Calculate Your Mortgage Qualification Based on Income
In this calculator you can inclue investments, annuities, alimony, government benefit payments in the other income sources. Be sure to select the correct frequency for your payments to calculate the correct annual income.
- daily: 365 times per year
- weekly: 52 times per year
- biweekly: 26 times per year
- semi-monthly: 24 times per year
- monthly: 12 times per year
- bimonthly: 6 times per year
- quarterly: 4 times per year
- semi-annually: 2 times per year
- annually: 1 time per year
This calculator defaults to presuming a single income earner. If your household has 2 income earners then you can expand the "spouse or partner" section to enter their income information. We calculate the mortgage qualification ranges using the following maths:
|Your Mortgage Qualification||Low End||High End|
|Single Income Earner||3X annual income||4.5X annual income|
|Two Income Earners||3X higher + 1X lower earner||3X both incomes|
* If one earner makes the vast majority of the income to where the two income limit is lower than the single income limit, we will return the single income limit below. We compare both low end and high end limits for each scenario and then publish whichever option is higher for each.
General Guideline: 3X to 4.5X Annual Income
Lenders typically like to see borrowers put at least 5% down on their property. When borrowers put down less than 5% they are typically charged a significantly higher interest rate to offset the additional risk the lender is taking.
Borrowers can typically borrow from 3 to 4.5 times their annual income. Lenders may allow borrowers to borrow up to 5 times their annual income, though regulatory restrictions prohibit lenders from having more than 15% of their loans above 4.5 times annual income.
How Are Joint Applications Treated?
For joint applicants the limit is typically slightly lower with them either offering a full multiple on the first income and then adding in the second income, or lowering the multiplier across all incomes down to 3. Examples are shown in the table below.
|Income 1||Income 2||Multiple||Loan Limit|
|£30,000||£20,000||3X 1st + 2nd||£110,000|
The reason why limits are lower for joint incomes is it is more likely someone will either get laid off or want to voluntarily quit to start a family or go back to school.
Bank of England Limitations
In the wake of the 2008 - 2009 financial crisis the Bank of England implemented mortgage affordability testing rules which aimed to stop banks from offering risky loans where the borrower would be unable to repay the reversion rate on the loan if the rate increased by 3%.
In June of 2022 the Bank of England pressed ahead with plans to scrap this mortgage affordability test, though borrowers who are stretched should consider what happens to their finances if rates rise.
How Much Can I Borrow? Detailed Considerations
Lenders presume borrowers spend about 3% to 5% of their outstanding debts on servicing costs. In our above calculation for individuals we subtract £3 for each £1 of debt for individuals and £2.4 for each £1 of debt for couples with multiple income providers.
In addition to your income level, lenders consider recent financial troubles, missed payments, and general living expenses when they determine suitability and lending limits.
- Loan-to-value: Lenders specify different limits for how much they are willing to loan for each type of loan product on offer. Typically LTV is the percent of the home's value not covered by your downpayment. So if you deposit 25% on a home that would mean the LTV is 75%.
- Pretax Income: basic income, pension, finacial support from ex-spouses & any other earnings like overtime, sales commissions or workplace bonuses. Some lenders may count overtime income in full while others may count it at a reduced rate of 50%. Self-employed people need to show additional documentation including their bank statements, business accounts, as well as their recent income tax payments.
- Outgoing Expenses: debt service fees on credit cards and other loans, insurance policies, council tax, vehicle expenses, utilities, and other basic living costs like recreation and childcare. Beyond the headline numbers, some lenders may lower your total limit for each additional child in the family. If your numbers sound off they may ask to see recent bank statements to authenticate them.
- Anticipated Personal Living Changes: risk of job loss, illness, and major life changes like having a child or taking a career break to obtain further education.
- Anticipated Market Condition Changes: lenders want to ensure you will still be able to make payments if interest rates rise in-line with typical historical shifts.
Money Advice Service offers an affordability calculator which takes into account your outgoings. In general lenders do not like more than 60% of a person's income going toward their mortgage and monthly outgoings. Nationwide also offers a similar calcualator, though it has quite a few steps in it and collects some personal data like your birthday.
Cleaning Up Your Creidt Profile
- Be sure you check your credit report 6 months in advance of purchase consideration so you can clear up any outstanding issues like missed payments or identity theft.
