Can I afford a mortgage?
Responsible lending is something you'll hear a lot about when looking at mortgages. Put simply, it aims to protect borrowers by ensuring they can take on debt they can afford. Over the last few years many changes have been made to help lenders see if borrowers can afford their mortgage.
Lenders will now look more closely at your financial situation, including your income and expenses, sometimes even going back a year or two. Lenders might want to know how much you spend on food, childcare, travel costs and clothing. This makes it even more important to get your finances in order before applying for a mortgage.
How much can I afford on what I earn?
As part of an affordability check, your income will be taken into consideration. A loan-to-income ratio tells you how much you're borrowing relative to your annual income. If you're planning to buy a house with someone else, you may have two incomes to take into consideration. You may also have bonus or overtime payments you can use as part of your income, depending on what the lender accepts. All the income you declare will need to be evidenced through payslips and statements.
Working out the level of mortgage you can afford is important at this stage as it helps give you an idea of the type of property you might consider.
How much am I likely to be able to borrow?
Money Saving Expert has a simple calculator tool which allows you to enter your annual income (and any bonuses or overtime payments) to get an estimate of the range of borrowing you might be offered.
If you're self-employed, remember to consider the new rules put in by lenders following the Mortgage Market Review. In order to secure a mortgage you'll have to work out a figure for your income, so a lender can assess how much you could borrow. There may also be different rules depending on whether you're self-employed, in partnership or a director of a limited company.
What is LTV and what do I need to know about it?
As you search for a mortgage you'll come across the term ‘loan-to-value' or LTV. This refers to the amount you're looking to borrow as a percentage of the value of the property, so it's essentially determined by the deposit amount you're able to put down.
Here's an example:
Your property is valued at £100,000. You have a deposit of £20,000 and need to borrow £80,000 (80% of the property value), so your loan-to-value is 80%.
If you can increase your deposit you'll lower your LTV. And the lower your LTV, the better the mortgage rate you're likely to get, with a lower monthly repayment.
Saving for your deposit
To get a mortgage, a lender will need you to provide a deposit. Lenders see customers with larger deposits as lower risk. This is because, if the worst happens and the house is repossessed, the lender has a greater chance of getting back the money lent on the property. This lower risk is often rewarded by offering a better mortgage rate to the customer.
Building a deposit is often seen as one of the biggest hurdles to getting onto the property ladder. But now, with the support available from Lifetime ISA, Savings accounts and the Virgin Money First Time Buyer Hub, there's an easier path to your first home.
How can I save for a deposit?
Once you've decided what you can and can't live without, saving money seems like an easy thing to do. But how do you make sure you're getting the most from your savings and where should you be putting your money?
By committing to saving a regular amount each month for a year, you could benefit from a fixed rate of interest throughout the year. Plus, you can still access your money should you need to.
With a regular savings account you might want to set up a Standing Order to automatically transfer a set amount of money each month, perhaps from your current account. This way you won't forget to make the payment and you can always increase the amount if you're in a position to do so.
Regular savings accounts can be great if you only need to save for a short period of time, although the interest rate on these accounts is usually variable.
If you're planning on saving for less than a year, this may be a great option for you. These accounts give you the flexibility to save as and when you want to. However, this flexibility means the rate of interest you earn on your savings is likely to be lower than a regular savings account.
Most first-time buyers will save for a few years at least, until they've raised enough money for a deposit. If this is the case for you, you might be better tying yourself into a longer term savings option. These tend to restrict when and how many times you can withdraw your money. If you're happy to provide notice to access your money – typically around three to four months – then a notice savings account could be suitable. In return for providing notice, you may benefit from a higher rate of interest.
A cash ISA provides you with tax-free interest. Cash ISAs come with either a fixed rate, which means the interest you're paid will stay the same, or a variable rate which means the interest rate can go up or down. Some cash ISAs will require you to pay in a lump sum when you open the account, which would be great if you already have part of your deposit saved. However, it's best to find out the individual terms of each before you make a decision.
A fixed rate bond is another long-term saving option and one which requires a lump sum when you open it. With a fixed rate bond, you probably won't be able to add any funds or withdraw so you really need a large amount upfront to make this option worthwhile. The interest rates are usually better than you'd receive with an easy access account for example, but you'll need to work out whether locking your funds into a bond for longer than a year is a viable option when saving for a house deposit.
Another option is to keep your money where it is. This will depend on what interest rate your current account pays and whether you can resist the temptation to dip into the money you have committed to save.
How much do I need to save?
As a first-time buyer, you'll be required to offer at least 5% of the property value as a deposit. The amount you can put down as a deposit will affect the mortgage deals you are offered. The more you save, the better the rate you will get on your mortgage. This is linked to your loan-to-value (LTV).
Remember, you're not just saving for your deposit. There are other costs involved with buying a house such as stamp duty, legal fees and moving costs. Find out more about the other things you'll need to save for.
What changes will I need to make?
Even if you're saving for just a 5% deposit, this can still take some careful planning and self-control. Here are some ways you can start planning right away.
