BUYING a home is a dream for most, but often comes with a million and one questions – for first-timers as well as old-hands moving house.
From how much you can borrow to when interest rates will change, it can all get a bit confusing.
We spoke to David Hollingworth, associate director of L&C Mortgages, to help answer the most common questions home buyers have.
How much can I borrow?
This, of course, depends on how much you lay down for a deposit and what’s known as your mortgage affordability.
This is a term lenders use to assess whether you can afford your monthly repayments.
David said: “Lenders will assess multiple factors, such as age, income, and monthly outgoings to determine if you can pay your mortgage back at both the current and potential future rates.
“They will also look to see if there are any likely changes to circumstances that could affect your ability to pay the mortgage.
“For example, if you’re about to start a family, then they may want to factor in any cost of childcare on returning to work.”
You’ll usually be asked to provide information such as payslips and proof of any other income.
If you’re self-employed, in most cases, you’ll be asked to show proof of income for at least two tax years.
Some lenders, including Halifax, Lloyds and NatWest, have mortgage affordability calculators on their websites which you can use.
Lenders deciding on affordability also use what’s known as loan-to-income ratio, and the maximum is usually 4.5 times annual salary, though this can vary.
So if you’re a couple earning £50,000, a lender will let you borrow up to £225,000.
But as the lender also looks at your outgoings too, this can affect the exact amount it offers you, and how much you can borrow may be lower.
How much you can borrow can also be affected by your credit history, but if you have a poor score it doesn’t mean you won’t be able to borrow money.
We spoke to an expert who explains how you can get a home loan if your credit score isn’t as strong as it could be.
Ans we spoke to mum of four Evelyn Igbinehi who bought her first home despite a terrible credit score.
How much is my house worth?
You can find out how much your home is worth by having a valuation done.
This can make it easier when it comes to selling your property, taking out insurance or remortgaging.
The best way to do this, David said, is through an estate agent or registered surveyor.
You can also use online valuation tools too.
They work by estimating how much your property is worth based on its location, size, age and other property listings in the area.
You can find them on websites such as Your Move, Yopa and Zoopla.
But bear in mind mortgage lenders will need an accurate valuation done which an online tool might not be able to provide.
David said: “Online valuation tools can also be used, but they provide a general estimation, and mortgage lenders will want an accurate valuation of the property to confirm its worth.”
When will interest rates change?
The Bank of England (BoE) has hiked its base rate consecutively in recent months in a bid to slow runaway inflation.
It has seen homeowners and those looking to get on to the property ladder hit with surging loan costs.
The central bank increased it from 5% to 5.25% in August – the highest it has been since the 2008 financial crash.
But it kept it at 5.25% in its most recent monthly meeting in September.
A change in the base rate usually has a knock-on effect on mortgage interest rates too.
That’s because it’s used by banks to set the interest rates it offers customers on loans and savings, as well as mortgages.
It’s impossible to predict what will happen to interest rates, but experts predict further rises.
While this usually means mortgage rates will rise, most recently mortgage rates have started to fall slightly.
That’s because banks had expected the BoE rate to rise further and hiked rates higher in anticipation.
But now, they expect they won’t go quite as high, and have reduced rates in response.
David said: “Ultimately, there is no way to know when interest rates will fall.
“(But) it is forecast that rates could increase by a further 0.25% or 0.50%, potentially peaking at 5.75% and then falling over the next five years as inflation eases.”
Speaking to a mortgage broker can help you understand what rates are a available and your circumstances.
How much deposit do I need?
A deposit is an amount you pay that’s a percentage of the property price, with the rest usually covered by a mortgage
How much you need depends on what you have available to you and the price of the property.
Typically you’ll need at least 5%, do on a £200,000 property, that’s £10,000.
But a bigger deposit will generally give you access to a wider array of mortgage options, typically with lower interest rates.
This is because the lender will see you as a lower risk.
Not only that, but it could mean monthly repayments are lower too as you’re borrowing less money.
