By Nicola Schutrups, Managing Director, The Mortgage Hu
Government research states that in 2020 employees would typically expect to spend 7.8 times their workplace-based annual earnings on purchasing a home in England, with this slightly less at 5.9 times their annual earnings for buying a home in Wales.
This amount is a significant outlay for anyone, with the average UK resident renting for about 5 years before they bought a house, although many remain tenants for much longer. The housing market can seem like a minefield for first time buyers, not only are prices in constant fluctuation, mortgage lending criteria can be confusing and dependent on factors that you would often not expect.
Nevertheless, there are several things that first-time buyers can do to equip them for the challenge of purchasing their first home.
1) Expect the housing market to change, it will always vary
In 2020, many building societies and banks withdrew from lending higher, riskier loans in fear that their borrowers may fall into negative equity if property prices were to take a downturn.
However, as 2021 has progressed, the market seemed to recover, and a notable shift has occurred in lending behaviour with an increase of products available. Plus, as Rishi Sunak announced in April, a range of UK lenders have begun to offer mortgages with just a 5% deposit. This type of mortgage means that once approved, and 5% of the house price is paid, buyers can borrow up to 95% of the value of the property they would like to buy.
Previously, many would-be buyers were priced out of the market, but with these lower deposit thresholds, there is a larger window of opportunity for them.
However, people should still be alert and prepared for the market to change. With the end to the Stamp Duty Holiday in June 2021, there has been a recent scramble to move house, and large numbers are looking to migrate out of the city to less crowded areas. Therefore, as you start your house-buying journey, expecting changes in the market will prevent you from being caught out by it later on.
2) Know what you’re looking for in a house
Everyone has different expectations when it comes to buying a first house. Some people are looking for a quirky or period property, and others will want to own a brand-new build. Although it can be hard to know what you want before you’re looking at it, having a basic idea will give you a solid starting point for trying to find the right property within your price bounds.
The UK House Price Index found that the average property price for a New Build house in the UK was £323,994 as of September 2020, so a buyer hoping to take advantage of the previously-mentioned 5% mortgage trend would need £16,199.70. Alternatively, the average price for an existing resold property was £256,239, so a 5 percent mortgage would require a £12,811.95 deposit.
However, it’s important to consider that as well as age, property prices will also differ depending on the type of house and its location. A detached new build in a busy city will be pricier than a semi-detached in a smaller town that’s already been resold once or twice. These factors will need to be taken into consideration when applying for a mortgage, as there is no one-size-fits-all strategy to calculating cost or initial deposit amounts.
3) Think about what you want to pay for a mortgage and when
Although deals like 5 percent deposit mortgages exist, you don’t have to use them. Consider how much you’re prepared to pay upfront. Though lower deposits can be much more attainable, having a higher deposit can help some borrowers to access lower interest rates, making the mortgage cheaper overall. There are lots of factors that affect how much deposit you’ll need and subsequently, how much interest you’ll be charged, so for clarity, just ask a mortgage broker.
4) Double check if buying a house is really for you
Just under two-thirds of households in England owned their home in 2019-20, one of the lowest rates in Europe. However, Halifax reports that during 2019-20 having a mortgage became cheaper than renting. The average monthly cost of repaying a mortgage for a first-time buyer only rose by 1% a month, compared to an increase of 10% in monthly renting costs. So, buying is a more affordable option for many.
Despite this, there is more flexibility in renting, and with it you do not have to go through the hassle of credit checks and meeting lender criteria
5) Research your options if you are looking to buy a house alone
If you’re buying a house alone, it can be harder because statistically, your income is likely to be lower. However, there are options available to help you get on the property ladder. For example, Shared Ownership is a scheme that many people overlook. It allows you to own part of your home and rent the rest. Shared ownership generally starts with purchasing 25 percent of a property’s value but can also extend to 50 or even 75 percent. Leaseholds vary and remain flexible during the scheme, and generally, they exist to allow buyers to pay less in an upfront deposit.
They do have some downsides however, including the potential for service charges, being responsible for repairs and maintenance and needing to ask permission to make home improvements.
6) Don’t get caught out by mortgage interest rates
Interest rates can be charged at a higher rate for loans that are categorised as high-risk and typically, loans for a large proportion of a properties’ market value, such as a 5% deposit mortgage, can be uncertain for the lender who is at risk of great loss if the borrower fails to keep up with their repayments.
The UK government has said that they’ll “shoulder some of the risks associated with 95% loan-to-value mortgages” which is why a wider range of banks and lenders are now providing additional mortgage deals, however, interest rates may be significantly higher in comparison to loans with a lower loan-to-value that require higher deposits. Therefore, it’s a good idea to consider your long-term income and spending habits before settling on one type of mortgage.
7) Manage your credit score
Lenders look at credit scores to determine if you’re likely to be unreliable paying for your mortgage, as well as to assess your affordability overall. Most lenders will be reluctant to provide loans with small initial deposits for those with poor credit scores, because it points to unstable spending patterns. So, for those looking to benefit from this year’s new 5% deposit mortgages, a good credit score is likely to be imperative to a successful application.
To maintain a healthy credit score, stay out of your bank overdraft, limit the use of credit cards and avoid high-risk borrowings such as payday loans or buy-now-pay-later schemes for retail purchases. These credit services especially can have a nasty, unforeseen impact when applying for a mortgage. Although they are commonly used for their convenience, lenders may view excessive borrowing as evidence of living above your means rather than just as harmless weekend shopping. In some cases, people have seen their mortgage applications rejected on the grounds of bad credit, despite having sufficient funds for the deposit.
8) Consider your job status
If you have been furloughed during the pandemic, that may impact the success of your mortgage applications. After an initial period where many lenders were accepting furloughed income, few now do. Many borrowers have been severely restricted to the lenders who will accept furlough income. But if they then cannot meet their other lending criteria as well, then unfortunately, there have been no other options.
Even so, there is hope if buyers have a return-to-work date in the diary. This can be a point of confidence for lenders because it signposts to a time from which their income will be more predictable. Once people have returned to work and have one month’s payslip without furlough pay under their belt, the choice of lenders will be broader.
For self-employed people, the criteria are slightly different. For example, most lenders require 2 to 3 years’ worth of bank records as proof of a sustainable income
9) If in doubt, ask for advice
The housing market is volatile and for first-time buyers, can seem a complete enigma. With so many factors involved in meeting lender criteria, knowing what kind of property is best for you, and making sure you spot the schemes you could be benefitting from, sometimes you need a bit of guidance. Mortgage brokers are there to help you find the perfect plan and answer all the questions that the process might throw at you. If in doubt, asking an expert is the best thing you can do.
About the author
Nicola Schutrups is the Managing Director of The Mortgage Hut, an award-winning mortgage brokerage whose team of experts have been providing clear and simple mortgage advice since 2011. For more information visit https://www.themortgagehut.co.uk/.