First Time Buyer FAQ’s

A mortgage is a loan from a bank or building society that helps you buy a home.

Mortgages are most often repaid in monthly instalments, with your lender charging interest on the amount you’ve borrowed. The higher the interest rate the more you’ll pay back each month and indeed over the term.  That said, it’s not all about the rate you pay but also about the terms of the mortgage you take. A fully qualified Mortgage Adviser will make a recommendation on the best mortgage to suit your needs and circumstances.

Mortgage payments on average are paid over a period of 25 years, although you can take out mortgages with longer or shorter terms. The quicker you pay off your mortgage, the less interest you’ll pay overall.

The mortgage application process can seem quite complicated, especially if you’ve never done it before, however a mortgage advisor will be able to support you throughout the process.

Not only will they be able to help you find the most appropriate deal for your circumstances, but they’ll be able to check your finances to help make sure that you’ll meet the lender’s lending and affordability criteria. They’ll also help you complete the paperwork and help you take all the costs and features of the mortgage into account.

The majority of mortgages in the UK are offered by financial organisations such as banks and building societies.

Those looking for a mortgage can source one from a bank or building society directly or through a mortgage broker.

The deposit is a percentage of the property’s purchase price or valuation (whichever is the lower), so if you’re buying a house for £150,000 a 10% deposit would be £15,000 that you’d need to have from your own resources.

The deposit is usually from your own savings or perhaps a gift from a family member but in some circumstances, you may be able to borrow 100% of the purchase price/value.

In the example shown above, you would then need a mortgage of the remaining 90% of the purchase price/value (£135,000) from your mortgage lender.

The loan amount compared to the purchase price/value is what’s often referred to as the Loan To Value (LTV) ratio.

Your monthly payments would then go toward paying off the amount you owe the mortgage lender plus interest. 

When buying a house for the first time, you’re likely to be looking at a 90-95% Mortgage deal. This means you’ll need to save a deposit of at least 5-10%.

However, the bigger the deposit you put down, the more choice you’ll have from products on the market.

Pros:

• The bigger the deposit the stronger position you should be in. This is because there are more mortgage products available and often the lower LTV products are cheaper in price
• Your monthly repayments will be lower if the amount you’re borrowing is less
• It’ll be more likely you’ll have equity in the house when you want to sell. Equity is the amount you’ll have left once the property is sold and the mortgage balance is paid off. The more equity you have, the more you’ll be able to put toward the purchase of your next home.

Cons:

• If house prices rise whilst you save, the amount you’ve saved so far may still not be enough
• The longer you save for a mortgage the longer you might need to stay in rented accommodation meaning more money being used on rent which has a knock-on effect on the amount of spare money you’ll have each month to save

An Agreement in Principle (AIP) or a Decision in Principle (DIP), is a written estimate from a mortgage lender of the amount that you may be able to borrow.

AIP’s/DIP’s while not essential, are useful because they give you an indication of the amount you’ll be able to borrow from your lender and some Estate Agents will insist you have one before they’ll accept your offer on a property.

While an AIP does indicate how much you can borrow, it’s not a mortgage offer so you’ll still need to make a formal application to the lender once your offer has been accepted.

Once the lender has your application, they will start to underwrite which means they’ll need to confirm your income and outgoings, credit status and value the property as a minimum.

The information below covers some of the factors that may affect the lenders underwriting decision.

A change in personal circumstances

A change to your personal circumstances such as a reduction in your admissible income could affect how much you’re able to borrow.

Starting a new job and still being in a probationary period could also affect the lenders decision.

The ability to lend on the property

The lender’s decision will also depend on whether they consider the property you’re interested in to be suitable for them to lend against. This will depend on the criteria of each lender.

It’s therefore worth checking with your lender whether they’re comfortable with the property type and location before putting an offer to the agent/seller.

When applying for a mortgage, the lender will need to be satisfied that you’ll be able to meet your monthly mortgage repayments.

To check whether you can make these payments a lender will assess affordability based on income and outgoings. This will involve the lender reviewing information you provide to them such as payslips, P60s and bank statements.

 Check your credit report.

A mortgage lender will usually check your credit report to find out if you’ve met your financial obligations so far, before accepting the mortgage.

