The Archer's Jennifer Aldridge is worried about shared ownership homes in a proposed new housing development in Ambridge. We help her by dispelling a few myths.
If you are a first-time buyer wondering what steps you need to take to get to your own front door, welcome!
This guide takes you through the process of buying your first home, including saving your deposit and applying for a mortgage.
Getting a mortgage is one of the biggest financial commitments you are ever likely to make, so it should be taken seriously. However, while it may feel scary, it needn’t be difficult.
Can you afford a mortgage?
As well as the deposit, you need to know if you can afford the monthly mortgage payments. As a first-time home buyer, the most important thing to bear in mind is whether you can really afford to take this step. It’s wise to put together a budget before you start looking for a property.
There are strict checks when you apply for a mortgage. Lenders will check that you can afford the mortgage and also ‘stress test’ your ability to make your payments if interest rates were to rise or if your circumstances were to change.
You can use free online tools to calculate what kind of mortgage payment you can realistically afford to pay each month. Free tools like the Money Advice Service’s online budget planner or Money Saving Expert’s budgetbrain are available.
As part of the mortgage application process you will need to show the lender evidence of any outgoings you have and prove your income.
How do you prove your income?
If you are employed by a company then you should receive weekly or monthly payslips. You will need to provide at least three months’ worth of payslips and potentially up to twelve months’ payslips if you receive overtime or commission from your job and your latest P60.
Self-employed or contractors
If you are self-employed or contracting, getting a mortgage can be more difficult. But it's not impossible. You will need proof of your income. This is usually done in one of two formats:
- Business accounts - you will need to be able to show two to three years of accounts. Usually, the lender will require them to be signed off by a Chartered/Certified Accountant.
- Tax returns - if you can’t show business accounts then two or three years’ tax returns are the next best option.
- Contracts - proof of short or long term contract and recent contractual history.
You will be assessed on profits, not turnover. For further information see our Self-Employed Guide.
The deposit & fees
Before you go booking appointments to view your dream home, you’ll need to save for a deposit. Generally, you need to try to save at least 5% of the cost of the home you’d like to buy.
For example: if you want to buy a home costing £200,000, you’ll need to save at least £10,000 (5%). However, saving more than 5% will give you access to a wider range of mortgages available on the market.
The golden rule is: the bigger the deposit = the better the rate = the lower your monthly repayments = the cheaper the mortgage repayments.
The difference between a 5% and 10% mortgage can provide savings in monthly repayments; the next jump is at 25% and then 40% deposit. So, if you have any chance of pushing yourself up a band (perhaps asking parents to help with the deposit), do it!
The bank of Mum and Dad (or Granny and Grandad)
Many first-time buyers rely on help from mum and dad for their deposit. But parents can be much more directly involved. There are a number of ways in which parents (and grandparents) can help. See our article on The Bank of Mum and Dad here for more details.
Mortgage fees & cost of buying
Before rushing ahead with your mortgage application, make sure you aware of the fees that are involved (these are separate to the costs of moving).
You could keep back some of the money from your deposit to cover these costs, or it is sometimes possible to add the fees to your mortgage loan, so you won’t lose any money if the mortgage doesn’t go ahead, providing the fees are refundable.
Types of mortgage fees
- Application/Arrangement fee - Some lenders will charge a fee to arrange your mortgage for you. This is to cover the cost of the administration associated with assessing your application and setting up your mortgage account. This fee can often be added to your mortgage, and may be refundable if the mortgage does not complete.
- Booking or reservation fee – Some lenders charge a separate reservation fee to secure a fixed-rate, tracker or discount deal. This is always payable upfront and is non-refundable. Some lenders roll this charge into the arrangement fee.
- Valuation fee - A basic standard mortgage valuation is an inspection carried out by a valuer to make sure that the property is suitable security for the loan required. The amount of the fee is based on the purchase price or estimated value. A mortgage valuation is carried out for the lender’s purpose but they will usually provide you with a copy of the report. Some mortgage products may offer a free mortgage valuation, but if you would like a more detailed report there would normally be a supplement to pay.
