces with London & Country, the UK’s leading Independent fee-free mortgage broker, to do just that.
Decision in Principle/Agreement in Principle
Lenders are able to give you a non-binding assurance known as an ‘agreement in principle’ or ‘decision in principle’ for a mortgage. This gives you the assurance that you could borrow a certain amount so that, when browsing potential homes, you have the confidence of knowing it’s affordable. Sellers also like buyers with these in place as they know they are dealing with someone with the financial capacity to make an offer, putting you in a stronger negotiating position.
One note of caution though: obtaining one of these does show up on your credit history. This means you shouldn’t just try to get one of these from several possible lenders as it could affect your credit score and ability to borrow. Try to make sure you’re happy with a lender – and likely to go along with them – before you go down this route.
Once you have this it’s time to choose a house and make an offer. If and when that is accepted you can then go about turning that offer into a concrete mortgage so that you can get into the property.
For your next step check out our guide to the types of mortgage available…