Secure a Mortgage as a First Time Buyer
As a first time buyer with a low credit rating and limited savings, securing a mortgage can be tricky. Having a good credit rating and a large deposit is key to any successful application, but unfortunately these are two blessings the majority of young buyers cannot count as their own. Credit scores must be built up over time through credit purchases and repayments, obligations most young adults are keen to avoid. Further, with the average UK house price sitting around the £165,000 mark, a 10% deposit necessitates a monumental saving effort on the part of the applicant.
Yet all hope is not lost and certain routes, though narrow, can still lead to home ownership. It must always be remembered that there is no blacklist on credit, and if you shop around with access to the correct information, good deals are still available. Here are some key explanations and top tips for securing a mortgage as a first time buyer, listen up:
Before you begin: considerations, checks and silly mistakes
Before applying for a mortgage it is important to consider every stage of the application, and every cost that may be accrued in the process. If you apply for a clearly unaffordable mortgage and are rejected, the subsequent ‘failed application’ marker on your credit report will undermine any application attempts within a six year period. Worse still, being accepted and failing to keep up with repayments will dramatically compound this effect.
Credit reports can and should be requested from any of the three major credit agencies, Experian, Equifax or CallCredit, in order to work out what is feasible for you. Any post application tinkering will cause unnecessary delay and a reassessment of your position, so make sure you have all the correct information and have accounted for extra costs before you begin. Failing to account for stamp duty, legal fees, surveying costs and building insurance could seriously jeopardise your long term aspirations.
Oversights in your application will also ruin chances of success. It is important to ensure you are enrolled in the electorate, and that any credit cards no longer in use are closed. You must be able to provide payslips from your employer, and it is even wise to put off any career moves until the application has been processed and judgement of your ability to sustain payments has passed. Paying off any other debts before applying will also make a large difference as it demonstrates exactly the type of fiscal responsibility lenders are looking for.
With this in mind you can consider the two key components of a successful application; your credit rating and deposit.
Your credit rating is a measure of your fiscal responsibility and is determined by your propensity to borrow (and repay) debts throughout your life. Credit rating agencies (CRA’s) compile an individual’s payment history, debts, credit type mix, frequency of applications, and the length of their credit history to produce a representative figure. In addition to these, county court judgements, bankruptcies and house repossessions are taken into account. Any credit based misdemeanours stay on record for 6 years after you settle a loan or close a card.
While most first time buyers will not be affected by the latter group of considerations, a lack of credit history can be just as damaging. Lenders are unable to determine your aptitude for debt repayment, and thus require a much larger deposit (which first timers are unable to produce).
Improve your rating
In a world run on credit it is vital to ensure your access to it is uninhibited. Having a bad rating is a disadvantage but it is not irreversible. In the short term cancelling unused cards, getting on the electoral register and staggering/halting credit applications will stem a downward flow. In the longer term it may be advisable to get a credit card and use it responsibly, quick repayments will be noted and appreciated by the agencies. Credit builder cards also provide a good medium for improvement, establishing small scale debt repayment and raising your overall score.
The single biggest factor determining the success of an application remains the size of the initial deposit put down against the house. A large deposit is vital for access to a full range of mortgage deals, with the cheapest mortgage options still exclusive to those who can stump up around 40% of the property’s value. For all but the most parsimonious or aristocratic a £66,000 deposit is unrealistic. In areas with higher prices such as London and the South East, the idea is laughable.
Things are, however, looking better for the 5%, 10% and 15% markets. Government aided schemes and a greater awareness in the lending sector of unrealistic deposit levels has led many banks and building societies to reassess their application conditions. Despite this, saving for a larger deposit still reigns as the most effective means to securing the best mortgage conditions and rates. But what is the most effective method of saving, particularly with interest rates at their current low levels?
Many first time buyers need to save for years to afford their new home. In the short term regular savings accounts lock in cash for the best rate of interest but, while these are easily created in tandem with a current account, they are not effective over large periods of time. More effective are cash individual savings accounts (ISA’s), which are tax free up to £5,760, and fixed rate bonds, which are usually fixed term and fixed value. Be careful though, in light of the current interest levels it is more important than ever to shop around. Indeed, you may find that some current accounts can yield better returns than savings accounts, though this tends to only be to a certain limit (around £20,000).
It may seem financially counterproductive to approach a mortgage broker, but for those seeking subprime or adverse credit mortgages, specialists can be the most effective tool to realise success. A broker will look beyond the rates and compare overall costs, deal with much of the paperwork, and often take their commission from the lender themselves (leaving you in the clear). Remember to always check for FSA credentials before entering into negotiations; if they are offering ‘advice’ (you must specify you wish for this over ‘information’), they are obliged to find you the best possible deal, and in the process guarantee your rights.
Buying a house with someone else can be a very effective way of ensuring an applications success, particularly if their rating is superior to your own. Reaching the required deposit level becomes much easier, and your own credit history diminishes in importance. Naturally it is wise to be wary of possible future developments, and work out a contingency plan in advance should either partner wish to exit the arrangement.
Help to Buy/New Buy
The government led ‘Help to buy’ and ‘New Buy’ schemes provide opportunities for 5% deposit mortgages. These three year schemes permit buyers to purchase properties up to £600,000, and while not the focus of this article, deserve due attention when shopping around.
Looking for a mortgage, particularly the right mortgage can quickly become a quagmire of closed doors for first time buyers. Actions that will improve your position will often take time to come into effect, and patience is always advised. Build up your deposit, take steps to build a respectable credit score and look for schemes, both state and private, that are intended to make the process easier.
Happy House Hunting.