With high mortgage rates and inflated house prices, it’s harder than ever for first time buyers to get a foot on the housing ladder.
Mortgage rates are soaring in the UK after successive hikes to the Bank of England bank rate, with banks more wary to lend in this environment.
Using YELLOWTOM you can find your nearest mortgage provider who can advise you on what steps to take to make your dreams of home ownership a reality.
In the meantime, there are some things you can do to increase your chances of getting a mortgage.
BUILD A BIGGER DEPOSIT
You might be able to get a mortgage with a small deposit of just 5%, but this reduces your chances of being able to afford a home loan. This is because the size of the loan you would need to take out would be a lot bigger, so your earnings might not stretch far enough for the lender to believe you can afford it.
For example:
If you have a small £10,000 deposit on a £200,000 home, you would need a £190,000 mortgage
But with a £20,000 deposit on the same home, you would need a smaller mortgage of £180,000
If you can scrape together a larger deposit, it’s likely you will find lower interest rates and a wider choice.
IMPROVE YOUR CREDIT SCORE
A mortgage lender will check your credit report to find out if you are a responsible borrower.
Your credit report shows your payment history over the past six years, including credit cards, personal loans and finance agreements. Non-payment of utility bills and mobile phone contracts may also be registered.
The better you are at paying bills and debt, the higher your credit score could be.
Check your credit records with any of the three main credit reference agencies well ahead of making your mortgage application. You can get your credit report for free:
– Examine your credit report for free via ClearScore (for Equifax)
– MoneySavingExpert’s Credit Club (for Experian)
– Credit Karma *(for TransUnion)
You should consider fixing any issues before they scupper your chances of getting a decent interest rate from a lender or qualifying for a mortgage at all.
There are some quick wins for improving your credit score, such as registering to vote.
REDUCE YOUR OUTGOINGS
When applying for a mortgage, lenders will want to check your income and outgoings to make sure that you can comfortably afford the repayments.
So, in the months leading up to your mortgage application you should aim to keep your outgoings as low as possible. You might want to stop splashing the cash on anything beyond essentials.
Mortgage lenders will also scrutinise your bank statements for signs you might struggle with existing debt. Avoid using overdrafts and pay down balances on credit cards, store cards and unsecured loans.
Definitely avoid applying for any new loans or credit cards which would lead to a ‘hard’ check on your credit report. If you have had multiple recent hard checks on your file, a mortgage lender could see it as a sign that you are in financial difficulty.
Above all, avoid payday loans, county court judgments and gambling transactions.
SORT YOUR PAPERWORK
Track down all the paperwork needed for a mortgage application now, so you don’t lose out on a loan because of a missing payslip.
You will need:
Proof of identity such as a driving licence and passport
Bank statements going back at least three months
Proof of income such as payslips going back three months (or longer if you are self-employed)
Savings statements to prove your deposit
Recent utility bills to show proof of address
Self-employed workers will need your tax returns and accounts for at least the past two years.
USE A MORTGAGE BROKER
With fewer mortgages available and changing lending rules, a mortgage broker can scour the market for the best deal. A good mortgage adviser will recommend which lenders are more likely to approve your application.
Brokers also get access to loans that aren’t widely available elsewhere and will get notified about flash sales of mortgage deals available for people with low deposits.
There are certain deals that lenders will only offer directly to the borrower so consider this as well.
GET GOVERNMENT HELP WITH HOMEBUYING
There are a number of different government schemes to help people buy homes.
Some of these are reserved only for first-time buyers, such as the Lifetime ISA which gives savers up to £1,000 in free government money every year.
There are other schemes as shared ownership where you buy a portion of a property
USE THE BANK OF MUM AND DAD
Parents and grandparents have been handing over hefty sums to help offspring with property purchases.
Nearly a quarter of homebuyers relied on the Bank of Mum and Dad in 2020, according to insurer Legal & General.
Family and friends gifted an average of £20,000 towards house deposits. But, unfortunately, many buyers don’t have parents who can gift such a huge sum of money.
For parents who can’t afford to hand over a wodge of cash to their kids, there are number of options:
Springboard mortgages
You could ask your parents or grandparents if they would be willing to take out a ‘springboard’ mortgage. This is where a parent or grandparent puts money in a savings account linked to the child or grandchild’s mortgage.
Parents can’t access the savings for a set of time, usually three or five years. Provided the mortgage repayments are kept up over that time then you can get your money back, often with interest added.
Family offset mortgages
Similarly, depositing savings in an account linked to a ‘family offset’ mortgage will shrink the interest paid by your child and could increase their chances of passing affordability checks.
However, parents won’t earn any interest on this type of mortgage.
Joint borrower mortgage
Alternatively, you could consider what’s known as a ‘joint borrower, sole proprietor’ mortgage. This is where a parent’s income is included when calculating the amount borrowed, but their name stays off the property title.
This means parents can avoid triggering the stamp duty surcharge on second homes and won’t have to worry about capital gains tax in the future.
Just remember that with a joint mortgage, if your child stops paying, you will be on the hook for the payments instead.