A Guide to Your First Mortgage
In this mortgage guide, we will take you from the first step to take when applying for your first mortgage all the way to the last. If you are seeking to apply for a mortgage you should first find lenders to provide you with a mortgage agreement.
We recommended getting this done before you start viewing any properties. Following this step will benefit you in two different ways in the future.
It will primarily give you a brief perspective of what to expect and what you can afford before deciding to buy a property. The other benefit is that it will let real estate agents understand that you are serious about purchasing a property.
Therefore, the chances of a real estate agent helping you find the right property is higher.
Keep in mind that before signing any mortgage agreement, you need to make sure to check what the lender requires.
The reason behind this is because some lenders in the market will carry a hard credit check for a mortgage arrangement.
The more hard credit checks you have on your credit history, the more it will negatively impact your credit score. The offer you make to the lender should last between 30-90 days.
In This Article:
How do I apply for my first mortgage?
Lenders try to avoid lending money to someone that has higher chances of not repaying the mortgage. The best way to get lenders to approve you for getting your first mortgage is by meeting a set of criteria including:
- Have a considerable amount of savings to put towards your deposit. If you have a larger amount of savings in your deposit that means that you will not only have it easier when it comes to finding lenders that trust you, but you’ll also get lower interest rates.
- Have a good credit score. This will let the lender know that you have good financial habits, such as making payments on time and in full. To check your credit score you can look up a credit agency like Equifax, Experian, or TransUnion.
- Make sure that you have personal income. Your income should be able to cover your mortgage monthly payments. Do the required calculations to see if your personal income can cover your living expenses after paying the mortgage. Also, make sure that it is enough to handle your mortgage payments even if prices rise unexpectedly in the future.
- Find several properties. Have a plan a and plan b for properties you think best fit your budget and meet your preferred requirements. Search online and attend to open houses when you have the chance.
- Get a mortgage. Before getting your first mortgage, check with your bank.
- Contact a broker. Brokers are great for simplifying the process of getting a mortgage by navigating the market. They can also make exclusive property deals for you.
- Choose the mortgage that benefits you the most and apply.
The purchase price of your new property
Before making a decision on getting a mortgage you need to first understand how much you can borrow from a lender. This gives you an idea of what price range you can afford when searching for houses.
The amount of money you can borrow for your first mortgage depends on two simple factors:
- The amount you will pay for the property
- If you are using a part of your mortgage to make improvements on the property
What criteria do you need to meet to get your first mortgage?
The criteria you need to meet to increase the chances of getting a mortgage is:
- Being employed
- Having a savings deposit
- Having a good credit history
- Proven to be sensible with your spending
Not everyone that applies for a mortgage is approved to get one. If you are thinking of getting your first mortgage, it will be difficult for lenders to lend you money.
In fact, getting a mortgage for your first property is more challenging than a remortgage.
This is due to having a smaller credit history and not enough proof that you are able to pay the mortgage on time.
The main focus still stands on the savings deposit. Lenders are willing to take a risk if you have a larger savings deposit rather than a small one.
What is the best option for taking out your first mortgage?
According to our mortgage guide, the best mortgage for anyone is a mortgage that does not require too many additional expenses. But this does not mean that the mortgage with the lowest interest rate is the best.
In some cases, mortgages with low-interest rates can be more costly when it comes to fees. Some of these fees can even go as high as thousands of pounds.
This is because mortgages with very low-interest rates have higher restrictions compared to a mortgage with a higher interest rate. If you are a first-time mortgage taker, then here are some that you might be qualified for:
- Government loan mortgages – If you are looking to buy your first property, the government can lend you 20% of the cost of your new property. This can go up to 40% for people living in the UK. The only inquiry needed is for you to provide the government with a 5% money deposit.
- ISAs – This is a savings account free from tax. It helps you save £2,400 every 12 months. The moment you withdraw these funds to buy your first property, the government will be willing to give you a 25% bonus for the property.