- If you have significant credit card debt lenders will presume you need to spend 3% to 5% of the balance to service the debt each month.
- If you have multiple credit cards with outstanding balances it is best to try to pay down your small debts and the cards with a lower balance (unless they are at a 0% APR or other special rate) in order to make your overall credit profile cleaner.
- If you decide to cancel unused credit cards or cards that are paid off be sure to keep at least one old card so you show a long opened account which is currently in good standing.
- Do not apply for new credit cards or other forms of credit ahead of getting a mortgage as changes to your credit utilization, limits and profile may cause your lender concern.
Most borrowers typically put at least 10% down on a property. Help to Buy schemes can help people with lower incomes and limited savings qualify for mortgages.
Estimate Your Monthly Mortgage Payments
In addition to using the above affordability calculator, you may want to check out our monthly mortgage repayment calculator to estimate your monthly payments for various loan scenarios.
The following calculator automatically updates payment amounts whenever you change any loan input, so if you adjust the interest rate, amount borrowed or loan term you will automatically see the new monthly fixed-rate and interest-only repayments.
Mortgage Calculator UK
Home Price - £
Deposit - £
Mortgage Amount - £
Interest Rate - %
Term - Years
Full Monthly Payment
Total Interest Payable
Total Loan Payments
We also offer a calculator with amortisation schedules for changing loan rates, so you can see your initial loan repayments and figure out how they might change if interest rates rise.
Mortgage Affordability & How to Qualify for a Home Loan
Purchasing a home is one of the most costly transactions people make. It entails ample financial preparation and commitment to make timely payments. Thus, long before you submit your mortgage application, it’s crucial to assess your financial eligibility and how much you can afford.
What does it take to qualify for a mortgage? Our guide will discuss vital factors that determine your mortgage affordability. We’ll also talk about the importance of maintaining a good credit score and how major credit issues hinder chances of favourable mortgage rates. We’ll give a rundown on the required debt-to-income ratio, deposit, and primary costs you must consider before taking a mortgage. If you’re looking for effective government schemes, we also included a section on Help to Buy mortgage assistance programs.
Assessing Your Mortgage Eligibility
After the 2008 UK financial crisis, lenders began employing strict measures before approving mortgages. By 2014, the Financial Conduct Authority (FCA) required lenders to perform thorough affordability assessments before granting loans. The evaluation considers your personal and living expenses, as well as the level of monthly payments you can afford. It includes a stress test which simulates how consistently you can pay your mortgage under drastic financial changes. To determine the loan amount, lenders specifically consider your credit score and history, debt-to-income ratio (DTI), size of the deposit, and the price of the property you are buying.
Expect lenders to scrutinise your employment records, how long you’ve held your current job, and your present address. They also check the length and history of your bank accounts, together with other debt obligations you must fulfil. To do this, they review your credit file also known as your credit report, which is used to determine your credit score. This gives insight into your ability to make mortgage payments. Ultimately, your records must prove you’re a reliable debtor who always pays on time.
Income – This includes your basic annual income and other sources of funds, such as overtime salary, guaranteed bonus payments, commissions, or earnings from freelance work. It also factors in income from investments and pensions, as well as financial maintenance and child support from an ex-spouse. You must prove your income by submitting the necessary payslips and bank statements.
Outgoing Payments and Total Debts – Lenders closely review your regular monthly bills. This factors in everything from rent, utilities, mobile phone bills, credit card debt, student loans, living expenses, etc. If your account balances are reduced to zero before pay day, it’s considered a red flag. Worse, if your account is in overdraft, the bank allows you to spend more money than you currently have. It’s best to avoid these situations to protect your credit record. To be safe, get your finances in order at least 6 months prior to applying for a mortgage.
Stress Test: Changes That Impact Your Finances – This involves simulating circumstances that obstruct your finances. Rising interest rates and higher monthly payments will significantly affect your ability to repay. It tests situations like job loss, inability to work because of illness, or if your spouse lost their job. It tests for drastic life changes, such as having a baby or taking a break from your career.
To protect yourself from unexpected financial problems, it’s important to build large savings when you can. If you experience redundancy or illness, you’ll have a reliable financial safety net. This should tide you over till you can recover your finances. It ensures you can afford timely mortgage payments to avoid defaulting on your loan.
