Many would argue that the pandemic was restricting and limited what you could and could not do. We couldn’t go on holiday, the majority of us were forced to work from home and in some cases, people were made redundant or experienced reduced hours which forced us to reassess our financial situations.
However, to many this was an opportunity to put their spare money to work, whether it be looking at improving their existing house and remortgaging, or buying their first house. Working from home many were also looking for houses with a spare bedroom to have a dedicated office space.
We have been renting for a number of years and every spare pound has been put into the pot to save for our first house. We have three children and 3 or 4 bedroom houses in our area. The pandemic has presented us with the ability to save more money as we are travelling less and spending less on petrol and we haven’t been able to have a holiday. Saving for the deposit on our first home was now a bit more achievable. We embarked on a journey to obtain our first mortgage.
How much can you borrow?
Typically, mortgage lenders will allow you to borrow between 4 and 5 times your individual income, or 3 to 4 times your joint income if you’re applying for a mortgage with someone else/spouse.
Obviously each lender has their own criteria for the maximum amount you can borrow and one big factor is affordability i.e. if you already have a lot of debt on loans or credit cards, your maximum mortgage may be lower. It’s important to
“House poor” – How much should I pay per month?
This topic came up quite often when we were looking for mortgages. You should firstly think about how much you want to pay per month on your new mortgage. Does it exceed your monthly current rent amount? One metric to use is if your mortgage repayments are greater than 30% of your take-home income (income after tax), you may find yourself “house poor,” where you own a house but can’t afford to build up your savings, save for a holiday, buy a new car, for example.
How much should you consider for your deposit?
The bigger your deposit, the less you have to borrow and the lower the loan-to-value (LTV) ratio, which means you’ll qualify for lower mortgage rates. The LTV ratio is the proportion you borrow compared to the property price. For example, a £10,000 deposit on a £100,000 home is 10%, so the LTV ratio is 90%.
Repayment or interest-only?
With this type of mortgage your monthly payments are made up of interest and a portion of the amount borrowed. As you pay off the debt and the interest goes down, more and more of your monthly payments goes towards clearing your mortgage – until the whole loan is paid off.
Overall your monthly mortgage payments are lower because they only cover the interest on the loan. However, mortgage lenders will only let you get this type of mortgage if you have another way to pay off the loan, such as savings, investments, or other assets.
We learned very quickly that first time buyers are unlikely to be offered an interest only mortgage, but many buy to let mortgages are of the interest only variety.
Fixed or variable rate?
our monthly payments are the same for the duration of the mortgage deal. On the one hand, you won’t benefit if interest rates fall, but on the flip-side your payments will not go up if the interest rates rise
Discount and tracker mortgages – these can go up and down, usually in line with changes to the Bank of England base rate. More information on this is available here
Help to buy? 95% Mortgages?
Before picking a mortgage or a home, check to see if you can take advantage of Help to Buy (Shared Ownership and Equity Loan), Right to Buy, Starter Home Schemes or Shared Equity Schemes.
95% mortgages are another option. These are based on the affordability criteria above, but the biggest feature of these mortgages are that under this scheme instead of providing the usual 10-15% deposit up front you are only required to provide 5%. If this is something that is of interest to you do not delay as they are only available until December 2022.
I hope this give you a good insight into our attempts to find more about mortgages. Are you looking to buy a home yourself, in the wake of the pandemic? Please comment below.