When you’re renting, the process of saving up and getting ready to buy a home can seem like a huge financial mountain to climb.
But, for many would-be first-time buyers, owning a home may not be as difficult as they think.
Unconvinced? Let’s take a look at the key questions to ask yourself when it comes to buying a home - what can I afford?
How many times my salary can I borrow?
The usual way to work out how much a bank will lend is to multiply your household salary by 4.5. This is known as the loan-to-income ratio. But, it is only a guide.
Many lenders use larger multipliers when they offer people mortgages, but this will depend on your personal circumstances, including your credit rating and personal expenditure.
Can I afford a mortgage?
Asking yourself, ‘Can I afford a mortgage?’ Many assume the answer is no - however this isn’t always the case.
Owning a home is cheaper than renting a property in most areas of the UK. Therefore, if you can afford to pay your rent, it’s likely you can afford a mortgage too.
Based on monthly costs alone, mortgage payments are likely to be lower or the same as your rental payments. This is because while rents has been rising in the UK, mortgage interest rates have hit almost rock bottom.
This comparison only works on a monthly basis! Buying a home is much more expensive at the outset. Renters need only find a deposit and the first month’s rent, but buyers must put down a cash deposit of between 5% and 25%.
Speaking to reputable, professional mortgage lenders will help you gain some insight into what you can afford to borrow before you buy a property.
Does my credit score matter?
Your credit score is hugely important when it comes to increasing your chances of getting a mortgage.
It influences how much a bank or building society will lend you, and the interest rate that will be charged. The better someone’s credit score, the better the deal they will be offered.
If you have a good score you may be readier to buy your first home than you think and can borrow more than you realise, plus your monthly mortgage repayments could be lower than you expect.
If you don’t have a good credit rating, there is a new way to improve it. Several services have recently started up that enable tenants to have their rent recognised and the regular payments added to their credit profile.
What size deposit will I need?
Saving for a house deposit can be tricky, but it helps to know what you’re up against. The minimum required by any lender is 5% of the home’s purchase price. These are called 95% loan-to-value or LTV mortgages. But beware; the higher the LTV, the more money you will pay to service the mortgage in the long run.
Most experts agree that the ideal deposit is 20% or 25%. At this percentage, first-time buyers get access to the best deals and pay the least interest. But, it can be hard to save up such a large amount of money.
If you are buying a £250,000 home then a 5% deposit would be £12,500 compared to a 20% deposit of £50,000, for example.
Recent research revealed that 95% LTV borrowers pay 50% more interest over the term of the loan than those with a 75% LTV mortgage. Also, those putting down a 25% deposit gain access to six times as many mortgage products.
Can I afford to buy a house in my twenties?
The answer is yes, but it takes discipline and budgeting. Denying yourself both the little and large luxuries for a few years will be worth it in the end. Or look at it this way; if a couple were to save £200 a month each for three years then they’d save up £14,400.
The government operates several schemes to help people buy a home, including:
Help to Buy
One way to save up a deposit even faster is to stash your cash into a Help to Buy ISA. These are available via banks and building societies and are topped up by the government to help first time buyers save up.
Help to Buy ISAs can be opened with a £1,200 deposit and savers are able to pay monthly instalments into them worth up to £3,000 a year or £9,000 in total. Depending on how much you save, the government will top your savings up by up to £3,000, but only if you use it buy a home.
The government also runs a more complex version of the Help to Buy ISA called a Lifetime ISA which also tops up savers’ cash but can be used both to buy a home and for general savings.
Shared ownership enables buyers to purchase part of a property’s value and rent the remainder, which they then later ‘staircase’ to full ownership.
Help to Buy equity loan
The Help to Buy equity loan lends up to 20% of a property’s value as a deposit so that first-time buyers can access the best and most affordable mortgage deals. After five years, this equity loan must be paid back.
Can I afford to buy a home on my own?
Buying a home is more difficult on your own because you alone must find the deposit, and because of the income multiplier system that lenders use. This means the amount that can be borrowed by a single person will be less than a couple.
But, a single person may not need such a big property as a couple and therefore the cost of the home will be less.
Despite this, have you considered all the extra costs associated with getting on the property ladder?
- Council tax
- Stamp duty tax
- Surveyor fees
- Solicitor fees
- Monthly payments e.g. maintenance
Where can I afford to buy a home?
Some people stay in their local area when buying a home, sticking to what they know and staying close to family and friends.
But, house prices vary hugely in many areas and cities and good research can uncover more affordable areas.
Give yourself a better chance of a smoother house sale when buying either a home. Order one of Phil Spencer’s Property Reports to arm yourself with the right information to help with every aspect of the purchase.