Your credit report lists details from any accounts you’ve had open over the past six years, including credit cards, loans, and overdrafts.

The repayment of your cards, loans etc. could affect your overall credit file, with even one missed payment having a negative impact. It’s therefore a good idea to check your credit history and make sure you make your payments for the correct amount and on time for each of your credit commitments, before your lender makes a check.

Please note, every credit check from a lender is also recorded and will leave a mark on your credit history so you might want to limit the number of checks that are carried out.

You can check your credit report with credit reference agencies such as Experian, Equifax and TransUnion to see what information the lender might see.

Too many credit applications

Applying for too much credit over a short period of time can appear as a sign of financial stress, so it’s best to avoid taking out new credit agreements for at least a year before you apply for a mortgage. (Credit requests stay on your file for at least two years, though the impact on your file diminishes over time)

If you’re experiencing money worries, there is plenty of free and confidential advice out there to help you from charities such as:

Payplan – 0800 280 2816 www.payplan.com

National Debtline – 0808 808 4000 www.nationaldebtline.org

Advice UK – You’ll need to locate the number of your local advice centre from the phone book or via this link www.adviceuk.org.uk

Step Change Debt Charity – 0800 138 1111 www.stepchange.org

Citizens Advice Bureau – You’ll need to locate the number of your local bureau from the phone book or via this link www.citizensadvice.org.uk

Please be aware that there are companies that charge a fee for managing your debts. If you intend to use the services of one of these companies, you should find out about any charges which may be applicable and fully understand any agreement terms.

Payday loans

Any payday loans you’ve taken out over the past six years will be listed on your file, even if you’ve paid it off on time.

These payday loans could be detrimental to your mortgage application as your lender may question your ability to live comfortably on your income.

This won’t necessarily mean you’ll get turned down for a mortgage as different lenders will view payday loans differently.

Not being registered to vote

You can help improve your credit file by registering to vote, as your lenders will be able to confirm who you are and where you live using the electoral register.

It’s quick and easy to do this online at the Electoral Commission or through your local council.

Having a poor credit file will not automatically rule you out for mortgage acceptance, but it could affect your chances.

Your deposit is too small

A small deposit amount might affect your chances of being accepted for a mortgage by a lender, however there are some lenders who will accept 5%-10% or fewer deposits so it’s worth searching for them.

You could however consider saving up for a larger deposit, using government schemes or getting help from your family by taking out a family assist mortgage.

Your admissible income is low

Admissible income is the amount available once your credit commitments have been deducted from your income, so the amount left over that’ll be needed to meet your mortgage payments and living expenses.

A responsible lender will make calculations to this effect and may find the income is insufficient, if so, you could try looking for a smaller mortgage, get help from one of the government home buying schemes or get help from your family through a family assist mortgage.

Not Matching the Lenders Criteria

Each mortgage lender has a different set of underwriting criteria (The standards by which decisions are made)and takes into account a number of factors when assessing mortgage applications.

Some mortgage lenders when underwriting your application might decline your application due to their set criteria.

i.e. the property or location of your mortgage application might be out of their lending remit.

Therefore it’s worth checking that the criteria matches with the lender before applying for a mortgage.

If your mortgage application is unsuccessful, it’s best to find out and resolve why and fixing whatever you can before you apply again.

Before applying again it’s a good idea to get help from a mortgage adviser or broker, who’ll be able to assess your financial and credit information and find a mortgage that’s more likely to fit the criteria.

Proof of ID –

• A current photo passport or drivers’ licence (This should be up to date with current home address) Expired licences will not be accepted.
• A recent utility bill (gas, electric, phone etc) This should be the full bill and not just the summary page.
• A bank statement or credit card bill – this must be dated within the last 3 months.

Proof of Income –

If you’re in PAYE employment

• Payslips, these must be no older than 3 months, and feature your name, employer, payment date, gross and net pay.
• The Mortgage lender might also ask for your latest P60 documents if you’ve just started your current employment.

If you are self-employed

• Self-assessed tax return forms (SA302) and tax year overviews, these can be requested from HRMC Revenue and Customers.
• An accountant’s certificate, this needs to be completed by a qualified UK accountant.