- Shared ownership for mortgages – If you buy at least 25% of a property that is either ex counseling housing or new builds, then the property association will lend you the rest.
- Guarantor mortgages – This is a form of lending where a relative puts their savings or even their own property as a form of security on your mortgage.
What is mortgage affordability?
In the present time, housing associations and banks need to follow a strict set of rules regarding how much they can pay you. This is based on a number of factors including credit score, income, and savings or otherwise known as affordability.
Affordability measures the amount of money you have left after your expenses have been taken into consideration.
You do not need just a high salary to be eligible for a first mortgage. In fact, the thing that matters the most is the way you spend your money.
If you are a first-time property buyer, then lenders will ask you for your personal banking information.
If you are a frequent spender or have a lot of debt, then that will increase the risk of not getting a mortgage. Lenders are always careful before deciding to trust you by lending you money.
They need to be sure that you will pay them back fully in the future. Follow our mortgage guide, and before applying for a mortgage, you need to understand that a mortgage rejection can negatively impact your credit history.
This will make it harder each time you apply for a mortgage and increase the chances of getting rejected.
How large of a deposit should you have for your first mortgage?
The savings deposit you have for the purpose of buying a property indicates the type of property you prefer to buy. The relation between your mortgage and the deposit you have is identified as the LTV ratio or loan-to-value ratio.
Let us take a look at an example. Suppose you will be buying a property that costs £200,000 and you have a cash deposit of £20,000.
This means that you have 10% of the property’s value to offer as a deposit. The amount of money you will need to borrow is £180,000 or the remaining 90% of the property’s value. This specifies that your LTV is 90%.
Throughout recent years, the number of lenders that are offering an LTV of up to 95% is rising. This is done to make it easier for first-time property owners to join the market.
Although, having only 5% -10% of the property’s value as a deposit will still have its challenges compared to having 25% and above in property value as a deposit.
The only thing that has positively changed in the past years is that the penalty for having such a low deposit is relatively lower. When the deposit reaches 15% of the property’s value interest rates start falling.
Can you get your first mortgage without having a deposit?
Getting your first mortgage without a cash deposit is not impossible, although it is a lot more challenging. The two easiest ways you can get a mortgage without a deposit is by:
- Receiving help from a member of your family
- Getting a mortgage with the help of another person
In some cases, you can even get 100% mortgages that are able to provide you with the total value of the property.
But even though these mortgages do not acquire a deposit, they need proof of capital. Another disadvantage of these kinds of mortgages is that they are not easy to find on the market.
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How do mortgages work?
A mortgage is a type of loan that a bank or building society lends to you to help you buy a property. The amount of mortgage you need to borrow will depend on the amount you’ve saved up to put towards a deposit for a property, and the amount you still need to reach the purchase price of the property you want to buy.
The amount of mortgage you then take out will be a percentage of the purchase price – this is called a loan-to-value or LTV.
How do you get a mortgage?
You can apply for a mortgage through a bank or building society – you’ll need a few documents to hand, including proof of identity, utility bills and bank statements.
When you apply you’ll be asked a series of questions about yourself and your finances, so your lender can calculate what kind of mortgage you’ll be able to afford. They’ll also run a number of checks to determine your financial status, and if your application is accepted, you’ll be sent an offer.
What is the average mortgage in the UK?
The average mortgage debt in the UK is just over £130,000 and a typical outstanding mortgage term is 20 years.
Those with a larger £200,000 mortgage with 20 years left would see monthly payments rise from £1,028 to £1,307, with the same rate shift, this is Money’s mortgage comparison calculator shows.
What is the average age to pay off a mortgage in the UK?
The average age people expect to repay their mortgage is 57-and-a-half years. However, there is a distinct generation gap when it comes to optimism overpaying off their property loans.
How much of your salary should you spend on mortgage UK?
Aim to keep your mortgage payment at or below 28 percent of your pre-tax monthly income. Aim to keep your total debt payments at or below 40 percent of your pre-tax monthly income. Note that 40 percent should be a maximum.