When you are thinking of buying a home, it is important to consider how much you can afford to buy. The best way of doing this is to prepare a budget plan.
- Start by calculating how much money you have coming into your household each month.
- Then keep a note of what you spend so that you can see your spending habits.
It is useful to do this as when you apply for a mortgage it is likely that your lender will ask you to outline your finances.
This will also help you decide whether you can afford the up-front costs of buying your home and the additional costs once you own it.
Use the Budget Planner to help you record your monthly spending and see how much money you have left over.
Saving for a deposit can take a long time but there is help available that could get you there faster. The Help to Buy ISA can help you save a deposit to buy your first home.
The Government will boost your savings by 25% – so for every £200 you save, you will receive a government bonus of £50.
You can find out more at Help to Buy.
There is also a Lifetime ISA (LISA) that you can use to buy your first home or save for retirement. Click to find out more.
There are a number of up-front costs when buying a home that you will need to factor in.
- Your deposit
- Solicitor fees
- Stamp Duty Land Tax
- Removal costs
- Renovation / decoration costs
- Furniture and appliances
Once you own your home you also need to budget for the on-going costs.
- Mortgage repayment
- Home insurance
- Mortgage protection and/or life insurance
- Management company fees (if applicable)
- Maintenance and repairs
Credit scores and credit reports
Your credit history is very important
- A credit score is a number that indicates your ability to pay back money that you borrow.
- A credit report is a record of your financial history and will include things like, if you have any credit cards or loans, and if you have missed any payments.
Lenders will usually use both of these aspects of the process to decide whether or not to give you a mortgage. The higher your credit score, the better your chances are of being offered credit.
It is important that you are mindful of the things that can impact your credit score to ensure that it’s the best it can be.
You can find out more on Money Saving Expert.
A mortgage is a type of loan that you take out to buy a property
The loan is secured against the value of your home until the loan is paid off.
The mortgage term is the length of time it will take you to pay back the loan. Typically a mortgage term can last 25 years but it can be shorter or longer.
If you do not keep up your repayments your lender may take possession of your home and sell it so that the loan is repaid.
Most of the time you will need to pay a deposit: usually between 5%-10% of the property price.
This is when you will hear about Loan to Value (LTV). LTV is the split between your deposit amount and your mortgage loan. The examples below provide illustrations.
- If you are purchasing a home at £130,000 and your lender requires a 5% deposit (£6,500) you are borrowing the remaining 95% (£123,500). The LTV is 95%.
- If you are purchasing a home at £130,000 and you have a 10% deposit (£13,000) then you are borrowing the remaining 90% (£117,000). The LTV is 90%.
There are three key stages to the mortgage application process.
Agreement in Principle
- The first step is to visit a bank, building society, mortgage broker or financial advisor to find out how much you can afford.
- You will receive an Agreement in Principle.
- This will give you an indication of the amount a mortgage provider may be able to lend to you.
- You can now agree a sale on a property.
- To complete the assessment process your lender will need evidence of your income, what you spend on things like household bills, other financial commitments and any deposit you’re putting down.
- Usually they will require payslips and/or bank statements that cover the previous three months, or if you are self-employed, up to two years of accounts.
- Your lender will then assess your application fully to ensure that you can meet the repayments.
Valuation and Offer
- Your lender will then carry out an independent valuation to check that the property is priced correctly and is mortgageable – this means checking that there are no major defects that could affect the property’s value and that the price is in keeping with similar properties in the area.
- Once the valuation has been completed, your bank or building society will write to you and your solicitor with confirmation of a mortgage offer.
There are two main types of mortgage available: fixed rate and variable rate.
- A fixed rate mortgage means that the interest rate (and your monthly payment) will stay the same for the duration of your mortgage deal. Typically fixed rate deals last for 2 years, 3 years or 5 years.
- A variable rate mortgage means that the interest rate (and your monthly payment) can change at any time. The rate is set by your lender and can go either up or down in line with the base rate set by the Bank of England.
- A tracker mortgage is similar to a variable rate mortgage except the rate will move directly in line with the Bank of England Base Rate plus a percentage.
There are two ways to pay back the money you borrow.
- A repayment mortgage means that each payment you make is paying back both the loan that you borrowed (capital) and the interest that accumulates. Sometimes this is called a capital and interest mortgage.
- An interest-only mortgage means simply that – you are only paying the interest and nothing of the amount that you borrowed (capital). With this option you need to have an alternative plan on how you are going to pay back the capital at the end of the mortgage term.
Your lender or financial advisor can help you decide which option is best for you.
What should I do now?
Now that you've got your finances in shape it's time to understand who does what.Who does what