Lenders’ best rates are usually reserved for those who can put down deposits ranging between 25% and 40%.
There are some 95% mortgages on the market, which mean putting down just a 5% deposit.
You can also get mortgages based on a 0% deposit, but lenders usually need some cash or equity from your family members as security.
That said, Skipton Building Society launched a 0% deposit in May without the need for a guarantor.
However, money-saving expert Martin Lewis did issue a warning on the scheme and there is a greater risk of falling into negative equity if house prices fall.
Bear in mind, lenders tend to prefer than a gifted deposit is from a close relative rather than a friend.
David said: “The deposit you put down should be at least 5% of the property value.
“More significant deposits at 10% or 15% allow for better and lower mortgage rates because lenders consider homebuyers with higher deposits as lower risk.”
Major banks usually have mortgage deposit calculators on their websites.
There are several schemes to help you save for a deposit – including cash bonuses worth thousands – we’ve rounded them up here.
Plus house builders also offer schemes to help first-time buyers on to the property ladder, and in some cases it means you need just a 1% deposit – check out the full list.
How can I get a mortgage?
The first move in getting a mortgage involves taking a step back and analysing your current financial situation.
This means checking your credit history which lenders use to find out whether you can manage debt well.
You can improve a low credit score though, for example by paying any credit on time and setting up direct debits for payments.
Plus, it’s worth closing any credit card accounts that are no longer in use.
Bear in mind there are things you can do in minutes to boost your credit score too – like joining the electoral roll if you haven’t already.
You can read our top tips on how to boost your score here.
Of course, a large deposit will boost your chances of getting a mortgage, but remember to save up for other fees such as stamp duty and surveys too.
When it comes to actually getting a mortgage, you’ll want to figure out which type you want – the most common being a fixed-rate mortgage.
Other types include standard variable rate and tracker mortgages.
You can use a broker to assess what the best option is for you.
David said: “Getting professional advice from a mortgage broker can be invaluable.
“A good broker will search across the market for you, taking into account your situation and checking lender criteria to ensure you get the best deal that suits your circumstances and will qualify for.”
Some mortgage brokers charge, usually around £800, but others are free.
Lenders have free mortgage advisers, but they will only be able to talk to you about the products they offer, and not what’s available elsewhere.
How much is stamp duty?
Stamp duty, also known as stamp duty land transaction tax (SDLT), is a tax you pay when you purchase a property.
You pay different amounts depending on the price of the property.
Stamp duty in England and Northern Ireland ranges from 5% to 12% of the purchase price, over s certain threshold.
So you’ll pay no tax at all on properties under:
- £250,000 for residential properties
- £425,000 for first-time buyers buying a residential property worth £625,000 or less
- £150,000 for non-residential land and properties
On properties over £250,000 and up to £925,000, you’ll pay 5% on this proportion.
Over this and you’ll pay 10% on the proportion over £925,00 and up to £1.5million, then 12% on anything over that.
So if you buy a £500,000 and you’re not a first-time buyer, you’ll pay nothing on the first £250,000, and then 5% on the remaining 250,000 – so £12,500.
For first-time buyers you’ll pay nothing up to £425,000 and then 5% on anything over that and up to £625,000.
If you buy a property over £625,000 then the standard rates apply, even if it is your first home.
For example, if you were buying a £500,000 home, you’d pay nothing on the first £425,000, then 5% on the £75,000 over that – so £3,750.
If you’re buying a second or subsequent property, there’s an additional surcharge of 3%.
The Welsh and Scottish government’s set their own stamp duty rates, which are known as Land Transaction tax and Land and Buildings Transaction Tax, respectively.
You can use stamp duty calculators to work out how much you’ll pay.
Never forget to factor stamp duty into your budget though.
David said: “The cost of stamp duty can be significant, depending on the price of the property you are buying, therefore you must factor this into your budget.”
Here are four hidden costs you should look out for as they often surprise first-time buyers.
Plus check out The Sun’s My First Home series, where we hear how people made their first step on to the property ladder.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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