In the years before the global recession really began to hit, almost anyone could obtain a mortgage, with lenders falling over themselves to offer loans that required little or no deposit and doing only minimal checks on employment prospects and earnings.
Today, it is a completely different story, as you are likely to have discovered if you have tried to secure a mortgage recently. Now, you stand virtually no chance unless you have a deposit of between 20 and 25%, and with house prices starting to climb once more, saving the necessary cash is a real challenge. What’s more, the rate of interest you are charged will be significantly higher than if you are able to put down 30 or 35%.
If you are a graduate who has been offered work, or recently started working for an employer, or wish to learn a little about how the property market functions, here are a few key tips designed to help you take that first step on the ladder. Remember, you might not be thinking about buying a property at this very moment, but it is something you should take into account when planning for the future.
More people than ever are finding themselves locked into long-term renting, simply because they can’t afford the deposit on a home of their own. Even though it might be difficult to begin with, it is essential that you start saving just a small amount now and it will stand you in good stead when you do decide it’s time to become a first-time buyer.
Before applying for a mortgage
Before you even consider looking at properties or contacting potential lenders, there are a number of key issues to deal with.
Having the best possible credit score is essential. There are three major credit rating agencies in the UK, Equifax, Experian and Callcredit, all of whom will provide you with a copy of your credit rating report free of charge or for a small fee. Check through it and query anything that looks suspicious. Your score is based on several criteria, late or non-repayment of credit card debts or loans, county court judgements (CCJs) and similar, not appearing on the electoral role, and how your personal bank account and credit cards are managed.
Prepare a list of your monthly income and expenditure. Be sure to include all expenses; lenders have been known to ask how much prospective borrowers spend on entertainment, eating out and holidays.
Expenses related to purchasing the property, such as solicitors, land registry and estate agents fees add up. You are also strongly advised to take out a mortgage life insurance policy. If you were to die before the mortgage is repaid, your dependents would not be liable for the outstanding debt.
Never ‘massage’ these figures, because while interest rates are currently at historical lows, it is inevitable that they’ll rise during the next year or so, which means your monthly repayments will increase. Be sure you can afford the repayments and still live comfortably.
Your yearly mortgage repayments should account for no more than around 25% of your annual nett income. There are numerous websites operated by banks, building society and comparison sites featuring free mortgage calculators. This useful resource enables you to look at various ‘what if’ scenarios, based on the amount borrowed, different repayment periods and varying deposits.
In addition to banks, credit unions and building societies, check out housing associations offering shared ownership schemes. You purchase a percentage of the property and pay a relatively low rent on the balance, making it a great option for first-time buyers with minimal deposits.
When you have all your documentation sorted, go to two or three lenders and compare the rates and terms on offer. If possible, have your lender pre-approve you for an agreed amount; this puts you in a much stronger position when it comes to negotiating a price on your chosen property.
In the short-term, it is unlikely that mortgages will become easier to find and interest rates are sure to rise. However, with a little forward planning and preparation there is no reason why you should not find a suitable lender.