Guides: mortgages
Buying a house
Buying a house can be confusing and disheartening. There are three key financial considerations and we've outlined each one below.
How much can you borrow?
The size of your mortgage used to be based on income multiples – four to six times earnings for a single person. But this has changed and lenders also take the following into account;
Checklist
- Work out how much you can afford to borrow
- Save for a large deposit or ask your family for a loan
- Don’t fall behind with your debts – your credit score is a vital part of the lending criteria
- Ask a mortgage broker to help
- Decide which type of mortgage you want
- Allow for the additional costs of buying
- Your outgoings and other debts to sense check what you can afford to repay each month.
- Your credit history is likley to be checked so it's important to review any missed payments on loans or credit cards and be upfront about these in your discussions with the lender.
- Lenders will consider how long you have been in your job and how secure your area of employment is so they can assess you will be able to make repayments regularly. If you're self employed, you may need to prove your income and supply at least two years’ worth of business accounts.
How can you raise a deposit?
If you have minimal savings but need to raise a deposit, you still have some options to help you buy your first home.
- You could try a shared ownership scheme where you buy a portion of the property (between 25% and 75%) and then pay a low rent on the outstanding proportion. The co-owner is a housing association or the developer and these schemes often don’t demand a deposit.
- The Government funds schemes such as Homebuy which is aimed at key workers such as nurses and teachers, or those on less than £60,000 a year.
- The first-time buyers’ initiative could help towards the cost of a new-build home on designated developments.
What sort of mortgage should you choose?
A mortgage is simply a large loan secured on the value of your home. Understanding the different types of mortgages can be daunting but essentially you can repay your home loan using a repayment mortgage or an interest only mortgage.
Within these two categories, there are a myriad of mortgage products. The main types are listed below.
- Fixed rate mortgage: The interest rate you pay on your loan - the mortgage rate - is fixed for a specified number of years.
- Tracker rate mortgage: These mortgages track the Bank of England base rate with a fixed percentage added to it. For instance, if the base rate is 0.5% and the lender adds 2.99% to the base rate you’ll pay 3.49%.
- Discounted rate mortgage: The rate you pay with these mortgages is discounted to the lenders’ standard variable rate. It is usually a few percentage points under their rate, which can change in future.
- Capped rate mortgage: These mortgages guarantee that the rate you pay for the specified time will not rise above a certain level.
- Standard variable rate mortgage : Lenders have a standard variable rate which they set themselves and this rate can change in line with the Bank of England's base rate too.