To prepare for your mortgage application, be sure to gather the following documents:
- Payslips from the last 3 months
- Bank statements from the last 6 months – 3 years
- Driver’s license or passport for identification
- P60 form from your employer
- Receipts of utility bills
- SA203 if you’re self-employed or if you have other income sources
If you are self-employed, expect lenders to ask for additional documentation. They require proof of income, such as a statement from your accountant covering 2 to 3 years of your accounts.
Mortgage Agreement in Principle
Besides taking an official mortgage application, don’t forget to apply for a mortgage agreement in principle (AIP). Also called a mortgage promise or a decision principle, it’s a document from a lender stating the specific amount they are willing to grant on your mortgage. While an AIP does not obligate a lender, it gives you a good idea how much you can borrow. Once you know the precise amount, you can start searching for homes that are within that price range.
AIPs only require a soft search on your credit file, which means it does not impact your credit score. Meanwhile, taking an official mortgage application entails a hard search on your credit file. Many real estate agents and sellers usually ask for an AIP. They consider it a sign of a serious homebuyer.
How much can you borrow? Mortgage lenders in the U.K. generally lend between 3 to 4.5 times an individual’s annual income. For instance, if your annual income is £50,000, that means a lender may grant you around £150,000 to £225,000 for a mortgage.
You can use the above calculator to estimate how much you can borrow based on your salary. You can also input your spouse’s income if you intend to obtain a joint application for the mortgage. Let’s presume you and your spouse have a combined total annual salary of £102,200. See the example below.
|Income||Your Income||Your Partner’s Income|
|Regular Annual Salary||£40,000||£40,000|
|Additional Income (monthly)||£600||n/a|
|Total Monthly Salary||£4,558.33||£3,958.33|
|Total Annual Salary||£54,700||£47,500|
Total Combined Monthly Salary: £8,516.67
Total Combine Annual Salary: £102,200
|Your Mortgage Qualification||Low End||High End|
Based on our calculator, if you apply for a mortgage with your spouse, a lender may grant you a mortgage amount between £211,600 to £306,600. Note that this not an official estimate. The actual amount will still depend on your affordability assessment, which reviews your credit records.
The Importance of Credit Scores for Mortgage Applications
Credit scores are a rating system that measures your likelihood to repay debts. It suggests how much risk you impose on lenders based on your credit history. A higher credit score indicates you are a reliable borrower who diligently pays debts on time. It also suggests you can manage your debts while being able to save. Applicants with higher credit scores tend to receive more favourable mortgage rates and attractive deals. On the other hand, homebuyers with poor credit scores usually receive higher mortgage rates. They may also be required to provide a larger deposit to offset the credit risk.
To assess your financial records, lenders usually use three major credit reference agencies (CRA). These are Experian, Equifax, and TransUnion. While there are other CRAs, these are most preferred by lenders across the UK. Out of the three, Equifax is the largest credit reference agency used by most lending institutions.
Credit scores vary per individual depending on the reference agency. Since lenders use different CRAs, the scoring method might seem confusing. Thus, it’s important to orient yourself with each credit rating system. For instance, if you have a credit score of 650, Equifax and TransUnion will classify your score as high. However, if your lender uses Experian, a credit score of 650 is considered a poor rating. The difference in rating is due to variations in credit score ranges and how each CRA organises their scoring system.
UK Experian credit scores range between 0 to 999, with good credit ratings from 881 to 960. If you’re aiming for an excellent rating, your credit score must fall between 961 to 999. As for Equifax, the scoring system starts from 0 to 700, with a good credit rating from 420 to 465. To get an excellent Equifax rating, your credit score should be between 466 to 700. Meanwhile, credit scores for TransUnion range from 0 to 710, with a good credit rating from 604 to 627. If you want an excellent TransUnion rating, your credit score must fall between 628 to 710.
