When it comes to big-yet-important expenditures, buying a house is definitely one of the crucial ones, which is why it is so important to have a clear understanding of how much you can really afford to spend. And since the vast majority of us don’t have fortunes lying around in our bank accounts, we opt for mortgages.
A mortgage is a loan from a financial lender to help you buy a property. This needs to be paid back over a set period of time – on average over 25 years.
But it’s not as easy or simple as withdrawing from a cash machine. Here’s what you need to know…
Before you even start scoping out houses, you need to calculate what you can afford. Work out your monthly income and expenditures, including the cost of running a home (such as bills, council tax, maintenance costs, insurance, and regular payments like grocery shopping and transport costs).
This will allow you to see the amount of disposable income you have and, thus, how much you can put towards paying off a mortgage.
Don’t stretch yourself too thin, as you don’t want to end up in debt or struggle to make ends meet just so you can afford the house of your dreams. And always account for future planned chances that will impact your income/home, like switching careers or starting a family.
As the lenders will be providing you with a big sum of money, they are going to want to go into great detail about what you spend and why.
You’ll need to provide proof of income and expenditure, plus declare if you have any debts, such as loans, overdrafts or credit cards. A broker may ask for information about your household bills, personal spending and also for proof of a deposit and information on your employment status.
It’s recommended that you check your credit score and make improvements to your financial status prior to approaching a potential lender (Experian or ClearScore could help with this). This is also a good chance for you to rectify any errors within your credit report, or offer an explanation for any misgivings.
Mortgages are offered through a bank or building society. A mortgage broker will help you choose a preferred lender based on your circumstances and what you can afford, and advise on the best type of mortgage, comparing the deals available on your behalf.
Websites such as Vouchedfor.co.uk or Unbiased.co.uk can help you in your quest to obtain a broker. Or you can seek recommendations from friends and family.
All financial advisers must be regulated by the Financial Conduct Authority (FCA), so always ask if a broker is fully-qualified and check this on the FCA register online. Ask what they charge, if you can read previous client reviews, and if they can find you a mortgage from all UK lenders.
Some advisers are restricted to a small number of lenders’ mortgages, while others deal with the whole market, including direct deals. Thus, decide which will best fit your circumstances.
The type of mortgage you can apply for will depend on whether you are able to pay off the borrowed amount and the interest. There are two main mortgage types: fixed-rate and variable.
• A fixed-rate ensures your monthly repayments will stay the same for a set time.
• A variable rate could fluctuate in line with the Bank of England base rate.
Others include discount, whereby you’ll receive a percentage cut off the standard variable rate (SVR) of interest; tracker, which moves in line with the base rate, plus a few percent added by the lender; capped rate, where a variable interest is limited to a cap; and offset, that links your savings to your mortgage and you pay interest on the difference.
Your type of mortgage, income, age, and deposit size will all determine your eligibility.
When calculating your affordability, remember to include broker and solicitor fees, valuation costs, Stamp Duty and expenses for any surveys needed on the property. Although broker fees will vary, you can expect to pay £200-500.
From home stagers to interior architects, we have them all here on homify, and much more. Check out our professionals page.
It’s not possible to obtain a mortgage without a deposit. And the bigger this is, the lower your interest rate is likely to be as the Loan to Value (LTV) is smaller.
For example, with a 10% deposit of £20,000 on a £200,000 property, the LTV is the remaining 90%, or £180,000. The cheapest rates are usually available for buyers with a 40% deposit.
Since the financial crisis, the questions lenders ask have become increasingly extensive, as they have to make sure that mortgages are offered to those who can afford it. The questions you may be asked include:
• The value of the property you wish to purchase, your deposit amount and the loan term.
• Your age, marital status and number of children, plus proof of identity.
• A breakdown of your income and outgoings including your P60, bank statements and utility bills for the last six months.
• How stable your income is (if you’re self-employed, you’ll be particularly scrutinised).
• Records of previous loans or credit.
• Lifestyle factors, such as whether you have ever gambled.
Don’t stress if your mortgage only allows you something tiny; see these: 25 ways to make the most of your small home.