Are you eager to get on the property ladder but don’t know where to start? Buying a house is a big deal, so it’s understandable to feel overwhelmed and uncertain when it comes to taking out a mortgage. This guide will take you through the steps you need to take to become a homeowner.
What is a Mortgage?
Let’s start with the basics: a mortgage is a loan that you take out in order to buy a property. Most people don’t have the whole amount required to buy a home sitting in the bank, so they need to borrow it. You pay a deposit on a property, which is usually 10% of the asking price but can be less, and then apply to a mortgage lender, usually a bank or building society, for the rest.
How is a Mortgage Repaid?
Your mortgage loan is paid off on a monthly basis. The mortgage lender calculates an appropriate amount for you to pay off each month, which will include the interest they charge you on the loan. Most mortgages have a repayment term of around 25 years, but they are also available for shorter or longer periods of time, and can be adjusted at a later date if you wish. The total amount of the mortgage, plus the interest, is divided over the years you will take to pay it, and then into monthly amounts.
What Mortgage Can I Afford?
Mortgage lenders are taking a big chance on you, and they want to be as certain as possible that you can repay the money they have lent you. This is why they do mortgage affordability tests. Whilst 10% is usually the minimum for a deposit, there are some mortgages that will accept 5%. You also only need a 5% deposit if you are using the government’s Help To Buy scheme. However, having a deposit over 10% of the price of the property you wish to buy puts you in a better position, as lenders have to give you less, which means it will be quicker and easier to pay back.
When it comes to how much mortgage lenders are prepared to give you, they tend to work by the 4.5 rule, meaning they will only lend 4.5 times your annual income. If you are buying as a couple and your combined earnings is £60,000 a year, you can apply for a mortgage of £270,000. A deposit of 10% of this figure would be £27,000, which means the properties you could consider buying would be priced around £297,000. Mortgage lenders look at all of your regular outgoings, such as household bills, loan repayments and credit card debt to make sure you have enough left to cover mortgage repayments. They will also perform a credit check with a credit reference agency to take a look at your financial history and see how much of a risk lending to you might be. Before applying you should check your credit score yourself and take steps to improve it if necessary.
How to Find the Right Mortgage Deal For You
There are hundreds of mortgage options out there, so, as well as doing your own research, it’s a good idea to ask an expert. An expert mortgage advisor will know about the best deals available on the market and be able to give advice on what would work best for you. As specialists, they usually have access to better deals than those publicly available on comparison sites. Mortgage brokers are usually paid on commission from your lender, but they may charge a fee as well, so be sure to check.
The Mortgage Application
The actual mortgage application itself is a fairly straightforward process. You may do this in person with your mortgage lender, but increasingly this step is done online. You’ll need to have proof of identity, so a driver’s licence or passport, as well as a utility bill, will be necessary. You will also need to show your annual income, which usually means a P60 from your employer, your last three months of payslips and bank statements for the previous six months. If you are self-employed you need to provide your three previous SA302 tax returns. When you have filled in the application and sent it to the lender with the relevant documents, the lenders will perform the credit check and review the information to decide on what they will lend you.
In recent years it has become increasingly important to get a mortgage in principle before you even begin to look at properties. This is a written indication from a mortgage lender stating how much it might be prepared to lend you. Whilst not compulsory, it can be useful to have when house hunting – especially for a first home – as it demonstrates to the estate agent that you’re a serious buyer. It puts you in a firm position to make an offer and could make the difference between a seller choosing you instead of someone without one.
The Cost of Buying
It’s vital to remember that along with the cost of the actual house comes the cost incurred whilst purchasing the house. Fees tend to be steep and can make a real dent in the amount you have saved for your deposit. Mortgage arrangement fees (usually around £2,000) are typically added to your mortgage amount, but you will have to pay upfront for your mortgage broker fee, valuation and survey fees, solicitor’s fee, stamp duty (if applicable) and moving costs. It all adds up so make sure you have set enough money aside to cover it.
The deal you get will depend on your income, the size of the property and, crucially, the size of your deposit, so make sure you have plenty saved up first. As long as you have the necessary documents and information in order, it should be a fairly smooth and straightforward process. Though it initially seems overwhelming, with good research and good advice, taking out a mortgage won’t be as complicated as you expect.