What you need to get on the property ladder
To get on the property ladder you will need a steady job, a good credit score, a mortgage deposit of 5-20% of the property price depending on if you qualify for a home buying scheme and that's it.
How Mortgages work
Mortgages are a loan borrowers receive to buy their first home.
As a borrower you put down a deposit, this can be 10-20% of the house price or 5% with the help of some home buying schemes. The Mortgage lender will then loan you the remaining amount.
You repay this loan back with monthly payments over a specific period of time with interest.
What are home buying schemes
There are government and private home buying schemes available, most of these schemes are targeted towards first time buyers.
Each scheme serves a different purpose, some help you fund a mortgage deposit and others help you save a mortgage deposit.
How to save a mortgage deposit
You will need to save a mortgage deposit and funds to cover costs such as stamp duty and mortgage costs.The most common savings vehicle is an ISA.
ISA stands for Individual savings account.
ISAs let you invest in cash, shares, and unit trusts, tax free on interest, dividends and capital gains.
You can have more than one ISA at once, but you can only invest your personal tax allowance.(currently £20,000)
The help to Buy ISA:
You pay in a lump sum, maximum of £1,200.
You pay in monthly installments, maximum £200 a month
You receive a 25% bonus on your savings, max £3,000
You get this once you buy your first home.
The Lifetime ISA
You pay in lump sums
You receive a 25% bonus each year, max £1,000
If you take the money out for any reason other than retirement or to buy a home you will lose the 25% bonus.
How lenders work out your Mortgage Affordability
Lenders will look at your total income to make sure that you earn enough to afford the monthly repayments. If you are self employed they would want to see that you have regular business.
Lenders typically take the total income of everyone applying for a mortgage and multiply that figure by 4.5. This will give you a rough indication of what a lender would be willing to lend you.
How lenders view your personal costs when considering mortgages
Lenders have to make sure that taking out a mortgage on top of your existing outgoings will not put you into financial hardship. Typically they can ask to review 6 months of bank statements.
The first thing they look out for is that your existing commitments are not too high. This includes costs such as:
- Child care
- Credit card payments
- Child school fees
Secondly they look at what you could call your lifestyle costs, these are the non essentials such as vacations, gym membership and eating out.
These are looked at on a case by case basis. On one hand lenders like to see that you have available cash to have fun,
On the other hand you could look risky at managing your own cash, for example excessive spending online gambling each month.
What is your credit score and how does it affect your mortgage?
Your credit score and history reflect how reliable you are at paying back loans.
Your credit score is determined by a number of factors such as amount of payments made late oor n time, how much credit you have access to and more.
Having poor credit can affect your mortgage. It won’t make you unable to get a mortgage, but it can give you less choice compared to someone with a better credit history.
The benefit of having good credit means you are seen as more reliable, so you will have access to offers with a lower interest rate, so you pay back less each month.
Co-buying a property
As house prices have increased it is becoming very difficult to afford a property.
To increase your chances of getting on the property ladder you can find a co-buyer or multiple co-buyers.
This means your affordability will be assessed together taking into account your cobuyers income etc
Cobuying involves buying with a joint mortgage. This has further implications and legal advice should always be sought.
How to improve your Mortgage Affordability
Your eligibility reflects your whole financial landscape, your income, your expenses and your credit score.
It is very possible to improve your eligibility, but it is not done overnight. Most changes are usually seen in 3 - 6 months so it’s the consistency that matters.
Everyone is at a different stage, so to get your own personalised insights. Start our property ladder plan and we will guide you along.