This might not seem like much fun, but it can help provide the peace of mind and structure you need when saving for a deposit. Make sure you're not spending more than you earn and take the time to work out where your money is going. Use our budget planner to get you on your way.
Start cutting your spending
This might seem obvious but look at how you're spending at the moment and where you can potentially make savings. Even little things make the difference, so could you cut out your daily coffee or perhaps shop at a cheaper supermarket? If you pay £2.50 for a coffee every day of the week, you could be saving up to £650 a year! Cutting down your spending may also have benefits for your cash flow. Could this help stop you dipping into your overdraft each month?
Lenders will look at your spending history and credit score
It's important you consider your individual financial circumstances and look at how you're spending and if you're relying on loans, credit cards and your overdraft to fund your purchases.
Set up a standing order
Once you have identified how much you could be saving, set up a standing order so this money is transferred out of your normal account. If it's not there, you're less likely to spend it.
House prices can fluctuate in a short period of time so by the time you think you have a 5% deposit, you might actually need to save a bit extra. Be patient and remember to review your savings plan. What might work one month, might not work the next.
Save money on your rent
In the short term, this can sound like a massive inconvenience but long term, you can really reap the rewards. Moving back home with your parents, with friends or moving into a shared house can all help you save towards your deposit. It might take time to adjust and you also might have to set some ground rules but you'll know the money you're saving is going into an investment for your future, rather than your landlord's pocket.
Repay your debt
Do you have outstanding debt on credit cards or loans? If you can afford to pay this off, you could be saving on any interest you're paying. Clearing any debt can also help with your credit check later on in the journey. However, if your debt is interest free, you might be better off saving your extra cash and earning interest on it, rather than clearing the debt right away. This largely depends on your individual circumstances and how far away you are from buying your first home.
Calculate your deposit
If you have a rough property price in mind, what deposit should you be aiming to save?
The bigger the deposit you can save, the better the mortgage deal you can get.
How long will I need to save for?
It's never too early to start saving. The more you save, the bigger your deposit, meaning you'll get more options for mortgage deals and better rates.
Need more help?
We'll help you work out how much you can afford to put aside each month towards your deposit by adding up your monthly bills and looking at other financial commitments over the year.
Getting your credit score in shape
A healthy credit score helps show lenders you can borrow money and successfully pay it back. It shows you have the discipline to make repayments and take control of your finances. Credit files can include credit cards, loans, overdrafts, utility payments and mobile phone bills. These items won't just be current repayments but could also list all your accounts going back over the past six years.
How do I know what's on it?
You can check your credit score on a number of websites and most offer a 30-day free trial.
What if there's incorrect information on my file?
If there's incorrect information on your credit file, it's important you get this corrected. Contact the lender the information is showing from and ask for the correction to be made. The MoneyHelper can give you step-by-step guidance on the best way to do this.
Should I be registered on the electoral roll?
While this won't affect your credit score, it will show on your file whether or not you're registered on the electoral roll. This will be used by lenders as an identity check, so it's important if you're not registered, you do it as soon as possible. Register for free on the electoral roll.
What if someone else is affecting my credit score?
If you've previously had a joint account or loan with someone you no longer have a link to, it's important you make this clear on your credit file. Your credit score might be healthy, but any missed payments your previous partner may have made will reflect badly on you. Experian has more information on credit file associations and what you can do to solve them.
How do I improve my credit score?
Always make sure you pay your bills on time.
Your lender will look at this favourably, as it shows the likelihood of your ability to repay your mortgage each month. If you miss any repayments on your bills, a default could go onto your account and could affect your credit score for the next six years.
Consider before applying for more credit.
From about six months before applying, you shouldn't borrow any more money if you might not be able to afford to pay it back or are likely to miss repayments. This might tell the lender you can't manage your finances, making them less likely to consider you for a mortgage.
Curb your spending and start looking after the pennies.
Our budget calculator will help you work out what you're currently spending and how you can cut back. The sooner you start adjusting your spending the better. Part of the affordability check when you take out a mortgage will include looking at your outgoings and lenders will ask for copies of your bank statements.
Don't use or rely on your overdraft.
This tells lenders you're not quite managing your finances with your monthly income. If you do have to use your overdraft, you should consider the financial implications of getting a mortgage and what potential, additional strain this could put on your finances.
Remember, it's not just a poor credit history that could work against you. Having little or no credit history can also cause lenders to decline your application. A line of credit proves to the lender that you can repay your mortgage each month.
Other things to save for
When taking out a mortgage there may be fees to pay. It's always best to find out what these are and to try and work out how much they'll cost you upfront, so you can set the money aside.
What is a product fee?
With some mortgage products there may be a fee to pay as part of the deal. This is often referred to as a product fee and forms part of the terms and conditions of your mortgage deal. Product fees may vary depending on the product, while some products don't carry a fee. These are referred to as ‘fee-free' or ‘fee-saver' products. However, they tend to come with higher rates.
