It's been a long time coming but the housing market is perking up a bit. The number of first-time buyers making successful mortgage applications increased last year and two thirds were given home loans, up from 50% a year ago1
So it could be an ideal time to apply for a mortgage and get on the property ladder because banks and building societies are clearly becoming keener to lend.
But reality can still bite hard when someone applies for a mortgage but despite being give a thumbs-up for a loan, it still won't buy them the dreams detached three-bedroom house or fashionable loft conversion they were hoping or.
It's best to be realistic at the outset. First-time buyers should work out how much they can borrow BEFORE starting a house hunt. It will depend on factors such as their credit history, how large their savings pot is and how much they earn and how much they spend.
This is our handy guide to getting over the initial hurdles in the race to get on the property ladder.
Income multiples
The traditional way to work out how much a bank will lend is to multiply a person or couple’s salary by 4.5, although lenders will often push this to the limit in order to lend, depending on their circumstances. The average multiplier in the UK is 7.6, according to government statistics2.
But this is only a guide. Lender do not sit down and decide to lend you four time your income, for example, but rather look at a range of factors and then decided how much to lend you, which can be expressed as an income multiple.
Credit history
The better a person's credit history, the better their mortgage deal will be, and the wider the range of mortgages they will be offered. The interest rates charged on mortgages and loans are, to a certain extent, based on a person’s risk profile – the more a lender thinksthey might not pay the money back, the more interest they charge.
Remember a person's credit history is a record of their responsible repayment of debt, which is held as a credit file and often turned into a credit score using an algorihm.
Help to Buy
Find out how CreditLadder can help you make the most of your rent and increase your credit score.
If you think you’re too proud to ask the government for help, then don’t worry because you will be in good company. Over 350,000 people3
have already bought a property via one of the three schemes (see below) that the government currently offers.
These include a tax-free savings ISA, a shared-ownership scheme and an equity-based loan. This makes it possible for buyers to pay just a 5% deposit (rather than the traditional 10% one) to get on the property ladder.
Help to Buy in England - expert overview
Shared ownership
How it works: a person or couple with a combined income of less than £80,000 (or £90,000 inside London) buy up to 75% of a property with a mortgage, and pay rent on the rest.
Equity loan
How it works: The property is bought with a 5% deposit saved up by the purchaser, a normal mortgage for 75% of its value and then a loan from the government for the rest, which lasts for up to five years.>/p>
Help to buy ISA
How it works: An ISA savings account is set up and then for every £200 a person saves every month, the government adds £50, up to a maximum of £3,000.
Debt
There’s nothing wrong with having debt, if it's been paid off and the payments were on time. But debt-to-income ratio is also important, so if someone has a lot of debt and a low income, their mortgage options will be narrower.
Credit utilisation
It’s not the sexiest subject in the world, but it can be very important one. 'High credit utilisation’ is a posh way of saying a person has run up a lot of debt but hasn’t paid it off yet, i.e. they’ve used or ‘utilised’ a lot of their credit, particularly when referring to cards.
To work out a credit utilisation rate divide the credit limit of the card/s by the amount still owed or ‘the balance. A high one will make borrowing more difficult; it’s that simple.
Budget
Knowing how much one can borrow and what the repayments will be is one thing, but it’s no good if a person can’t afford to pay it. So it’s time to crunch the personal finance numbers. Tot up the fixed costs (house bills, subscriptions, credit card and loan repayments, schooling costs or insurance premiums) and also the flexible costs (entertaining, transport, food and drink) and work out how much disposable income someone may have left over each month.
Deposit
The larger the deposit someone can scrape together, the better the rate and size of mortgage they will be offered. Lenders like big deposits because it proves someone is a saver, responsible with money and therefore less of a risk.
But it also means the crucial loan-to-value rate is lower. If someone has a deposit of £100,000 to buy a £200,000 home then the loan to value (LTV) rate is 50%. Ifthe deposit is £40,000 for the same deal, the LTV rises to 80% and the interest rate will be higher. The higher the LTV, the more risk the bank feels they are exposing themselves to.
Read more:How to save up for a mortgage deposit.
Outgoings
The financial crisis of 2008 was triggered by mortgage lenders here and in the US granting people mortgages that they couldn’t afford. After the crash, the UK government decided to force lenders to tighten up their lending criteria, and now mortgage companies must take into account a person’s financial commitments when working out if someone can afford to pay the mortgage premiums. This includes membership fees, regular payments into savings accounts, maintenance payments, utility bills and travel and school fees, for example.
Mortgage Market Review - expert view
If someone wants to know why mortgages are more difficult to get these days, they should blame the government or, to be more accurate, the Financial Conduct Authority.
It was set up to police lending more harshly after the global financial crisis brought several banks to their knees. It then carried out what was called the Mortgage Market Review and introduced two sets of tighter lending rules for home buyers and landlords.
These can be summarised as:
An an end to self-certified mortgages, which use to enable self-employed people to fill in a mortgage application’s financials themselves without checking. Not any longer!
Make interest-only mortgages much harder to find - they are now fairly rare.
Ensure lenders gather more proof of affordability including income and both fixed and variable expenditure.
Force lenders to consider what would happen if the interest rate were to increase - would the borrower still be able to afford the monthly repayments?
How to improve your chances
One way to ensure you get access the best mortgage deals is to improve your credit score. CreditLadder enables anyone paying rent to help improve their credit scores and raise their chances of getting a better mortgage deal.
https://www.creditladder.co.uk/how-it-works">Find out more
Sources
1 Mortgage Introducer magazine
2 Mortgage affordability report
3 Government Help to Buy release
CreditLadder can help you improve your credit score
If you want to improve your credit position by reporting your rent payments, CreditLadder is the only way to improve your credit score and position across all four of the main Credit Reference Agencies in the UK, namely Experian, Equifax, TransUnion and Crediva. Building up a high credit score has a lot of benefits, including helping you access finance at better rates - this can also help save you money.
CreditLadder also runs a free mortgage application service in partnership with Tembo which will tell you how much you could borrow.
Remember the information provided in this article is for information purposes only and should not be considered as advice.