Other costs of buying a home
Yes, more costs. Apart from the monthly mortgage payments, there are others costs when buying a home to be prepared for. These include:
• Survey costs
• Solicitor’s fee(s)
• Removal costs
• Buildings insurance
• Initial furnishing and decorating costs
• Stamp Duty (you can visit the Gov.UK website to calculate how much stamp duty would be payable, depending on your circumstances and property value. )
Finding the right mortgage
There are many different mortgage types and deals, so knowing which one is the best for you can be tricky. It can depend on a number of variables, so it’s a good idea to do some research, talk to your local lender or an independent mortgage broker. Almost every bank or building society has their own range of mortgage deals and you can compare them on comparison sites. But that won't necessarily tell you if a mortgage is suitable for you, or if a lender would be likely to accept your application. This is why it really helps to talk to a qualified adviser.
Ultimately it's your decision. Take advice AND do your own research to compare against their recommendation. And then decide for yourself.
You can find information on the different types of mortgages on the market in our mortgages explained leaflet.
Research affordable home-buyer schemes to get you on to the property ladder
Several government-backed schemes aim to give home buyers a helping hand onto the property ladder. If you can use one of these schemes, lenders will still want to ensure you can afford to pay your mortgage. However, as you are purchasing a share of the home, deposit levels are often less than those when buying outright, so it is worth investigating the schemes further. The following pages may help:
Boost your chances of getting a mortgage – get mortgage fit!
Making sure you can afford a mortgage and having a deposit is only the start. Affordability and credit checks play an essential part in a lender’s assessment of whether they will give you a mortgage. Each lender has its own bespoke criteria, and you need to be a strong applicant. Not every lender will view you in the same way, but there are a number of things you can do to get in mortgage shape that can make a big difference. Read our 10 tips to help improve your credit score article for more information.
Time to find your home
So, now you can start looking. Once you have found a property you want to buy, the next step is to make an offer, usually through an estate agent. If your offer is accepted it is then time to make your mortgage application.
Applying for your mortgage
Your lender has a responsibility to ensure that you can afford the mortgage you're asking for. Don’t get concerned that the mortgage application form seems very detailed, it's all about working out how much you've got coming in, how much you've got going out and what you can afford to pay. You will need to provide:
• Proof of identity for example; photo driving licence, passport, birth certificate and your national insurance number (it will depend on what the relevant lender requests)
• Proof of address for the last three years, such as utility or council tax bills (if relevant)
• Employment details and contact number
• Proof of income such as payslips, P60, self-employed accounts (two to three years and approved by a chartered accountant), SA302s.
• Proof of bonuses and commission
• Proof of deposit (plus written confirmation from donor — typically parents — if getting a gift towards the deposit that it really is a gift & not a loan)
• Outgoings including debts and loans
• Your last three months bank statements
• Details of assets such as other accounts, properties, investments, etc.
Your lender will also need to be comfortable with the property you want to buy. Some lenders won’t lend on homes near commercial premises, those without a working kitchen or bathroom (even if you plan to refurbish), or those in a high rise. So ensure you declare everything on your application form. The purchasing details you will need to provide include:
• Which property you wish to buy (address and details)
• Contact details for your solicitor/conveyancer
• Your valuation/survey requirements
• Your bank account (if not with the lender)
Your lender will then arrange for a surveyor to conduct a valuation of the property you wish to buy. During this period, the lender will also be processing the rest of your application. This will involve processing fees, chasing outstanding documents and checking all details. It is vital that each and every piece of information you put on a mortgage application form is correct, otherwise it could cause delays or even your application to be declined.
Once the lender has finished processing your application, and if they are happy with the application and valuation, they will extend a formal offer to you. If you accept, they will send a copy to your solicitor.
Then the exchange of contracts can take place. The funds will be sent to your solicitor, who will conclude the transaction with the seller, and the property will finally be yours! This is known as the completion date. The keys to your new home will change hands, and you can move in. Congratulations – you are now a home-owner!