Stephen Pruce has been a Financial Consultant at Wesleyan for 12 years. He specialises in finding the right mortgage deals for professionals such as doctors, dentists, lawyers, and teachers.
In a climate of rising property prices (up by 7.2%1
in the year to January 2017) and low savings interest rates, we quiz him on what first time buyers can do to maximise their chances of getting onto the housing ladder. This article does not constitute financial advice.
Your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments on your mortgage
.Q: Stephen, you've been advising first time buyers at Wesleyan for 12 years, what tips would you give those saving towards a mortgage deposit?
A: Firstly, it's a good idea to come up with a 'savings strategy'. This will help you to identify exactly how much you need to save for a deposit, and how long it is likely to take you to achieve your goal, based on how much you can afford to save.
Think about how you can maximise the amount you regularly put away, for example by cutting back on things like eating out, designer clothes or mobile phone bills. You may also be lucky enough to have family members that are willing to contribute towards a deposit, either as a gift or an interest free loan, so factor this into your savings strategy.
Once you're out of the starting blocks with your savings, consider carefully where you keep them. This is very important so that you can protect your cash from the effects of inflation (think of this as the increase in the general price of goods and services. It's a measure of what your money is 'worth' in real terms).
Someone saving £10,000 towards a mortgage deposit over a five year period, for example, could see it's 'real' value eroded to just £8,901.70 due to the impact of inflation.
Let's assume a rate of inflation of 2.3% (as at February 2017). If you put £10,000 into a savings account with 0% interest, in real terms it would be worth:
- £9,770 in one years time
- £8,901.70 in 5 years time
- £7,924.02 in 10 years time
Cash ISAs often keep pace with inflation and can be a good option for many first time buyers as they allow quick access to the savings should they be needed in an emergency.
There are also ISAs designed specifically for first time buyers, such as the Help to Buy ISA's and the new Lifetime ISA (launched in April 2017). Both benefit from government bonuses, but also have significantly lower savings limits than their standard cash / stocks and shares equivalents. You can however, use standard ISAs alongside these to shelter further savings from tax (up to an overall maximum of £20,000 in the 2017/18 tax year)2
. It's important to remember that the value of investments in a stocks and shares ISA can go down as well as up and you may get back less than you invest.
Finally, it's sensible to look at any debts you have. If possible, try and clear them altogether, or consolidate them with the aim of potentially reducing the interest you pay. Q: You mentioned clearing debts. Can you elaborate on why this is so important? Those saving for a mortgage deposit might, for example, have a few debts on credit cards offering 0% interest for a fixed period.A:
It's sensible for first time buyers to clear as much debt as possible in preparation for their mortgage application. Lenders use measures of both 'income' and 'affordability' when assessing applicants' suitability. The affordability element is really an assessment of whether you are comfortably able to honour your mortgage payments every month, once all of your essential outgoings have been paid (council tax, utility bills, food shopping, and so on).
Lenders will look at any outstanding balances you have to pay and can deduct these from your net income or the amount you are able to borrow (criteria differs according to the lender, but they will all compensate the amount you owe, from the amount you can borrow, in some way).
Another strong case for clearing debts is that the interest payments on them may be more than any interest you are earning on your savings. Q: Credit scores seem an important part of a lenders assessment of a mortgage application so many first time buyers may consider checking their own history. What factors should they look for if they decide to do this?A:
Your credit score is like a running history of your debts, loans, and credit cards records over recent years, as well as your re-payments record.
Every time you apply for credit, a 'soft footprint' is left on your credit file. If you fail to make re-payments, or make re-payments late, this can affect your credit rating. On the other hand, having no history can also negatively affect your credit score because you haven't got a proven record of re-paying on time and in full.
