When it comes to mortgage applications, having the right answers to make smart decisions could mean reducing both the stress and the cost.
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With buying a home often being the biggest financial commitment we make in life, getting to grips with the mortgage application process is critical.
There are likely to be many questions that we feel we should know the answer to, but are too embarrassed to ask. Yet we also don’t take out a new mortgage very often, so it’s perfectly natural not to know everything.
With the help of Post Office, we provide answers to some of the common issues which can cause confusion amongst first-time buyers.
Even after getting to grips with the mortgage process, many first-time buyers still struggle to get on to the property ladder. That’s why Post Office has also developed two products – provided by Bank of Ireland UK – to help.
Post Office Family Link™ is designed for first-time buyers who haven’t saved a deposit but can afford monthly mortgage repayments. The mortgage lets parents or close relatives help you buy your own home, without gifting a cash deposit.
First Start boosts your borrowing power by combining your income with a sponsor’s (usually a parent or step parent). So together you can borrow more, responsibly.
How much can I borrow?
When you start house hunting, the burning question you’ll likely want answered is ‘How much can I borrow?’ because this dictates the type of property that you can afford.
Generally speaking, you may be able to borrow between three and four and a half times your salary. So, if you earn £30,000 a year, you may be able to borrow between £90,000 and £135,000.
While this is based on a simple income multiple, you need to be aware that lenders, such as banks and building societies, decide how much they’ll lend based on both your income and your outgoings.
You need to be prepared for lenders to assess your bank statements to work out if you can afford a mortgage, so be upfront and honest from the start.
In addition, your credit score can also have a big impact. Someone with a healthy credit history and few existing debts may be able to borrow more than someone with a poor credit score and a host of loans.
What does loan to value mean with a mortgage?
The loan to value – or LTV – is the size of the mortgage compared to how much your property is worth and is usually expressed as a percentage figure. The lower the LTV, the lower the mortgage interest rate tends to be.
For example, if a mortgage is offered at 90% LTV, you’ll need to find a deposit of 10%. If a mortgage is offered at 75% LTV, you’ll need to find a bigger deposit of 25% – but rates will typically be lower.
What’s the difference between a fixed and a variable mortgage?
With a fixed rate mortgage, the amount you pay stays the same for an agreed term. This gives you peace of mind knowing your monthly repayments won’t change within that term – making budgeting a whole lot easier.
By contrast, a variable rate product – such as a tracker mortgage – will go up and down with the Bank of England base rate. If the base rate rises, your monthly repayments will go up, and vice versa.
If you’re worried about being able to afford higher monthly repayments as and when the base rate rises, opting for the security of a fixed rate mortgage could be the way to go.
How long should I fix my mortgage for?
There is no definitive answer to this as it depends on the interest rate, fees of the individual product, and also your individual plans.
Within the market there are options ranging from two-year fixed rate deals, through to ten-year fixed rate deals with some lenders.
While you may warm to the idea of your monthly repayments staying the same for a decade, you need to be aware that if your circumstances change and you do need to sell during that time, you could face large early repayment charges.
The key is to seriously consider your individual circumstances. If you think you might end up moving in a few years, a shorter deal could be more appropriate.
Equally, if you’re going to be staying in your home for a while and are looking for some security should the Bank of England increase the base rate, then a longer term deal could be more suitable for you.
How long does a mortgage last for?
Again, there is no definitive answer to this as it depends on your individual circumstances, such as your age. Generally speaking however, mortgages can last for up 35 years.
The longer the mortgage term, the lower your monthly repayments will be. That said, the main sting in the tail to a longer term is a bigger interest bill overall, as you’ll be paying interest on the capital borrowed over a longer period of time.
How can I pay off my mortgage more quickly?
If you want to pay off your mortgage more quickly, you could look at making overpayments.
Paying even an extra £50 per month will reduce the overall interest you pay and can reduce the term of your mortgage.
That said, you need to check your lender’s terms and conditions, as most lenders will only allow you to overpay by up to 10% a year. Above that, you may face a financial penalty.
You also need to bear in mind that once you’ve made an overpayment, you can’t get that money back. The right decision will depend on your particular circumstances, so don’t rush and make sure you’ve done your homework.
