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6 things worth knowing before you get your first mortgage

How can you get yourself the best deal on a first mortgage? What are the upfront costs? Here are 6 things worth knowing if you're applying for a first time mortgage

15 May 2017 6 min read

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Whether it’s saving up enough money for the deposit, choosing the right kind of mortgage or more simply finding out if you’d even qualify, taking out your first mortgage can be utterly nerve-wracking.

In this article, we take the mystery out of the equation, so you can get the keys to your dream home without breaking a sweat. Here are six things you need to know about applying for - and getting - your first mortgage.

Before you even start viewing houses, you need to make sure your finances are shipshape. That way, you’ll avoid the disappointment of getting attached to a property only to discover you won’t be able to buy it.

Here are three tips on how to go about this:

Work on your credit score

It’s never too early to work on your credit score, even if you’re not thinking of getting a mortgage immediately. The better your credit score, the more likely you are to get approved for a mortgage and the better your deal is likely to be.

You can use ClearScore to check out your credit report for free, so you know exactly what’s going on. Make sure you check it for errors and fix them as soon as possible as they could be affecting your score. You can also take other steps to improve your score.

Avoid multiple credit applications

Try to avoid applying for a ton of credit right before you’re looking to take out a mortgage. Making multiple credit applications in a short space of time could lower your credit score, which in turn could have a negative impact on your mortgage application.

If you do need to take out credit before you apply for your mortgage check your eligibility first so you’re limiting the number of applications you need to make. You can check your eligibility by doing a soft search, which won’t affect your credit score.

Cut down your monthly outgoings

Most mortgage lenders will determine how much to lend you by conducting an affordability assessment. This assessment doesn’t just look at your income, but also at your monthly expenses.

With this in mind, it makes sense to go over your expenses and try to cut them down if possible. You could start with looking at your regular monthly outgoings and cancelling any services or subscriptions you’re not using anymore. It’s also worth checking if you’re getting the best deal on your utilities, broadband and car insurance - if you aren’t now might be the time to switch.

Along with the deposit, you’ll need to start saving for the upfront costs that come with buying a property.

The deposit is probably the largest upfront cost of purchasing your home. You can take out a mortgage with as little as a 5% deposit. However, the larger your deposit, the better your deal will probably be. If you’re fortunate enough to be able to save, a good target might be to save between 20% to 25% of the property price.

You may also have to pay all or at least some of these costs:-

  • Stamp duty - this applies to any property over £125,000
  • valuation fees
  • legal fees
  • survey fees
  • land registry fees

Many high street banks have packages designed specifically to help out first-time buyers with these costs. Most of them have cashback and discounts. And some lenders may also waive certain fees altogether. It’s worth shopping around to see what’s available.

If you’re struggling to save up enough money to cover upfront costs, the government has schemes to help you.

Equity loans

If you’re buying a newly built property that costs up to £600,000, you can apply for an equity loan.

With an equity loan, you put up a 5% deposit and the government will lend you up to a further 20% (40% if you’re in London). This means you’ll only need to take out a mortgage amounting to 75% of the purchase price.

The loan is interest-free for the first 5 years and attracts interest at 1.75% in the sixth year. After the sixth year, interest rises according to the retail price index plus 1%.

Save to buy ISA

If you save money for your first home in a save to buy ISA, the government will boost your savings by 25% up to a maximum of £3,000. The scheme applies to homes costing £250,000 and under (£450,000 and under in London).

You can open a save to buy ISA at most retail banks. However, you’ll need to be 16 and over; and you must not own a property anywhere else in the world.

Shared ownership

If your landlord is the council or a household association, the shared ownership scheme allows you to buy a portion of your home and pay a reduced rent on the rest. You can buy between 25% and 75% at one go, with the option to buy more later until you own the full 100%.

Anyone with an income under £80,000 (under £90,000 if you’re in London) can apply.

Generally speaking, you have two big decisions to make when it comes to choosing the type of mortgage you want.

Choice one: Repayment mortgage or interest-only mortgage

In broad terms, mortgages are either 'repayment' or 'interest-only'.

With repayment mortgages, you will pay off the interest on your mortgage as well the mortgage itself. This means you’ll have a bigger monthly repayment to make compared to an interest-only mortgage. However, you’ll be paying off all your outstanding debt.

Interest only mortgages are - as you’ve guessed - where you only pay the interest on your mortgage. You’ll have lower monthly payments to make, but you will need to find another way to pay down your outstanding mortgage.

Choice two: Variable rate or fixed rate mortgage

You also have the option of choosing either a variable rate or a fixed rate mortgage. A variable rate mortgage means the interest you pay might change from month to month depending on the market rate. A fixed rate mortgage means you commit to a single interest rate for a set period of time.

If you’re a little uncertain on the best path to go down, you might want to enlist the help of a mortgage broker. If you do decide to go down this route, think about choosing an independent broker who advises on the whole market. The broker should also let you know upfront whether they’ll charge you a fee or receive a commission from the lender.

Your expenses don’t stop after you’ve taken out your mortgage. You’ll also need to take care of ongoing costs. Your mortgage repayment will be your largest monthly outgoing. And, of course, you’ll need to cover council tax, utility bills and other ongoing expenses, too.

With this in mind, making a budget and sticking to it is crucial. If you fall into debt, you may be unable to keep up with your mortgage repayments; and your lender will take away your home. Defaulting on your mortgage will also negatively affect your credit score, which will damage your chances of borrowing money again.

Most importantly remember that, as a homeowner, you’re now the one responsible for maintenance and repairs. Try setting aside about 1% of your home’s purchase price each year. This will give you a reserve of cash to tap into should your home need attention.

Your first step is to determine an amount to save towards.

The minimum deposit for a mortgage is 5% of the home cost. However, in reality, the average first time buyer deposit in the UK is around 15%, which equates to an average house deposit of £33,000 outside of London and about £115,000 in London.

Once a deposit is down the rest can be covered by a mortgage loan from a bank or building society.

You will then spend years paying back the mortgage amount (plus interest) in monthly instalments. This is why it is always better to pay as much in your deposit as possible: you will owe less each month to your mortgage lender.

To calculate how much deposit is needed for a house and how much you will need to pay each month after, you want three numbers:

  1. Look up the average cost of properties in the area you want to buy.
  2. Then use a borrowing calculator to see how much mortgage you can get for it.

The difference between #1 and #2 is roughly what you need upfront at a minimum.

Using the #2 figure, you can then use a mortgage payment calculator to see what your monthly payment might be. This will give you #3.

Mortgage lenders will want assurance that you are capable of paying off #3 each month. If you can’t prove that, they will loan you less, which means you need a greater deposit.

It’s worth adding that in some areas it’s normal to pay over the home valuation price. Mortgage providers, however, provide mortgages based on home valuation, not the ultimate purchase price. Anything over the home valuation must come from your pockets as part of the down payment.

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