If you have other/additional sources of income:

• P60 and/or 3 months’ payslips – for evidence of bonuses, overtime, and commission.
• Most recent HMRC letter – for evidence of child benefits or working/child tax credits.
• Most recent Department of Work and Pensions (DWP) letter – for evidence of state pension or state benefits.
• Letter from local authority – for evidence of income from fostering, with number of children and amount of time you have been fostering for.
• Pension payslip – for evidence of a private pension or annuity.

Proof of Expenses (Outgoing expenses) –

• Full Bank Statement (Dated within last two months) with correct name, address, and a running balance.

It’s a good idea to have multiple copies of all these documents ready for the mortgage application process.

In addition to the mortgage deposit and monthly repayments, there are other costs involved when taking out a mortgage that you need to be aware of, these include:

Application/Completion fee (where applicable)

This is a fee charged by the lender. Sometimes, you can add this fee to your mortgage account (subject to loan to value limits). However, you should consider carefully before adding any fees to your mortgage as these will incur interest charges and may result in you paying more overall.

Solicitor Fees

These fees will normally depend on the size of the property and will include a Land Registry fee, the solicitor’s own conveyancing fee plus other charges and expenses known as ‘disbursements’. It’s worth shopping around for quotes.

Search fee

If you’re buying a property, you will need to pay local search fees. A search provides information about your property and immediate neighbourhood, which may affect your decision to purchase the property. Your solicitor will normally arrange for these to be carried out.

Higher lending charge

A Higher Lending Charge normally applies if you want to borrow more than 80% of the property’s value and provides indemnity insurance to protect the lender against any potential future loss if, for example, you go into arrears with mortgage payments or your property is repossessed. The Higher Lending Charge will normally be provided free by The Loughborough.

Valuation Fee

Before the lender can make a lending decision, they’ll need to value your property. There are three types of valuation available:

Standard/Basic Valuations

This is a basic valuation of the property and is for the lender’s benefit only. It enables the lender to decide whether the property is suitable for lending purposes.

Homebuyers report

This report is a more detailed inspection of the property than a standard valuation. You’ll receive a report on the condition of the property, stating any repairs or defects that need attention.

Full Building Survey

This survey is the most comprehensive type of report and is a thorough and complete inspection of the property and its structure.

Stamp duty is a tax payable by the purchaser of a property. It’s collected by the solicitor/conveyancer prior to the sale completing and is charged at various rates.

However, first-time buyers in England and Northern Ireland do not have to pay stamp duty on the first £425,000 of property value, provided the total purchase price is £625,000 or less.

You can find the most up to date rate of stamp duty payable on the government website here.

Yes, most lenders will let you overpay by 10% per year, check with your lender first before making an overpayment, as you could be subject to Early Repayment Charges if you overpay during the product period.

An unexpected circumstance could lead to you falling behind with your mortgage payments, this often leads to stress and worry that a lender will repossess your home.

Contrary to that belief, lenders will want to help you if you have a problem making mortgage payments and repossession is a last resort.

Therefore, its best that that you get in touch with your mortgage lender as soon as possible if you’re unable to make your monthly payments or experiencing financial difficulty.

For further support, The Building Societies Association has a practical guide to help those who can’t pay their mortgage.

If you’re struggling with debt, there are also a number of independent charities that help people get out of debt by offering free and impartial advice and work with you and your creditors to come to an agreement.

Debt charities include:

• Citizen’s Advice Bureau
• National Debtline
• StepChange

Saving for a deposit as a new buyer can be difficult, especially if you’re paying monthly rental payments.

However with help from Government schemes and savings accounts there are ways to help you save for your deposit.

• You could open a regular savings account and set up a standing order to deposit a fixed amount of cash into it every month.
• With your money in a separate savings account, you’ll be less temped to touch it.
• The government has a number of Affordable Home Ownership Schemes that First Time Buyers can take advantage of, visit the governments page here for more information

• You could use a budget planner such as the one from Money Helper this would help you track how much your spending and where you can potentially cut back in order to save more for your mortgage deposit and other fees associated with buying a house.

• Lastly if your living situation is preventing you from saving for a deposit, you could potentially move back in with your parents or go into a flat share whilst you save for your deposit.