It’s well-documented that getting on the property ladder is harder than ever – with a quarter of new home purchases funded by family loans and prices consistently rising, it’s easy to see why a generation of renters feel priced out of the market.
But owning your own home doesn’t have to be a pipe dream, there are part-ownership schemes and ‘Help to Buy’ options as well as various mortgage rates available to suit different financial situations. To cut through the jargon and help you know where to start, we’ve put together a guide to mortgages…
Are there different types of mortgage?
Yes, there are a few different types of mortgages but the main options are a fixed rate and a standard variable rate:
Fixed Rate Mortgages
A fixed rate mortgage is by far the most popular, accounting for over 75% of all home loans. With this kind of mortgage, the interest you pay will stay the same for between a two and ten-year period, regardless of any changes to interest rates during this time. This can provide peace of mind and help you budget as your monthly payments won’t change, although you won’t benefit should interest rates fall.
You are tied into the deal for the length of the fixed period, so be careful to look out for any additional charges should you want to leave early. When the fixed period runs out, you should look for a new mortgage deal within two to three months to avoid being placed on the lender’s standard variable rate, which is generally much higher.
Standard Variable Rate (SVR)
This option means your mortgage lender will charge a standard rate for as long as your mortgage lasts (generally 25 years) or until you take out another deal. The interest rate may change at any time, for example if the Bank of England’s base rate changes, but you do have the freedom to overpay when you can afford it or leave at any time.
Other kinds of variable rate mortgages include discount mortgages, which offer a discount from your lender’s SVR for a set period of time, or tracker mortgages, which move directly in line with the Bank of England’s case rate plus a few percent. These mortgages can be risky as you’ll need to ensure you can make the repayments should your lender’s interest rates rise, but there is the benefit of more freedom.
How can you find the best deal?
You can apply for a mortgage directly from a bank or building society, but experts strongly recommend you seek advice from a mortgage broker or independent financial adviser (IFA) who can compare different mortgages on the market to help you get the best deal. Price comparison sites can also be helpful for giving an overview of the current market.
How much can you borrow?
In the past, lenders would multiply your income by up to five times to calculate your maximum mortgage size. However, this has become more complicated and there are now stricter guidelines to assess your ability to afford repayments, not just at current interest rates, but also if rates shot up by 6% or 7%.
Online mortgage calculators such as Money Saving Expert’s can be a helpful indicator as to how much you can borrow – but it’s important to remember these don’t take into account any significant outgoings such as debt repayments or various membership fees, so you should speak to a lender or a mortgage broker to receive a more accurate estimate.
Is there any support for first-time buyers?
Absolutely, whilst it might be tricky to know where to start, there are a few schemes offering support for first-time buyers:
With a Help to Buy Equity Loan the government will lend you up to 20% of the cost of a newly built home (or 40% in London), so you will only need a 5% cash deposit and a 75% (or 55%) mortgage to make up the rest. You also won’t be charged any loan fees on the government loan for the first five years of owning your home.
The scheme is open to first-time buyers and homeowners in England looking to move to a newly built property worth up to £600,000 and you must not own any other property at the time of buying the home.
If you can’t afford the mortgage on the full price of a home, the government’s Shared Ownership scheme gives you the chance to buy a share of your home (between 25% and 75% of the property’s value) and pay rent on the remaining share. To qualify, you must be a first-time buyer with a household income of £80,000 a year or less or £90,000 a year or less in London. This option also allows you to buy a greater share of the property further down the line when you can afford it.
Help to Buy ISA
In addition to these schemes, aspiring first-time buyers can open a Help to Buy ISA on properties worth up to £450,000 in London and £250,000 elsewhere. Save up to £200 a month towards a property and the government will boost your savings by 25% – so that’s a £50 bonus for every £200 you save, although the total contributed by the government is capped at £3,000.
How can you boost your chances of getting a mortgage?
Here are ten expert tips that will give you the best chance of being accepted for a home loan:
- Start Saving: Try to save the bigest deposit you can; mortgage providers reserve their lowerst interest rates for people with large deposits.
- Know Your Credit Score: You'll need a strong credit profile to qualify for good deals. If you don’t have much in the way of credit history, get a credit card to build your score, but use it sparingly and make sure all debts are paid off each month.
- Pay Off Debts: Clear as much of your debt as possible and close down any accounts you no longer use to assure lenders you are able to keep up with repayments.
- Update Your Address: Register on the electoral roll at your current address, as many companies use this to verify your identity.
- Avoid Unusual Properties: Mortgage lenders are often less willing to lend against properties that might prove hard to sell on should you default on your repayments; these can include flats above commercial premises or old buildings.
- Be Prepared: Prep all the documents you'll need to process a mortgage application; these generally include several payslips, three years of accounts, three months of bank statements and full details of loans and credit cards.
- Collect Evidence Of Self-Employment: If you're self-employed you'll have to provide more evidence of your earnings than those with full-time jobs; usually this means providing your full accounts for the last three years.
- Know What You Want: Do your research and shop around, ensuring you take all factors into account.
- Use A Broker: Once you've decided what type of mortgage you want, ensure you get the best possible deal with a broker. It could save you thousands, even tens of thousands, of pounds in the long-term.
- Don't Alter Your Application: Once you've started an application don't fiddle with the figures if, for example, you decide you want to borrow more, as this can cause unnecessary hold ups.