To distinguish different CRA ratings between major credit agencies, refer to the chart below:
|Excellent||961 – 999||466 – 700||628 – 710|
|Good||881 – 960||420 – 465||604 – 627|
|Fair||721 – 880||380 – 419||566 – 603|
Experrian provides a detailed break down of how credit score ratings affect mortgage rates:
|Experian Credit Rating||Impact on Mortgage Rates|
|Excellent, 961 – 999||Borrowers in line for the best mortgage deals with lower interest rates.|
|Good, 881 – 960||Borrowers likely to secure the best mortgage rates and deals.|
|Fair, 721 – 880||Borrowers who could secure good mortgage deals with reasonable rates.|
|Poor, 561 – 720||Borrowers who may qualify for mortgage deals but with high rates.|
|Very Poor, 0 – 560||Borrowers likely declined by lenders, usually gets mortgages with high rates.|
Review Your Credit Report
Before applying for any type of loan or credit, be sure to review your credit report. This will give you a precise idea of your rating and how to improve your credit score. All CRAs are obligated to provide consumers with a statutory credit report. You may access a free copy of your credit file on their website or request your CRA in writing. Experian and Equifax also offer full credit checking services which include a full credit report. Sometimes, CRAs might ask for more information before they can send your file. For more information on how to secure a copy of your credit report, visit the Information Commissioners Office page.
Here are several steps to improve and maintain your credit score:
- Pay your bills on time. – This guarantees you won’t have missed payments that negatively affect your credit score. Since credit history is an important factor for creditworthiness, you must avoid late payments at all costs.
- Pay off large balances. – You might have a high-interest credit card debt worth over £5,000. Make sure to prioritize eliminating this debt. Having large balances reduces your chances of obtaining a mortgage. High-interest credits card debts also drain away your savings the longer you don’t pay them down.
- Maintain a low credit balance. – Do not exceed your credit limits. As much as possible, try to keep your balances at 25% or less of your limit. Lower balances improve your chances of mortgage approval.
- Make sure to register to vote. – Apart from your credit history, credit reference agencies also monitor your electoral roll. This shows how long you’ve been registered to vote at your current address. The electoral register also helps companies confirm your identity and where you reside.
- Avoid applying for credit 6 months before your mortgage application. – A hard search is recorded on your credit report each time you apply for credit. Too many hard searches within a short span of time is a sign you might be dependent on credit. The new credit purchases will also increase your credit card balance. This increases you credit utilization ratio, which is how much you currently owe divided by your credit limit. Lenders will likely regard it as negative financial behaviour.
How Bankruptcy Affects Your Credit Report
In certain cases, consumers are forced to file for bankruptcy if they cannot keep up with debt obligations. When this occurs, the bankruptcy record stays for 6 years in your credit file. If you’re missing mortgage payments, it will certainly impact your credit score negatively. Your lender might file a County Court Judgment (CCJ) against you. This will obligate you to pay off your debt under a deadline as ruled by court.
Depending on your situation, it may also take longer until you’re discharged of debts. This will make it harder to obtain new credit or open a new bank account. The magnitude of your bankruptcy will have a negative impact on your creditworthiness. During this time, you might find it difficult to secure renting accommodations, insurance, or even take direct debit (since you can’t open a credit card). However, over time, as you pay off outstanding balances and significantly reduce your debts, you can recover your credit score. Just be patient because it will certainly take time to rebuild your finances during bankruptcy.
If you haven’t built any credit, you must start doing so now. You can build credit by applying for a credit card, paying credit card bills on time, and maintaining a low balance. People who have poor credit scores may simply be because of their age. They have short credit histories which logically results in low credit ratings.
Major banks and mortgage lenders require evidence of responsible financial behaviour. Likewise, homebuyers with pristine credit histories have better chances of securing mortgage deals at the best rates. Though it’s possible to obtain a loan without substantial credit history, it’s a recipe for disaster. You will likely receive subprime mortgage deals with high rates at unfavourable terms.
Understanding Debt-to-Income Ratio
Besides your credit score and financial history, lenders also evaluate your debt-to-income ratio (DTI) to determine mortgage affordability. Debt-to-income ratio is a risk indicator that measures your total monthly debts in relation to your monthly gross income. Expressed in percentage, this shows a picture of how much debts you owe compared to how much money you have. It also has a significant impact on your credit score.
Ideally, the less you spend, the more money you’ll be able to save. This is vital if you’ll commit to long-term mortgage payments. Thus, prospective homebuyers with low debt-to-income ratios have better chances of obtaining a mortgage. This suggests you have enough money to cover monthly payments, even during emergencies. People with lower debt-to-income ratio tend to have good credit scores and secure better mortgage deals at affordable rates.
