Buying your first home

A beginner’s guide to mortgages

There are two key parts to buying your first home. Saving for your deposit and getting a mortgage. Here we’re just going to look at getting your mortgage – but if you need it, we also have some helpful advice on saving for a house deposit. 

To start with the basics, a mortgage is a loan which helps you buy a property. You pay back the loan with interest each month.

The mortgage added to your deposit makes up the total house price. So, if you want to buy a house for £250,000 and you have a £30,000 deposit, you’ll need a £220,000 mortgage.

In that example, your mortgage would form 88% of the purchase price. This is known as the Loan-to-value (LTV) ratio.

The LTV ratio

Usually, the lower the LTV ratio, the better interest rate you will get on your mortgage. That means you’ll pay less back to your lender over the course of the mortgage term.

You’ll usually need at least a 10% deposit, as most lenders will only offer mortgages up to 90% LTV. However, in April 2021, the UK government introduced a new 95% mortgage scheme to encourage banks to start offering them again. 

You can find out more about the scheme here.

Can you get a mortgage?

Applying for a mortgage can be a bit daunting if you've never done it before. But if you’re well prepared, there’s no reason to be nervous.

The key thing to understand is that the lender will be looking for affordability. They’ll only offer you a loan if they think you can pay it back. 

To assess affordability, lenders will look at the following things:

Your income

The amount you earn and the stability of your salary is crucial. Lenders need to see that you have enough regular income to cover the mortgage payments, after all your expenses.

As a rough guide, you’ll usually be able to borrow around 4 or 4.5 times your salary (or combined salary, if you’re applying as a couple). This does vary though. 

You’ll need to prove your earnings through payslips and P60s if you’re in full time employment. If you’re applying for a mortgage as a self-employed person, you’ll need to show at least two or three years of consecutive tax returns.

Your expenditure

To calculate your ability to pay a mortgage back, lenders will also look at your regular expenses. Things like food and energy bills are to be expected, but if you’re paying off a student loan, car finance or other debts, this could have more of an impact on your application. 

If you’re paying a lot in rent, don’t worry. The lender is only interested in expenses that will continue alongside your mortgage. With that in mind though, you might need to be prepared to cut back on any non-essential outgoings - like expensive gym memberships or takeaway habits. 

Your credit rating

Everybody has a credit record, which is used by agencies to give you a credit rating (or credit score). The healthier your score, the more likely you are to be approved for a mortgage. 

You can check your rating for free at any time through the main credit score agencies, like Equifax or Experian.

Your credit score is based on various factors, including your debt levels and your bill repayment history. If you have a history of missed payments for example, it’s likely to mean a lower credit score.

Even if you think your credit score should be healthy, it’s worth checking before you make your mortgage application. If you’ve house shared at any point, your housemates’ payment history could have affected your own score – and you might need to work on improving it.

Improving your credit rating

Credit scores take time to build, but there are things you can do that may help to boost your rating:

• Get yourself on the electoral roll: If you’re not registered to vote, credit can be hard to come by. Head to gov.uk to register.
• Set the record straight: Spotted a mistake on your credit profile? Even something as minor as wrong address can affect your score. Report anything that’s wrong.
• Own your contracts: When you’re younger, things like mobile phone contracts often get set up under your parents’ name. If that’s still the case, you won’t be getting the credit for your good repayment record.
• Consider your credit card use: Using and paying off a credit card can be good for your credit score, as it shows lenders you can be trusted with credit. Get too close to your card limits though, and it can have the opposite effect.
• Clear your debts: If you do have any debts outstanding, it might be sensible to get them cleared before saving any more into your deposit fund.

Finding the right mortgage for you

Assuming the lender is happy to loan you the money, you’ll usually have a few options in terms of your actual mortgage product. You should be able to choose:

• How long you want your mortgage to last
• How long you want to fix your interest rate for
• Whether you want to pay a product fee or not

All these factors have an impact on your monthly payments, and therefore on the total cost of the mortgage over the term.

Choosing your mortgage length

Most mortgages last for around 25 years, but you may be able to extend this. Giving yourself longer to pay back the loan means lower monthly payments - but because of interest, you will be paying back more overall.

If you can afford higher monthly payments, you could reduce the term to get your mortgage paid off quicker.

Fixing your interest rate

Most mortgage lenders offer you the chance to fix your interest rate for up to 5 years, and sometimes longer. 

Typically, the longer you choose to fix for, the higher interest rate you’ll pay – but you do get the stability of knowing exactly what your payments will be. Fix for just 1 or 2 years, and you’ll usually get a lower rate of interest – but once the term expires, you’ll either need to remortgage or you’ll be on your lender's standard variable rate (SVR).

The SVR is usually significantly higher than the fixed rate and can go up or down at any time.

Paying a product fee

On some mortgages, you get the option to pay an up-front product fee in return for access to a better rate. 

Depending on how much you’re borrowing and the length of your fixed term, the product fee may or may not be worth paying. At Wesleyan Financial Services, we can help you work that out. 

The process of buying a house

Of course, there’s more to buying a house than arranging a mortgage. If you’re not sure what happens (and when) in the home-buying process, here’s a very brief overview of the steps involved.   

1. See what you can borrow. The first stage of buying a house is finding out roughly how much you can borrow. If you haven’t already, you can do this via a mortgage calculator online. This will help you narrow down your property search and work out exactly how much deposit you’re going to need.
2. Get a decision in principle. When you’re ready to look at houses, you can apply for a mortgage ‘decision in principle’ – sometimes known as a mortgage promise. This is where the lender will put in writing what they would be willing to lend, subject to you completing a full application. It’s not a guaranteed mortgage offer, but it means you can show genuine intent to buy when you’re looking at properties.
3. Make your offer. Found your ideal first home? Put an offer in and agree a price with the seller. Usually this is done via the estate agent.
4. Appoint a solicitor. You’ll need a solicitor to handle all the legal and paperwork surrounding the purchase of the property. Make sure to choose one who is recognised by your lender, as they’ll need to work together. You can usually expect a solicitor to invoice part of their fee up-front. The rest you’ll pay on completion. At this stage, your lender will appoint a surveyor, who will visit the property to ensure it’s worth the purchase price.
5. Finalise your mortgage. Assuming all is well with the survey, you can proceed with your official mortgage application. It’s at this stage where you’ll decide on fixed terms, product fees and learn what your monthly repayments will be. You’ll receive an official mortgage offer, which is usually valid for 3 to 6 months. That gives plenty of time for your solicitor to complete their searches.
6. Exchange contracts and pay your deposit. Once the solicitor has completed their searches, they should send you a contract to sign and complete the sale. You’ll also need to pay your deposit if you haven’t already. This is paid to the solicitors, who hold the money before sending to the seller on completion.
7. Completion day. When all parties are happy and the contracts are signed, a completion date is set. The money you are borrowing from the bank is paid to the solicitor, and on completion day, that money (along with your deposit) is transferred to the seller.                                                                                                                                                          

And just like that, you’ve bought your first home.

Remember, at various stages of the process, there could be additional costs to pay. You can find out about the extra costs of buying a house here.

Get help with your first mortgage

Buying your first home is exciting and scary in equal measure. But at Wesleyan Financial Services, we can help take the stress out of it by finding the right mortgage for you.

Our Specialist Mortgage Advisers can provide impartial mortgage advice, listen to your needs and search the market to find your deal. Wesleyan Financial Services offers fee-free mortgage advice. We will be paid a fee by the mortgage lender upon completion of the loan.