Last year, despite the pandemic, there were 674,263 houses sold in the UK and a staggering 356,800 of these were bought by first time buyers. Now that is fantastic news! Not only does that show that the housing market is still chugging along at a steady pace, but it also shows that first time buyers are still able to make it on to the housing ladder and achieving their dreams of home ownership. Here at Oportfolio, our broker support is second to none.
We value all our clients however we believe that it is first time buyers who have historically had it harder than other more experienced property owners and we want to make it our priority to give you as much help and expert advice as possible so that everyone who is starting the home ownership journey feels like they know where to start. We have compiled a list of the four main things we think first time buyers need to be aware of before going down the house buying path.
Perhaps the word that most first time buyers dread to hear when they start looking to buy their first property. Unfortunately, over the last few years the word ‘deposit’ has developed into a mythical word that conjures up images of an unattainable fortune that only the elite have access to which of course, is not necessarily true. Now we more than anyone know that saving a deposit is not always a walk in the park, in fact saving a deposit as a first time buyer living on your own and paying rent at the same time can be a nightmare but there is always a way forward.
Once common misconception is that you need to have a very large deposit in order to stand a chance of getting a mortgage. Its true that if you have a larger deposit, your mortgage amount required will be lower and therefore it will generally be easier to get the borrowing amount that you want however you don’t NEED to have a large deposit at all. It all comes down to the value of the property you are purchasing and how much the bank will lend you based on your income and outgoings. A lot of mortgage lenders will actually allow first time buyers to put down a minimum of 5% of the value of the property as a deposit.
That means that if you were for example looking to purchase a flat in the midlands worth £150,000 you would only need to put down £7,500 deposit and you would require a mortgage of £142,500 to cover the other 95% of the property. If you are a young couple buying or friends that’s only £3,750 each to own a home! Another option is shared ownership, an increasingly popular scheme most beneficial in places like London, where you purchase a share of a property rather than the entire property and secure a mortgage on that share. The other share of the property not initially owned by you will be rented to you with a view to purchase the rest of the property later down the line.
We also understand that not everybody is able to save a deposit easily due to a rise in the cost of living and rent increases however sometimes careful budgeting can make a huge difference. Many banks offer first time buyer isa’s and savings accounts that are designed to help you put some money (an affordable amount based on your income and living expenses) away every month and at the end of your saving period they will often give you a bonus contribution toward your saved deposit.
Another option for helping save a deposit (if you have extremely nice parents) is to potentially move back in with your parents for a few months to get rid of the monthly rent commitment and potentially save your thousands which you can put towards your deposit savings. All of these options can be carefully looked at by one of our advisors who will be able to tell you exactly what steps you need to take to start saving for your future purchase.
Probably the most important factor when buying a property and getting your first mortgage is your income as this is a large part of determining what the mortgage lender will be willing to lend you. Generally, the rule of thumb is that a lender will be willing to lend around 4.5X your annual income for a mortgage. Normally a lender will take 100% of any basic employed salary and 50% of any bonuses or commission income that is received.
If you are self employed or a contractor most lenders will use an average of the last 2-3 years self employed income figures after tax to determine your income. It is important to note that not all mortgage lenders are the same when calculating income and borrowing amount so it is always advisable to speak to a mortgage broker who will be able to do all the relevant calculations for you.
Its also important to know that the amount a lender will be willing to lend you is also based on your outgoings as well as your income. If you have large outgoings that will continue when you purchase your new property i.e. Large personal loans or large credit card balances, the lender will reduce the maximum mortgage amount they will offer. Again, speak to your mortgage advisor about any large credit commitments you have to see if they will affect lending potential.
3) Credit history
Another myth that we want to dispel is that you categorically can’t get a mortgage if you have had any issues with credit in the past. That is not necessarily true. The truth is that of course, mortgage lenders prefer clients who have not had any credit issues because the risk of them not keeping up with their mortgage payments is significantly lower. Simple. However, it takes extreme credit issues for you to not be able to get a mortgage at all.
Credit issues such as bankruptcy, IVA, large defaults and fraud on your file are all examples of extreme credit issues that would all need to be satisfied and removed from your credit file prior to trying to secure a mortgage. Smaller indiscretions such as missed or late payments that have not defaulted or historic defaults (3 years old) are often overlooked by mortgage lenders however it will normally come down to how much these issues have affected your credit score. The lower your score, the more you may struggle with passing a lender credit check.
Before submitting a mortgage application, a lender will always require you to do a credit check through their online software which will determine if your credit is acceptable for them. This is called either a decision in principle or an agreement in principle. If you decide to use the help of a mortgage advisor, they will look at your credit situation first and if there is a potential route forward they will run a credit check with the most appropriate lender. As long as the credit check passes, you will be able to proceed to a full mortgage application.
4) Interest rates
When you choose a mortgage with your advisor’s help, you decide on a product with a specific interest rate which determines how much you pay per month on your mortgage and most people choose to fix their rate for 2-5 years so that you won’t pay more than you are comfortable with. If you have been watching the news recently, you will know that the Bank of England has raised the base rate from 0.1 to 0.25%. For those of you who don’t know, the base rate is the rate that the Bank of England charges banks and financial institutions in the UK for loans with a maturity of 1 day. If the bank of England puts its base rate up then logically banks and financial institutions will put their rates up as well.
This means that mortgage rates are likely to increase (if they haven’t already which some lenders have done prematurely) and monthly mortgage payments will increase however the rate change is very minimal and still very low. For people who already have a mortgage and have opted to fix their mortgage products won’t be affected by this rate change, at least until their fixed period ends.
However, first time buyers who have not already secured a mortgage will have to choose a product that has been altered in line with the Bank of England base rate change so the likelihood is that you will pay slightly more than someone who purchased earlier in the year. But don’t worry, Oportfolio would still help you to choose the best rate on the market for your circumstances and make sure that you feel comfortable and secure with your mortgage payments.
So those are the four main things that we think first time buyers need to be aware of before looking to purchase their first home. Of course, there are other elements to the house buying process but our advisors will be very happy to discuss all of them in detail with you so that we can help make your dreams come true. Speak to a dedicated mortgage broker at Oportfolio today.