There are two types of debt-to-income ratio (DTI): the front-end DTI and the back-end DTI. The front-end DTI represents your housing-related expenses compared to your gross monthly income. This includes your mortgage payments, mortgage insurance, property taxes, etc.
On the other hand, the back-end DTI accounts for your housing-related expenses along with all your other debts. This includes car loans, student loans, credit card debts, etc. Front-end DTI is seldom used by lenders for mortgage applications. They commonly refer to the back-end DTI to review a fuller picture of an applicant’s finances.
What is a Good Debt-to-Income Ratio?
Most UK lenders consider 20% to 30% a low-risk range. Borrowers within this limit typically receive more favourable mortgage rates. Some lenders do not impose a maximum limit (they assess applications on an individual basis) and may accept a debt-to-income ratio of 45% to 50%. If your DTI ratio is over 50%, you will normally be advised to improve it.
A high debt-to-income ratio indicates you might be over-leveraged. This means you are not in a good position to take on more debt. It will also negatively impact your credit rating, which suggests you have more debts or large balances that need to be paid. Thus, you might be declined for a mortgage.
However, there are lenders who are willing to extend credit, even if you have a DTI ratio over 50%. Some lenders are prepared to offer financing to people with higher credit risk. However, beware. You will likely receive more unfavourable mortgage rates or subprime deals. It’s best to improve your debt-to-income ratio and credit score before purchasing a home.
To understand how debt-to-income ratio impacts mortgage approval, refer to the table below. This presumes all other parts of your application such as income, credit score, and credit history, have a good record.
|Debt-to-income Ratio||Impact on Mortgage Approval|
|20%||Highly favourable, most lenders will accept your application.|
|30%||Good chances of approval. Only a handful of lenders have a max. |
DTI limit of 30%.
|40%||Lesser lenders willing to approve. But with a good credit record, |
you can get accepted.
|50%||Lenders are more cautious of extending credit. Expect greater scrutiny.|
|60% – 80%||Fewer lenders willing to approve the mortgage. Expect greater scrutiny.|
|90%||Very high risk, most lenders are wary of extending credit. Likely declined. |
Some lenders will assess your case with other affordability factors.
|100%||Very high risk, most lenders are wary of extending credit. Mostly declined. |
Some lenders will assess your case with other affordability factors.
Note that the required debt-to-income ratio varies per lender and type of mortgage. To improve debt-to-income ratio, borrowers can apply together with their spouse. However, if your spouse has a low credit score, with a record of missed payments, and large credit card balances, this may negatively impact your affordability assessment. In which case, consider applying individually to secure your mortgage.
Anticipate Mortgage Costs
Saving a significant amount takes time before you can afford a home. You must consider the home’s price, the amount of your deposit, and how much you can set aside for monthly mortgage payments.
How much do houses cost? As of December 2020, the average home price in the UK was £251,500. According to the UK House Price Index, this rose by 1.2% compared to the previous month, and grew by 8.5% compared to the previous year. The 8.5% year-on-year growth is the highest growth rate in the UK housing market since October 2014.
Depending on the location and the size of the property, home prices may be a lot higher. In January 2021, The Guardian reported that the average London house price exceeded the £500,000 mark for the first time. Since London is a densely populated city with business districts and prestigious universities, it typically has higher property prices. But in 2020, higher demand for housing further raised London home prices. The housing boom was caused by the temporary Stamp Duty break due to the COVID-19 crisis. Stamp Duty break was announced in July 2020 and due to end on March 31, 2021.
Stamp Duty Land Tax
Stamp duty land tax (SDLT), otherwise known as Stamp Duty, is a payment you make when you buy property or land beyond a certain price. By April 1, 2021, stamp duty should return to the original threshold for all residential property purchases valued over £125,000, with rates ranging from 2% to 12%. On the other hand, rates are 3% to 13% for second homes that are leased by property owners. But during the COVID-19 crisis, stamp duty threshold was raised to £500,000 to relieve costs on homeowners. Different policies are implemented throughout other UK countries, with some changing over time. In April 2018, Stamp Duty was replaced by the Welsh Revenue Authority with a Land Transaction Tax (LTT).
To know the specific rates by country, visit official Stamp Duty websites for England, Wales, Scotland, and Northern Ireland. Each country has slightly different restrictions, rates, and limits, with features that vary for first-time homebuyers and landlords. Note that rates vary based on the type of property and how it’s used.