If first time buyers do decide to check their credit history there are a number of things they can look out for, in case they are incorrect, missing, or will give the lender a misleading impression of their financial health:
- Any applications for credit you have made in the past that have been turned down, are likely to be recorded in your credit history. Check these carefully so you can fix any errors before you make further applications. For example, if you have lived in multi-occupancy accommodation, perhaps as a student, and somebody from the same address has had a credit application refused, it may incorrectly appear on your record
- Your credit score is tied to your UK home address history over the past three years. Check that the addresses, and the dates you have lived at them are correct
- Your credit report will contain information about anybody you have had financial links to (for example, you may have made a joint application with a partner in the past). If anybody you have made a joint application with has run up 'bad debts' this could affect your own score. If this is the case, you can ask for your records to be separated - this is known as 'financial disassociation'
- Check for (and rectify) any late payments you have made, and avoid these going forward. If you do have a history of making late payments, think about whether you could provide lenders with any background information as to why they were late. I have seen examples where late payments occurred because a direct debit was not set-up in time by an individual's bank. I was able to provide evidence of this to the mortgage lender on behalf of my client
Ultimately it's important to be honest about your financial past. If there is an issue with your credit history, a Financial Consultant may be able to help you understand how this will affect a mortgage application.
Q: A good credit history is obviously important. What other steps can first time buyers take to improve their chances of a mortgage application being accepted?
A: Firstly, make sure you can evidence your income. I would recommend that first time buyers complete a budget planner to help demonstrate that they can genuinely afford their monthly mortgage re-payments, once all other essential outgoings have been paid.
To help evidence your income also keep hold of 3 months previous pay slips, as well as your P60. If you are self-employed, you will usually need to provide two years' previous accounts history (some lenders may ask to see evidence dating back further than this).
Secondly, you will need to evidence your address history. Make sure you are listed on the electoral register and eligible to vote.
This helps potential lenders to see where you have genuinely been living via your council tax records. You could for example, live in rented accommodation but still have your bank statements addressed to your parents' house, giving a misleading picture of your address history. If you are a foreign national, lenders are likely to want to see how long you have left on your 'highly skilled migrant visa', so have this information available.
Thirdly, if you're fortunately enough, speak to the 'bank of mum and dad'. Discuss whether they are able and willing to act as mortgage guarantors as this can be seen favourably by some lenders. Relatives may also be able to help towards your mortgage deposit.
Finally, consider using a professional mortgage broker. Financial Consultants at Wesleyan are trained to understand the unique financial circumstances of professionals such as doctors, dentists, lawyers and teachers. We can relay this directly to mortgage providers on your behalf so they understand what you can truly afford to borrow (which could be up to 95% of the purchase price of a property).
Q: You mentioned using a mortgage broker, which is something many first time buyers may not have thought about. Can you explain why this is so advantageous?
A: Well firstly, at Wesleyan we don't charge our customers a fee for mortgage advice. This is because we'll get paid by the lender once a mortgage successfully completes. This doesn't affect the rate our customers are offered. Our customers can also benefit from:
- a dedicated and experienced Financial Consultant who is trained to understand their specific pay scales and income sources, career progression, earnings potential, sick pay entitlements, pension contributions, and so on. We can then relay this information directly to mortgage providers so they can build an accurate picture of your 'income' and 'affordability' - the two measures they will use to assess the strength of your application
- access to 100s of mortgage deals, many of which aren't available through high-street lenders
- step-by-step guidance throughout the mortgage application process (we will liaise with the lender directly and deal with both the application and the associated paperwork to support it, freeing up the buyers time to focus on other things)
Our customers also really appreciate that we can meet at a time and place convenient to them, rather than having to be tied to the opening hours of a high-street lender. Many of our customers work long or anti-social hours, and we are able to fit-around these.
In many cases we are also able to provide our customers with a 'decision in principle' - giving them an indication of how likely a mortgage provider is to approve their application. This demonstrates to estate agents that they are serious about a purchase and have the ability to obtain a mortgage. This can lead to the property they have set their sights on being removed from further marketing. As well as supporting first time buyers to find the right mortgage, a Wesleyan Financial Consultant will also be able to help with related needs such as home insurance and mortgage protection - saving customers the time and hassle associated with using multiple providers.
If you have unanswered questions about applying for a mortgage, please contact us and we will put you in touch with a Wesleyan Financial Consultant who is trained to understand your personal and professional circumstances: https://www.wesleyan.co.uk/mortgage-enquiry (please quote reference 80765).
1 Official Statistics - UK House Price Index summary: January 2017
2 You can't save into a Help to Buy ISA (which is a type of cash ISA), or a Cash Lifetime ISA, and a standard Cash ISA in the same tax year.