Home and Property - UK (Buying and Renting)

10 things first-time buyers need to know before applying for a mortgage
Typical first-time buyers in London need 10 times their annual income – so how do young people in the capital manage to get a mortgage?
The typical first-time buyer in London needs 10 times their annual income to afford an average-priced home. Yet the usual income multiple applied by mortgage lenders is just 4.5 times salary.
This explains why the Bank of Mum and Dad has become such a phenomenon, with 80 per cent of parents giving large lump sums to fund the difference between mortgage offer and purchase price, according to analysis by the Institute for Fiscal Studies. The average deposit in London is £72,000.
1. SIZE MATTERS
The bigger the deposit a buyer puts down, the better the mortgage interest rate will be. All lenders demand a deposit of at least five per cent. But if you can put down 20 per cent you will likely pay several hundred pounds less per month.
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New survey of mortgage lenders reveals how to find the best deal
2. DON'T GIVE UP
Despite mortgage rates being historically low, lenders are obliged to “stress test” applications to ensure buyers could afford to repay in the event of an interest rate spike.
But brokers urge would-be buyers not to give up their home ownership dreams as there’s lots of competition in the mortgage market, literally hundreds of deals, mainly trackers —linked to the Bank of England base rate — or fixed-term loans, typically two-, three- and five-year deals.
3. KNOW THE BEST RATES
One of the best rates available is Nationwide’s 1.64 per cent fixed for two years, but this requires a 25 per cent deposit. Yorkshire Building Society requires only a five per cent deposit for its 2.87 per cent deal, fixed until December 2020.
Barclays is offering a two-year fix of 1.84 per cent, with a minimum 10 per cent deposit.
4. SHOP AROUND
Depending on your circumstances, the only rates available may be higher than four per cent. Shop around first by checking comparison websites such as moneysupermarket.com.
5. FIX IT
The virtue of a fixed rate is that you know exactly what you will be paying, and can budget accordingly. But remember that once the fixed-rate term is over, the interest rate reverts to the lender’s standard variable rate, which may be as high as five per cent. Borrowers then usually take out a competitive new deal, perhaps with another lender.
6. EXTEND TO SAVE
Some lenders say young would-be buyers can beat affordability restrictions by opting for a mortgage with a term length of 30 years and fixing the interest rate for five years or more, for which less strenuous stress tests apply.
7. ADD UP THE EXTRAS
Do not focus solely on the interest rate. Lenders typically charge an arrangement fee, possibly £995 or more, though this can be added to the mortgage. Sometimes there are free legal and survey fee deals. Halifax is offering £1,000 cashback.
8. CHECK YOUR CREDIT REPORT
Make yourself attractive to lenders by showing them you can manage your regular finances. Also cut back on unnecessary outgoings. Tougher mortgage affordability rules mean it’s not just what you earn that matters, but how much of it you spend. And check your credit report to make sure it’s accurate and up to date.
9. USE A HELP TO BUY ISA TO SAVE
You are more likely to get a mortgage if you have a good savings record, even if that is a modest amount each month. First-time buyers can save towards their home with a tax-efficient Help to Buy ISA.
10. AIM TO OVERPAY
To stretch affordability, lenders are extending the mortgage term up to 40 years, which lowers the monthly repayment.
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