Save Enough for a Deposit
Given the expensive price tag, you must prepare a significant deposit to secure your mortgage. If you’re a first-time homebuyer, you are required to pay at least a 5% deposit of the home’s price. For instance, if the property is priced at £260,000, your deposit should be £13,000. Note that first-time buyer mortgages allow a loan-to-value ratio (LTV) of 95%. However, mortgages that allow a high LTV typically offer higher mortgage rates. Homebuyers tend to pay a deposit of at least 10% to reduce their mortgage rate.
Saving up for a higher deposit will reduce your LTV. LTV compares how much you owe on the property versus the property’s appraised value. And the more you reduce your LTV, the lower your mortgage rate. Thus, if you want to obtain a more favourable deal, consider making a 15% deposit, which reduces your LTV to 85%. Offering a higher deposit also lowers your monthly mortgage payments. This will you save a substantial amount on your loan’s interest costs. Most lenders also prefer borrowers with a larger deposit because it reduces credit risk.
For instance, using the above calculator, let’s estimate your monthly mortgage payment. Suppose you’re purchasing a home priced at £250,000 and you saved a 5% deposit worth £12,500. Your mortgage’s initial rate is 2.29% APR for the first 5 years. Here’s how much your monthly mortgage payment will cost.
|Mortgage Amount (Capital)||£237,500|
|Initial interest Rate (APR)||2.29%|
|Mortgage Term||25 years|
|Full Monthly Payment (capital & interest)||£1,040.52|
Based on this calculation, your monthly mortgage payment will be £1,040.52. If you choose to make interest-only payments, it will only be £453.23 per month.
In the next example, let’s say you were able to save a 15% deposit worth £37,500 for the same home price. This reduces your interest rate to 2% APR. Here’s how much your monthly mortgage payment will cost.
|Mortgage Amount (Capital)||£212,500|
|Initial interest Rate (APR)||2%|
|Mortgage Term||25 years|
|Full Monthly Payment (capital & interest)||£930.99|
If you make a 15% deposit, your monthly payment will be £930.99, while your interest-only payment will be £405.52. By making a higher deposit, you can save £109.53 per month, which is equivalent to £1,314.36 per year. This example shows it’s worth saving for a larger deposit before taking a mortgage.
Budget for Mortgage Set-up Fees
Mortgage set-up fees typically include the product arrangement fee and booking fee. To determine the mortgage’s annual interest calculation, lenders include valuation fees and redemption fees. The valuation fees are often referred to as the overall cost for comparison. When you apply for a mortgage, all your fees must be specified under the key facts illustration. This is a document prepared by the lender to outline the details of your mortgage and what they recommend during the early stages of application.
Take note of the following fees when you apply for a mortgage:
- Booking fee – Usually costs between £75 to £250. It’s a fee charged for the mortgage application, which is paid whether your loan was accepted or not. It’s also called the reservation fee and is sometimes included into the arrangement fee.
- Arrangement fee – Typically costs between £500 to £2,000, which depends on your lender and the type of mortgage you obtained. It’s also referred to as the completion fee. Lenders usually allow borrowers to add it in the mortgage costs. But be wary of this. Adding the arrangement fee to your mortgage increases the amount you borrowed, which also increases your monthly payment. It’s best to pay the arrangement fee upfront if you can. You must also cover an electronic transfer fee of around £40. This pays for the cost of transferring the mortgage amount from the lender to the solicitor.
- Estate Agent fees – Note that this is only paid by the seller, not the buyer. It typically costs from 1% to 3% of the home’s sale price including VAT. It’s a payment for the estate agency’s services once the property is put on the market. It can be very costly especially for more expensive property.
- Valuation fee – While the price varies, valuation fees usually costs up to $350. This is normally paid by homebuyers to know the value of the property. It confirms that the home is equivalent to the sale price. This assures lenders they are securing a home for the right amount. In some cases, the lender might do the valuation for free.
- Surveyor fee – Property surveys for a homebuyer report generally cost between £450 to £1,000, depending on the value of the home. It checks for structural problems, subsidence that compromises the home’s foundation, and damp that causes mould. On the other hand, a building survey involves a more thorough inspection on the property’s condition and structure. You might need this if the building is a lot older, such as 50 years old. This usually costs around £600 to £1,500. But for relatively new homes in good condition, a survey that costs between £400 to £950 is usually enough.
