This is for you if you are saving up to buy your first house, or saving up to move house or if someone you know needs your help.
1 Know how much deposit is enough
If you try to buy your house or flat with a deposit of 10% or less, you will find that the choice of lenders is limited. We expect you will also find that the fees associated with arranging the mortgage can be a bit high, as can the interest rate.
This is because the lender is taking a greater risk. They are putting up 9/10th of the money to buy the house or flat so if it all goes wrong - in other words if you default on the mortgage - they take a bigger risk that they won't get their money back if they have to sell the house to recover their money.
The government help to buy schemes are designed to help in these situations, and there are 95% mortgages, but this page is about saving up, not about different mortgage types.
If you are buying an average terraced house in Cheshire, you will need just over £15,000 to get a 10% deposit, because the average house price (August 2016) is £151,113.
A slightly bigger deposit of 15% - just under £23,000 for that average terraced house in Cheshire - would widen the choice of lenders because they are now more keen to fight for your business.
How does the lender decide how much I can borrow?
Mortgage applications are made up of very detailed information, and the lender uses all of that to decide whether to lend you any money, and how much to lend you. However, here are the factors they are considering: –
2 Build - and keep - a good credit rating
The most important consideration is your credit worthiness. You may often see advertisements on TV for monitoring your credit rating, and it may be worth using one of those services as you save up.
If you maintain your credit record by using one of the credit referencing companies, you may notice that your credit rating improves if you have a small credit card facility, and clear its balance monthly. It is important to use moderation with this one! The point is to demonstrate to a lender that you are able to handle credit without borrowing all the money available to you in one go. (Do you know someone for whom the credit card limit is a 'target' not a 'safety net'?) As such, you won't improve your credit record by going up to your credit card balance - or worse - every month.
3 If it's a 'credit agreement', treat it carefully
We often see minor credit problems result in serious difficulties when we apply for a mortgage. One example we have seen a few times is a missed final payment when people change mobile phone providers. Does this sound familiar? A fee dispute at the end of the contract leads to someone getting fed up with the phone provider, and cancelling a direct debit. This gets logged as a missed payment. In turn, this creates a poor credit record and can stop a mortgage application in its tracks.
In summary, please be careful to resolve any fee disputes rather than stopping credit payments.
4 Get on the Voters' Roll (the electoral register)
Being on the voters' roll (electoral register) will help when you apply for a mortgage. Again, as people rent properties and move around a lot it often happens that they don't get around to registering onto the voters' roll and this causes difficulties.
5 Tell DVLA and your bank where you live
A similar problem arises with driving licences. It is a legal requirement to keep your address up-to-date on your driving license, which does include a rented address. Leaving the address as 'mum and dads' house' could get you into trouble with the authorities, and will cause a problem if you apply for a mortgage.
Also try keeping your banking address also up to date. It's tempting to use a stable and reliable parent's house for bank statements - especially if you're in a shared house, but it will confuse a mortgage lender if you say 'I live here but my bank writes to me there'.
6 Keep your loans low
Lenders also consider how much other debt that will continue after you buy a property. For many first-time buyers, or home movers, this can be a car loan.
If you already have a car loan or any other type of debt when you apply for a mortgage, the lender will deduct the monthly payments from the amount that you are allowed to borrow. Different lenders will adjust your maximum borrowing amount in different ways, but the existence of other debts will reduce the maximum that a lender will offer you.
7 Think ahead before you borrow
If you are considering buying a house, it is likely that you will face higher spending after you move. It does make sense to consider delaying new loans/lease purchase/PCP arrangements until you have moved in. This gives you chance to make sure you will be able to afford monthly repayments and bills before you take on that type of credit.
8 Know how a lender will assess your income
Lenders will, of course, look at how much you are earning as well as how much you are likely to earn, particularly if you work in a recognised profession such as medicine, law or education. It also depends how your pay is structured.
A zero hours contract will cause some difficulties because the lender can't be sure how much you will work next month, or next year.
Commission-based income is taken into account, usually with some adjustment if it isn't guaranteed income. Lenders love high basic salaries in established industries with established employers.
Being self-employed brings another layer of confusion sometimes. Lenders will only consider the income you pay tax on and lenders like to see steady or rising income.
9 Compare yourself to the average
The average pay in Cheshire is £25,272.
There is no such thing as an average amount that the lender will offer you, because the maximum depends on a blend of all the factors we are listing here, plus the lender's opinion of the house or flat that you are planning to buy. The lender will also consider the same factors applied to any joint applicant if you are buying the property together with anyone else.
However, we do see a typical range of mortgage amounts, as a multiple of your earnings. Typically, lenders will offer between three times and five times the annual pay. So, our average Cheshire owner, buying an average Cheshire terrace with an average 15% deposit will struggle:
The house will cost £151,113.
Their 15% deposit will provide £22,667 of that, leaving them looking for a mortgage of £128,£446.
If they are looking to buy that house on their own, they will need just over five times their average salary of £25,272 to buy the house.
10 So what can you do about it?
Spend time building as much deposit as you can, and take steps to get your finances in good shape. This might include following the steps we have suggested above. You will give yourself the best chance. If you would like a little more help or advice, saving up for yourself, or helping your children, or helping anyone, please do get in touch.
And remember your home maybe repossessed if you do not keep up repayment on your mortgage.