Whether you choose a product with a fee or not will depend on your individual circumstances and how much you can afford to pay each month. Choosing a mortgage with a product fee means you might pay more up front but less monthly. If you apply for a mortgage face-to-face or through a broker, the options around paying a fee will be discussed with you so you can make the best decision.
You have the option to pay the product fee at the point of application or add it to the mortgage. If it's added to the mortgage, you'll have to pay interest charges on this fee at the prevailing interest rate for the term of the mortgage until it has been paid. The fee will be refunded if the mortgage does not complete.
What is an application fee?
An application fee is a fee you may be charged when you take out a mortgage to cover the cost of processing your application with a lender. If your mortgage is cancelled, you will not get a refund. Full details of this fee will be outlined within your Key Facts Illustration. This document is tailored for you, based on a particular mortgage and the level of borrowing you require. It will typically show the costs of the mortgage, including repayment, any fees or charges, the interest rate and any special features.
What are surveyor and valuation costs?
Before you formally agree to buy your new home, you need to make sure it's a sound investment and so your lender will arrange to have your property valued. This involves sending an independent, qualified valuer to check the property is priced correctly and is suitable for your mortgage. Your mortgage valuation however is not a comprehensive survey. You should get your property surveyed to check the condition and avoid any unexpected surprises once you've moved in.
There are generally three main reports to choose from:
Mortgage Valuation Report
The main purpose of this report is to help the lender assess the property as security for your mortgage. It's based on a limited inspection and certain defects in the property won't necessarily be revealed.
Homebuyers' Survey and Valuation
This report is approved by the Royal Institution of Chartered Surveyors (RICS) and includes information on the state of repair and condition of the property, a valuation, parts of the property needing urgent attention and advice of any ongoing repairs and maintenance that may affect the value of the property.
Building Survey (formerly known as a Structural Survey)
This is the most detailed survey report and includes an investigation and assessment of the construction and condition of a property. It will not normally include advice on value or a valuation, therefore lenders will still require a Mortgage Valuation Report in most cases.
Usually the type, structure and location of your property will influence the type of report you choose to have carried out.
What legal costs will I need to pay?
When you buy a home, you'll need to pay a solicitor or qualified conveyancer for the legal work required. This will include checking the title to the property, preparing the mortgage documents, receiving the money to pay for the purchase, paying it to the seller's solicitor, and negotiating with the seller's solicitor in the event of any dispute.
If you need help finding a solicitor, most lenders are happy to recommend one.
What is stamp duty?
Stamp duty (Land and Building Transactions Tax in Scotland) is a tax charged by HM Revenue & Customs (HMRC) on certain house and land purchases and some transfers of property.
You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland.
The tax is different if the property or land is in:
- Scotland - pay Land and Buildings Transaction Tax.
- Wales - pay Land Transaction Tax if the sale was completed on or after 1 April 2018
Will I need insurance?
It's important to protect you and your new home, so you'll need to consider buildings insurance. All mortgage lenders will need to know your property is suitably insured. Your property may already be covered by a management company of the freeholder, if it's leasehold. Your solicitor should be able to confirm whether this is the case. It's also likely you'll need contents insurance to cover any fixtures, fittings and valuables in your property.
What bills should I prepare for in my new home?
Once you're in your new home there will be ongoing bills to pay which you should factor into your future outgoings as early as possible.
It's worth checking your council tax band before you move.
Don't forget to do your homework on utility providers, e.g. gas, electric, water, TV subscription, Internet. There are lots of comparison websites to help you spot the best deals.
You'll also need to make sure you set-up your TV licence in your new home.
Finally, don't forget to redirect your mail so anything you need to receive gets to you.
Do I need to start saving for furniture yet?
In most cases, yes. Furnishing your new place can be a huge expense and one few first-time buyers remember to save for. If you're currently living at home with your family or perhaps in furnished rental property, chances are you're going to be starting from scratch.
Here are a number of ways to minimise the amount you may have to pay:
Websites such as Google Shopping will display a list of prices from retailers for the item you're searching for. This will give you an overview of what you're likely to pay and where to find the best deal.
Some things in life really are free
Websites like freecycle.org or Gumtree are great spots to find things people are giving away for free. Often you can find sofas, TVs, dining room tables, all at a reasonable quality and ideal to get you started off. You can also ask family and friends if they're planning on buying any new household items. You never know what you might be offered.
You might not think of using eBay to search for large household items, but you'd be surprised what you might find at a bargain price. As well as big brand names, you might also find some original, quirky pieces to make sure your new home is one of a kind. Remember, you don't have to be online to bid for things, you can visit your local auction house too. This will allow you to see up close what you're hoping to buy.
Anything you can buy flat-packed will usually cost you less. Places like IKEA are great for first-time buyers, as you can furnish your home on a budget and still get something that's both good quality and stylish.
Plenty of furniture stores offer payment plans for many of their items. But remember, any finance agreement you sign up to will be taken into account by your mortgage provider and may affect the amount they'll offer to lend you.