- Conveyancing fees – Also called solicitor’s fees, these are payments homebuyers make to a licensed conveyancer. These professionals are tasked to review the legal aspects of the property. Their role is to secure the titles along with all the right of the property. They make sure you’re aware of any restrictions before you become legally committed to the mortgage deal. Conveyancers may charge a flat fee or a percentage of the home’s value. Expect the cost to range between £500 to £1,500 depending on the type of property and its location.
- Land Registry fee – These are charges paid for all registered properties throughout England and Whales. The fee is required for registering a new property owner. The cost is dependent on the price of the house, which ranges between £30 to £910. Likewise, a more expensive home requires a higher land registry fee.
What About Home Insurance?
According to the 2018 AA British Insurance Premium Index, the average combined home and contents insurance policy costs £161.75 annually. This is equivalent to £13.60 per month. The estimate applies to the average UK household which owns £35,000 of possessions in their home. Note that a more expensive property with more costly possessions typically come with higher mortgage insurance.
Homebuyers who purchase their property with a mortgage are usually required by lenders to obtain building insurance. The basic coverage includes events such as fires, fallen trees, frozen or burst pipes, as well as theft and vandalism. The content insurance, meanwhile, covers objects inside the property, such as furniture and appliances. If you’re not using a mortgage to buy your house, home insurance is not compulsory. However, it is still highly recommended by financial advisors to protect your property from possible damage and loss.
Mortgage Protection Insurance
Mortgage protection insurance is distinct from home insurance. This covers your mortgage payments in case of unexpected events that cause significant income loss. Since mortgage payments comprise a substantial part of your debt obligations, it’s important to avoid defaulting on your payments. While this type of insurance is not compulsory, you should consider getting one in case of emergencies. Mortgage protection provides financial cushion while you’re recovering your finances.
Two Main Types of Mortgage Protection Insurance
Payment Protection Insurance (PPI) – PPI provides short-term mortgage protection for up to 12 months. It takes care of your mortgage payments due to job redundancy, injury, illness, or disability. The payments are given by your insurance provider to your lender. Note that it comes with an initial exclusion period of 90 days after you stop working. Within that period, you should be able to cover your monthly payments before the insurance pays for your mortgage.
Mortgage Payment Protection Insurance (MPPI) – MPPI provides longer mortgage protection for 12 months up to 2 years, depending on your policy. Your insurance provider covers 125% of your mortgage. In case you need more time to secure a new job and find stable income, your mortgage payments are guaranteed. You’re entitled to claims if you lose your job due to redundancy, an accident, illness, or disability. Your provider gives the payments to you, which you should send to your lender. It comes with an exclusion period of 30 to 60 days before you can receive payments.
*Note that most insurers exclude coverage for pre-existing medical conditions. You will also not receive the pay-out if you knew the job had a high-risk of redundancy before when you took the policy.
Types of Mortgage for First-Time Homebuyers
You’re considered a first-time homebuyer if you have never owned residential property in the UK or abroad. It also applies if you’ve only owned a commercial property with no attached living space, such as a pub with a small upstairs flat. If you fit this profile, you qualify as a first-time homebuyer.
On the other hand, you are not considered a first-time homebuyer if:
- You’ve inherited a home, even if you’ve never lived in the property since it’s sold
- You’re buying a house with someone who owns or has previously owned a home.
- You’re having property purchased for you by someone who already owns a house, such as a parent or guardian.
There are a variety of mortgage products which are suitable for first-time buyers. Before finalizing a mortgage deal, look into the following types of mortgages:
In recent years, fixed-rate mortgages have become widely popular for first-time buyers in the UK. When you take this option, your interest rate remains locked for the first several years of a 25-year term. The fixed rate lasts for the first 2 years up 10 years of the mortgage. But generally, fixed-rate mortgages are commonly taken as a 5-year term.
Shorter fixed terms are often competitively priced and have lower interest rates than longer fixed terms. Meanwhile, 10-year fixed-rate mortgages are initially more expensive, but they provide more financial security with predictable payments. Having a fixed rate ensures your monthly payments do not change during the agreed period. It offers stability by making it easier to anticipate and budget monthly payments.
