By Marianna Hunt 23 August 2020 • 11:29am
This is The Telegraph's ultimate guide for first-time buyers. In this series we look at the Help to Buy scheme, how to get a mortgage and how to open a Lifetime Isa or a Help to Buy Isa.
You’ve saved enough for the deposit but what happens next? Unless you have enough cash in your bank account to cover the rest, you are going to have to take out a mortgage to borrow the money.
Not everyone will qualify for a mortgage – a lender will need to judge whether you can afford the repayments. Banks are being much stricter about lending to people who only have a small deposit because of concerns that lots of people will lose their jobs and not be able to keep up with repayments during the Covid-19 crisis.
So how do you get a mortgage, and how can you make yourself more appealing to lenders?
To apply for a mortgage, you can go directly to a bank or building society and choose one of their products, or you can use a mortgage broker or financial adviser. These will be able to compare deals from different lenders across part of all of the market.
A lender decides whether or not it is willing to offer you a mortgage based on a number of criteria. It will take into account how much you earn, your regular outgoings, any existing debts and the value of the property you want to buy.
Working in the same job for an extended period also helps. Most lenders will want to see that you’ve been with your employer for a reasonable amount of time, so if you are considering changing jobs it may be better to do so after your mortgage is secured. If you're self-employed you'll need to provide company accounts for the past few years.
A student loan does not appear on your credit history but most lenders will ask you about it. Having student debts will not mean you are automatically blacklisted from getting a mortgage, but lenders usually take it into account when calculating how much you can borrow.
A loan-to-value ratio, or LTV, is the size of your mortgage in relation to the value of the property you want to purchase as a percentage. Most lenders will have a maximum LTV that they are prepared to offer you.
For example, someone wanting to buy a £200,000 home who has a deposit of £50,000 would need a mortgage of £150,000, meaning they'd have a LTV of 75 per cent. A typical first-time buyer puts down a deposit of between 5 and 10 per cent, so would have a LTV of at least 90 per cent.
Banks are being much picker about who they lend to since the start of the pandemic. If you are rejected by one, that does not necessarily mean you can't get a mortgage. It may be worth speaking to a mortgage broker, who will be able to hunt down specialist lenders who are willing to give you the money.
Self-employed people who have accepted government support, such as a grant or loan, during the crisis may also struggle to get a mortgage and may benefit from speaking to a broker, too.
How to make yourself more mortgage-friendly
A leg up from the family
There are a number of ‘family springboard’ mortgages that allow parents to help their children buy their first home. With a springboard mortgage, a buyer is able to put down a smaller than average deposit, while taking out a mortgage for the remainder.
To give the lender further security, a family member then puts 10 per cent of the property's total value into a savings account (where it earns interest) with the lender.
After a set period of time the family member's funds are released as long as the mortgage payments are up to date. Lenders offering family-backed mortgage deals currently include Barclays, Lloyds Bank, and Family Building Society.
Parents who prefer not to lock away their savings can help their children with a guarantor mortgage, such as the Post Office’s Family Link deal. This allows a buyer to borrow up to 100 per cent of the value of a house by taking out 90 per cent as a traditional mortgage then borrowing the rest, using a family member’s home as security (which they must own outright). The 10 per cent loan must be repaid within five years of buying the house.
It is very important to seek advice before taking out these types of mortgages.
Lenders take your credit history into account when calculating how much you can borrow. You can check your credit rating online through one of the three main credit reference agencies: Experian, Transunion and Equifax. The higher your score, the better your credit history.
You can improve your score by ensuring you pay your bills on time, including credit card payments and any loans. Some agencies also allow you to have your utility and mobile phone bills taken into account. Registering on the electoral roll also helps, as does staying at one address for an extended period of time. If you have a poor credit history, you could consider taking out a credit-builder credit card and paying it off reliably every month.
A mortgage is a huge financial commitment, so it’s important to get it right. Going to a broker means you can compare deals from different providers; they also tend to be more flexible about when you can book appointments than bank branches.
However, some lenders offer better deals if you go to them direct. One compromise would be to approach several brokers and see who can get you the best deal, as some lenders offer better rates through certain brokers. The most important thing is to do your research and shop around.
We've answered readers' questions about getting a first mortgage below.
Q. What's the difference between a repayment and an interest-only mortgage?
A. With a repayment mortgage you pay off both interest on the loan and some of the original amount you borrowed every month until the whole debt is paid off. Taking out an interest-only mortgage means your monthly repayments only cover the interest: at the end of the mortgage term you'll still have to find the money to pay back what you borrowed. Mortgage lenders are unlikely to offer interest-only mortgages to first-time buyers unless they are sure you have the funds to pay off the loan.
Q. What's the difference between a fixed rate and a variable rate mortgage, and which is better?
A. You can either choose to repay a fixed monthly amount for the entire duration of your mortgage (a fixed rate mortgage) or to go for an option where the repayment amount rises and falls in line with interest rates. If rates go down, you'd benefit from taking out the latter as your repayments would drop, but it is a gamble.
Do you have any more questions about buying a first home that we haven’t answered in the series? Send them over to marianna.hunt@telegraph.co.uk.