In this article, we run through the financial need-to-knows of getting a mortgage. There are some important considerations if you are to become self-employed, perhaps working as an associate dentist or locum doctor, which we’ll highlight here too.
When buying a property, you put down a deposit and pay the rest using a mortgage which you borrow from a lender. This loan is secured against the value of your home, meaning that if you cannot make your repayments, your home may be repossessed to recoup the money owed.
The most common type is a repayment mortgage, in which you repay the money borrowed and interest accrued in monthly instalments for a set number of years. Less common is the interest-only mortgage, in which you pay interest each month and repay the full sum of the loan back at the end of the term.
How do I get a mortgage?
There are many different lenders, including banks and building societies, who provide mortgages. You can obtain advice from professionals such as mortgage advisors and financial consultants who use their understanding of your financial situation and their knowledge of lenders to match you to the best deals.
Lenders have different criteria for mortgage applicants and different appetites for lending, meaning some lenders might reject you where others will accept, and some may offer you good rates where others will not.
Additionally, lenders offer different types of mortgages, typically varying in the way in which interest is calculated and charged on the loan. Despite these differences, lenders generally use the same 3 metrics to assess your suitability for a mortgage.
CreditLenders are assessing the level of risk they are taking on when lending to you. This includes looking into how you have used credit in the past by checking your credit report. For example, sensible use of a credit card proves to lenders that you can be trusted to use credit within your means, and that you can afford to pay it back.
You’ll need to put down a minimum of 5% of the value down as a deposit when buying a house. The larger your deposit, the smaller your loan, typically giving you access to a lower interest rate. A lower interest rate will cost you less over the term of the mortgage and make repayments more manageable.
Taking out a loan to fund your deposit is risky and unfavourable to lenders. Government schemes such as the Help to Buy equity loan and the Lifetime ISA are designed to support first time buyers in the challenge of raising a deposit. No matter the source, you’ll need to declare where the funds for your deposit came from.
Lenders will use your income and outgoings to assess if the mortgage you are applying for is affordable, including a stress-test to ensure that the mortgage remains affordable after a rise in interest rates or a life event such as having a baby.
These assessments will limit the amount of money you can borrow. If you are employed, for example in FY1/DFT, your income is evidenced by 3 months of payslips and a signed copy of your contract. If you are self employed, for example as a dental associate or locum GP, you’ll need to demonstrate both your past and future earnings. Business accounts and details of your tax return such as an SA302, and a letter from your principle, show past earnings.
Accounts from the practice and the projection of your earnings from your accountant verify your future earnings. These accounts will need to cover the last 2-3 years as a minimum, potentially delaying access to mortgages for self employed individuals. This insight could influence any career moves you have planned on the run up to buying a house. But not all hope is lost - some specialist lenders will take into consideration the benefits of your chosen career, including good earning potential and job security, to provide better mortgage deals.
What can I do now to prepare?Work out your budget
It’s important to take stock of your outgoings when preparing to buy a house so that you can assess what you can afford to borrow. Are there areas where you can cut back on your spending?
Clear outstanding debts
Your disposable income should be used to pay off outstanding debts as a priority. This will improve your credit rating and reduce your outgoings, meaning one less thing to pay for once you’re a homeowner.
Work on your credit score
Using a credit scoring platform such as ClearScore will give you an insight into your credit report. Your report is summarised as a score which you can keep track of and work to improve. The app will assess where the weaknesses lie in your report, allowing you to identify errors on your file and actions you can take to improve your score.
Get a deposit together
Build savings into your budget by diverting part of your disposable income away from expenditure and into savings. It’s more effective to save money when you put it aside at the start of the month than to put away what’s left on the day before payday. Do your research by comparing the best savings vehicles for your deposit, such as savings accounts and ISAs.
See how much you can lend
Unless you are sitting on hundreds of thousands of pounds in cash, you will likely have to take out a mortgage to purchase your first property. You’ll typically be able to lend a multiple of your income, for example four times your salary.
Make sure you do your homework on the costs you will incur such as Stamp Duty (LBTT in Scotland and LTT in Wales), Solicitor costs, removal costs and factor this in when calculating your budget
Work life balance is an important topic here at The Next Step, and as all-consuming as work can be, it’s important to take a holistic view. Don’t sacrifice your life goals for your work goals!
Take stock of your situation and assess if you need more flexibility at work so you can make your dreams outside of work come true, too. Other articles in this series, including moving abroad and taking a gap year, address how work can sometimes get in the way of life events that are important to you - and buying a house is no exception.