It might be stating the obvious, but the essential first step to buying your house is to work out how much you will be able to borrow.
Rapidly rising house prices have made it hard for first-timers to get on the property ladder, as the amount buyers need to borrow has increased. In fact property prices have outstripped earnings by a record amount.
Sale prices for homes in England and Wales increased 12.2% in March year-on-year, while some of the upmarket areas saw price rises of over 20%. And, as if the unexpected interest rate hike in January was not bad enough, some analysts are predicting rates could rise as high as 6% later this year!
Download our free Home Buyers Guide hereMortgage and transaction costs have also soaredThen there is the fact simply applying for a mortgage is now twice as expensive as it was just three years ago. One consumer finance survey found the average application fee for a fixed rate mortgage would now cost £611, compared to £334 in February 2004. Plus there is Stamp Duty to consider.
All of this is bad news when it comes to mortgage affordability – especially for first time buyers (FTB). But while it is undoubtedly more difficult to get on the ladder than ever before, there is some respite in the fact mortgage lenders have started changing the way they calculate how much they are willing to loan you.
Traditionally, lenders calculated this sum using various multiples – for example 3.5 times the gross salary for someone who is single, and around 2.5 times the collective gross salary of a couple. So, given surging property prices, it is easy to see why lenders had to change their models or risk losing valuable new business.
Click here to download our Guide to Getting the Best MortgageWidening the mortgage netNowadays it is not uncommon to see many of the big name lenders offering income multiples of up to four, and even five, in a bid to attract prospective buyers.
And in a bid to further widen their net, many lenders are increasingly analysing each individual’s economic situation to determine their ability to pay – the so-called ‘affordability’ measure - rather than simply using restrictive multiples that dump everyone into the same bracket.
This is a significant development as, for example, it means banks are able to recognise how a two-income household without children would likely be able to pay back more than a similar household with two children.
What this means is most buyers are now being offered larger loans than before, as banks are able to determine more accurately what their actual financial limits are. It should be mentioned not everyone will necessarily benefit, specifically single income households with dependants, whose ability to pay is obviously significantly diminished.
Download our free Home Buyers Guide hereOverall, though using an ‘affordability’ measure can be a more flexible method than the restrictive ‘income multiples’, which simply dump everyone into the same bracket.
Still these new models mean you will have to pay more in interest than before – lenders would not introduce anything that wasn’t going to make them more cash – but at least they provide an opportunity for people desperate to get onto the property ladder.
Types of mortgage to considerSo, where to start? Well a good place would be to work out how much you can realistically afford to put aside. Draw up a thorough budget and subtract all your expenses from total earnings. A mortgage is obviously a long-term investment, so keep in mind any possible expenses/income that could change your financial situation in the coming months, or even years – things like your children starting school, and so on.
Use our
mortgage calculators to breakdown the monthly repayments required for each mortgage. It’s not going to be precise, but these services are free and will give you a good idea about what value mortgage you should be looking for.
One factor that could massively influence the affordability of your mortgage is which type of loan you decide to take. None are intrinsically better than the others, and depend greatly on your financial situation – as well as macroeconomic factors like interest rates.
What do the top lenders use?The table below showswhata singleFTB could borrow if he/she earned £25,000 p.a.,had no outstanding debts and had saveda deposit of 10%.
| Lender | Assessment | Max. Borrowing |
| Abbey | Income Multiples | £95,000 |
| Alliance & Leicester | Affordability | £120,000 |
| Halifax | Affordability | £110,000 to £125,000 |
| HSBC | Affordability | £93,750 |
| Nationwide | Affordability | £106,250 |
| RBS | Affordability | £93,750 |
| Woolwich | Income Multiples | £100,000 |
Source: Moneyfacts
The
fixed rate mortgage is proving massively popular at present, particularly among FTBs. The Council of Mortgage Lenders (CML) says nearly 85% opted for fixed rate deals in January - the highest proportion on record – while 70% of those moving house went down the fixed route.
The lure is quite easy to understand, as it offers buyers the security of knowing costs will remain steady for the next few years at least. And the unexpected rate hike in January has no doubt pushed more people to consider this option.
But simply because most people are doing it does not necessarily make it ideal for you. Have a detailed look around at what each can offer.
One final, and essential, thing to consider is how your costs are going to change upon moving. Mortgage payment insurance, council tax, transport costs – all these things are going to change when you move, so make sure they are going to be affordable.
Click here to download our Guide to Getting the Best MortgageKey points to remember1. Use our
mortgage calculators to do your sums. This will give you an indication what size mortgage you can realistically pay off.
2. Draw up a detailed budget and work out how much your monthly outlays eat into your total income. Keep in mind first time homebuyers will be exposed to more costs.
3. A mortgage is a long-term commitment, so be wary of variables that can affect the affordability of your loan.
4. No mortgage deal is intrinsically better than another. Be aware of he pros and cons of each. Fixed and discount mortgages might offer attractive rates to start with, but could translate into far higher payments down the road.
5. Pay special attention to the