If you’re going to overpay, you should only do so once you’ve cleared more expensive debts, such as credit cards or personal loans, as these generally have a higher repayment interest rate than mortgages.
What questions should I ask my mortgage broker?
If you’re struggling with the mortgage application process, a broker can help you plot a path through the maze and should help find the best mortgage for you, based on your personal circumstances.
Here are some questions you may want to ask:
- How do you charge for your services? Fees or commission, or a combination?
- Can you give me a breakdown of your costs?
- Are you independent and able to cover the whole mortgage market?
- What qualifications do you have?
- How long will it take to arrange my mortgage?
- What deposit will I need?
- Will you offer guidance throughout the whole mortgage process?
What are the Government schemes to help first-time buyers?
There are a host of different options to help first-time buyers get on to the property ladder.
Help to Buy: Equity Loan
With this scheme, you borrow a proportion of the cost of a new build home interest-free for the first five years.
If you’re able to save a 5% deposit, the Government will lend you up to 20% of the value of a property you want outside London (40% in London and 15% in Scotland).
You then take out a mortgage on the remaining 75% of the property’s value. The new build property must be worth less than £600,000 in England, £300,000 in Wales, and £200,000 in Scotland.
If you earn less than £80,000 a year (£90,000 in London), you can buy a share of a new or existing home from a council or a housing association, typically at between 25% and 75% of its value.
You then pay rent on the remainder, so a smaller deposit is required. You also have the option to buy a bigger share in the property at a later date.
Help to Buy ISA
These tax-free savings accounts are designed to help you save for a deposit. You can start with an initial sum of £1,200 and can save £200 a month after that. The Government will then top up your savings by 25% up to a maximum bonus of £3,000, once £12,000 has been saved.
Aimed at those aged 18 to 40, Lifetime ISAs offer the same 25% bonus as Help to Buy ISAs, but there is a higher yearly limit of £4,000. Those who save the full £4,000 get a tax-free bonus of £1,000. The money can be put towards a deposit on a first home worth up to £450,000.
How does the Post Office Family Link™ mortgage, provided by Bank of Ireland UK work?
With this product, you can take out a 90% LTV mortgage from Post Office and then raise the remaining 10% as a mortgage (also from Post Office), secured against the mortgage-free home of a parent or another close family member (your assistor).
You make two separate repayments for the first five years – one towards the assistor’s mortgage (which is interest free) and one towards your own mortgage (which incurs interest).
After five years of payments, you’ll have paid off the 10% assistor mortgage and reduced the balance on your own 90% mortgage.
Plus, as long as house prices don’t fall, you’ll have reduced the size of your mortgage compared to the value of your home.
- The mortgage has a 90% LTV.
- Five-year fixed rate.
- The maximum loan size is £500,000.
- The only upfront cost in relation to your mortgage is your solicitor and legal fees.
- The assistor’s property must be mortgage free and have a minimum value of £150,000.
- The assistor must take independent legal advice before completion.
How does the First Start mortgage, provided by Bank of Ireland UK work?
If you’ve sorted a deposit but are limited in the amount you can borrow because of your salary, then First Start could work for you.
It lets a close relative act as your sponsor (usually a parent or step parent), bringing their salary into the mix. Using their income means they can help financially with the monthly repayments now, rather than later with something like an inheritance.
Say the house you’re looking at costs £300,000, and you’ve £15,000 saved, meaning that you need to borrow £285,000. If you’re on £25,000 a year, this could be tricky. But if your sponsor is on £50,000 a year, then this could be used to allow you to borrow the cash you need.
This makes them jointly responsible for your repayments and they must get independent legal advice before completion if they choose not to be registered as a joint owner. Legal and financial advice is highly recommended even if they choose to be a joint owner.
- Borrow up to 95% LTV.
- The maximum loan size is £500,000.
- Minimum first-time buyer income of £20,000 per annum.
- Minimum sponsor income of £30,000 per annum.
- The sponsor must be a homeowner.
- Maximum age for the sponsor at the end of the mortgage term is 80 years old.
The above content is for information purposes only and does not represent mortgage advice. For full terms and conditions on the Post Office Family Link™ and First Start mortgages, visit postoffice.co.uk
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.