IF you’re lucky enough to be in a position to start hunting for your first new home, signing yourself up for a mortgage might seem a little daunting.
And with a load of options to choose from and confusing jargon to sift through, sometimes it’s hard to know where to start.
But don’t panic: we’ve rounded up a list of six top tips to keep in mind while shopping around, including which lenders are offering “no deposit” loans.
Save for a deposit
To be in a position to buy a home, you’ll most likely need to have some cash in the bank saved to put down a deposit.
It’s also likely that you’ll have to save more now compared to what was on offer before the pandemic.
Pre-Covid, first time buyers could buy a home if they had enough cash for just a 5% deposit.
But when the pandemic hit, the housing market shut down, and because lenders couldn’t value properties, the minimum deposit rates hiked up to 20% in some cases.
However, this jump was short lived, and now major lenders are bringing back home loans which need a deposit of just 10% – see more details below.
Saving tens of thousands for a deposit is easier said than done – but there is help available to make your money go further.
You could apply for a Help to Buy equity loan, which means the government will lend you up to 20% of the home’s value (or 40% in London) after you’ve put down a 5% deposit.
A Lifetime Isa could also help you boost your savings.
This is another government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home.
Or, you could consider a shared ownership home, which means you could co-own the property with a housing association and buy a part of the property and pay rent on the rest.
You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Buying a house without a deposit
In theory, there are options where you can get a loan to buy your home if you haven’t saved for a deposit.
You can get a guarantor mortgage, which means a parent or close family member will offer their home or savings as a security against the loan, according to Which.
If you miss a payment, then your guarantor will have to foot the bill.
Barclays is offering a loan like this, called a Family Springboard Mortgage.
You can borrow the full purchase price of your home without a deposit.
But there are conditions. A “helper”, which could be a family or friend, will have to stump up 10% of the price of the property as a security deposit.
This will be held over a five-year period, after which their money will be returned, along with interest.
Aside from these types of mortgages, online mortgage broker Trussle says there are no mortgages available where you don’t have to cough up for a deposit.
Shop for your mortgage if you have a small deposit
There are a number of lenders offering higher loan to value (LTV) mortgages than others.
LTV essentially means the ratio between the size of your deposit compared to the value of your property – so a higher LTV means you don’t need as big a deposit to secure a mortgage.
So if you’re looking to buy a £250,000 property and have saved up a 10% deposit (which is £25,000), you can get a 90% LTV mortgage – meaning you can borrow 90% of the property’s value.
However, keep in mind the basic rule is that the bigger your deposit, the better the rate you’ll get, and the smaller your monthly repayments will be.
The average UK house price is £235,000 – so bearing that in mind, here’s mortgages we’ve spotted on the market that you can get if you have just saved up a 10% deposit:
- Nationwide is offering a 90% LTV mortgage on a two year fixed basis with an initial rate of 3.24%.
- Over at Natwest, if you have a 10% deposit, you could get a mortgage on a two year fixed rate basis with an initial rate of 3.6%.
- At Lloyds, the rate could be an initial rate of 3.49% on a two year fixed rate for a 85% to 90% LTV.
- HSBC has also brought back its 90% LTV mortgage deals too, with an initial two year fixed rate of 3.99%.
It’s best to check exactly how much you can borrow and what you’ll be paying back with your mortgage provider.
Get your paperwork ready
You’ll have to check with your mortgage provider as to exactly how much you will be able to borrow.
Lenders will not only look at income, but also at regular outgoings and financial commitments such as utilities, childcare costs and travel, L&C Mortgages communications associate director David Hollingworth says.
In fact, being able to borrow enough will be a “big challenge” for first time buyers, so you’ll need to know exactly what you can afford when applying for a home loan.
“It makes sense to pin down monthly costs and understand all those costs more specifically in a budget planner,” he says.
“It might even help to weed out some unnecessary payments that may only help with saving toward the deposit.”
However, we’ve spotted that Accord Mortgages will let you borrow five times your income to buy your new homes – but your household income must be £60,000 or over.
You’ll have to prove your income when you’re applying for a mortgage – so Hollingworth advises to get all your paperwork in order.
“Make sure you have the latest payslips and P60 as well as bank statements to back up your mortgage application,” he says.
As a result of the Covid crisis, it is important to note that some lenders might not view variable income like overtime, bonus or commission as favourably as they did before the pandemic.
So make sure you “break down the income correctly and shop around for the best fit to your circumstances”, Hollingworth adds.
Consider a broker
Getting a broker on board to help you seal the deal for your new home could be a good idea.
A broker will help you arrange a mortgage between you and the lender, and they can give you advice on exactly what kind of mortgage you need.
And it could be a good idea to use one because of the disruption Covid has caused to the market, Moneyfacts finance expert Rachel Springall says.
The pandemic has meant mortgages might be subject to availability, and could be frequently repriced, so using a broker can ensure borrowers are “kept as up to date as possible with what is available to them,” she says.
The amount of time it takes to process a mortgage has also been affected by coronavirus, so using a broker instead of going direct to a lender will mean “borrowers are kept up to date with the process and save themselves their own time in chasing down the stage of their application,” she adds.
What to do if you’ve got a bad credit history
It can be tougher to get a mortgage if you have a bad credit history.
But Trussle’s head of mortgages Miles Robinson says there are four steps you can take to improving your chances of getting a loan.
Firstly, make sure you check your credit report so you can address any issues before applying for a mortgage. ClearScore offers this service, as well as Experian.
Secondly, be honest about your financial situation with your broker so you can get the best advice for your circumstances. “Our research shows that 90% of people with a poor credit history are approved for mortgages,” Robinson says.
“This could be the result of smaller lenders operating in more niche areas to stand out in an incredibly competitive market – and a mortgage broker will help you find the most suitable mortgage.”
Next, try to pay down your debt as much as possible. Missing payments can hit your credit rating hard, so set up direct debits to avoid missing future installments.
And finally, lenders look at your credit rating to make sure you have a history of managing debt responsibly – so they may turn you down if you don’t have much of a credit history, Robinson says.
Using small amounts of credit, like a planned overdraft or a credit card, can help build up your credit rating and improve your chances of getting bigger loans in the future.
“However, it’s very important that you manage this debt sensibly and make your repayments on time, otherwise you could end up paying high interest rates and doing more damage to your credit rating than good,” Robinson says.
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