With increased living costs and a trend of multiple home ownership – not to mention the ever-present mantra that ‘getting onto the property ladder is increasingly difficult’ – you may want to start thinking about preparing to buy your first home sooner rather than later.
So, what do you need to know (and do) when planning for this milestone? Find out more below.
What is a mortgage?
Unless you have access to a large amount of cash, you’ll probably need to use a mortgage to buy your first home. There are two main elements to consider when buying a house this way – the deposit and the mortgage itself.
A mortgage deposit is the amount of money you pay upfront when buying a house. You pay the rest of the property price using a mortgage, which is money you borrow from a lender.
The 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 you owe.
Your deposit added to your mortgage makes up the total house price. For example, 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 this example, your mortgage would form 88% of the purchase price. This is known as the loan-to-value (LTV) ratio.
The loan-to-value (LTV) ratio
Usually, the lower the LTV ratio, the better interest rate you’ll get on your mortgage. This is because you’ll pay less money back to your lender over the course of the mortgage term. So, the more deposit you can put down, the better.
You’ll usually need a minimum of 10% for your 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.
With all of this in mind, you can start to see the impact that the size of your deposit has on the type of mortgage deals you’ll be offered. Saving for a house can feel like a real challenge, which is why good financial planning really pays off in the long-run – pardon the pun!
Applying for a mortgage
In a recent video recorded by The Next Step, Dr Kiran Morjaria confessed:
"When I bought my house, there were so many things I didn’t know that I wish I knew sooner – the biggest being the fact that it can be easier to get a mortgage when you’re in training compared to being a locum.
"This is because when you’re training you have a regular income and a contract, so the lender knows how much you earn. As a locum doctor, you don’t necessarily have a contract, so it can become difficult to predict how much you’re earning."
Affordability is a key part of applying for a mortgage, as your lender will only offer you a loan if they think you can pay it back. To assess your affordability, lenders will look at your income, expenditure and credit rating.
The amount you earn and the stability of your salary is crucial when it comes to applying for a mortgage. Lenders need to see that you have enough regular income to cover your mortgage repayments after your other 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.
To calculate your ability to pay back a mortgage, 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.
To put it simply, a credit score is a three-digit number that rates your credit ‘worthiness’. You’re considered more reliable at borrowing and repaying money if your number is high.
Your credit score rating can range from ‘very poor’ to ‘excellent’, and there are things you can do to improve your credit score.
A common myth is that not borrowing money will give you a good credit score, when actually, this just means that there is no history of you repaying any loans. As such, there is no evidence that you can responsibly borrow money.
Think beyond your deposit and mortgage
Finally, it’s important to be aware that there are other fees to watch out for when buying a house. Things like stamp duty, valuation fees, surveys, solicitors fees and insurance costs can easily be forgotten, overlooked, or simply come out of the blue.
That’s why it’s important to build a buffer into the money you save. This will prevent you from being caught short after paying your deposit.
Securing a mortgage for your first home can be daunting, but planning and preparing can help to ease some of the nervousness. Everyone’s situation is different, which is why it can be a good idea to seek advice from a Specialist Financial Adviser.
Thinking about applying for a mortgage?
If you’re thinking about applying for a mortgage, check out our ‘Guide to mortgages’ webinars. Tailored to dental and medical graduates, we’ll walk you through the must-knows to give you the confidence you need to take this next step.