Once the fixed-rate term ends, your mortgage normally reverts to a standard variable rate (SVR) mortgage, which usually has a higher interest rate. This is also a good time to remortgage your loan to find more favourable rates at better deals. You may choose another lender or apply for another fixed-rate term with your original lender.
Standard Variable Rate Mortgage
Each lender sets their own standard variable rate (SVR) on a mortgage. This is the default interest rate they charge if you do not remortgage after a particular type of mortgage ends. This includes fixed-rate mortgages, tracker mortgages, and discount rate mortgages. SVRs typically have higher interest rates than other types of mortgages.
A variable interest rate rises or decreases based on the UK economy and fluctuations in the Bank of England (BoE) base rate. If rates increase, you must be ready for higher monthly payments. However, the extra money you pay will go toward the interest instead of the capital (mortgage amount). In effect, you won’t be paying your mortgage more quickly. So be sure to remortgage if you do not want to take an SVR. Note that lenders may also adjust their interest rate any time, especially if the BoE announces a possible increase in the near future.
Unlike SVRs, tracker mortgages have variable rates that follow the Bank of England (BoE) base rate. When you take this option, your mortgage’s interest rate changes based on a fixed rate above the BoE. For instance, if the BoE is 0.1% and the rate is 2%, you will be charged 2.1%. As of February 2021, the Bank of England policy committee maintained the base rate at 0.1%.
But take note. Lenders may place caps for the lower end of the base rate, without caps for the higher end. When this happens, your rate cannot decrease to a certain level even if BoE rates fall. Under these circumstances, your lender earns a basic profit margin while you risk having more expensive payments if the BoE increases.
Discount Rate Mortgage
When you take a discount rate mortgage, your interest rate is fixed at a specific rate below the standard variable rate (SVR). For instance, if your lender’s SVR is 4% and your mortgage has a 1% discount, your rate will be set at 3%. A discount rate normally lasts for a limited period, which is typically around 2 to 5 years. In some cases, it can be set for the entire duration of the mortgage.
Borrowers also have the options to take stepped discount rates. This allows you to pay a certain rate for a set period, then a higher rate for the remaining term. Your mortgage can also be capped at the higher end, which means your rate cannot increase any further. But as a drawback, while the discount rate stays the same, the interest rate may increase depending on the lender. Thus, a discount rate is ideal only when SVR rates are stable.
Capped Rate Mortgage
Capped mortgages are variable rate loans that cannot increase or decrease beyond a specific rate. It’s a feature available in tracker and SVR mortgages. However, it’s not commonly offered by most lenders. Capped rates keep your mortgage payments from becoming increasingly unaffordable. The upper limit ensures your lender never charges more than the capped rate.
Besides the upper limit, it also comes with a collar. The collar is a cap that limits your rate from falling beyond a particular rate. Though you’re protected from higher rates, the collar keeps your rate from falling significantly. In effect, you might miss out on potential savings when rates decrease. However, borrowers who take this option don’t mind as long as their monthly payments remain affordable.
100 Percent Mortgage
You can take a 100 percent mortgage if you’re looking to secure a home loan without making a deposit. This mortgage finances the entire property’s cost, which makes an appealing option. However, as a drawback, expect it to come with a much higher interest rate.
100 percent mortgages are a type of guarantor mortgage geared toward buyers who cannot afford a home on their own. Aside from the borrower, their parents or family member also takes responsibility for the mortgage. As a trade-off for 100% financing, lenders also ask for collateral such as stocks and bonds before approving the mortgage. In some cases, a lender may allow you to use your parent’s collateral to function as a deposit.
If you have a savings account and you opened a mortgage with the same bank, you are eligible for an offset mortgage. It’s a payment feature that allows you to use your savings to offset the interest charged on your mortgage. For instance, if you had a £200,000 mortgage and £20,000 savings offset against it, you only pay interest on £180,000 of the mortgage. Instead of paying, say, 3% interest on £200,000 in a year (£6,000), you’ll only pay 3% interest on £180,000 a year (£5,400). This saves you £600 a month, which is £7,200 a year.
One advantage of an offset mortgage is it allows you to access your savings as needed. But note that if you withdraw from your savings, that money will no longer be offset against your mortgage. It means your monthly payment will also increase. It’s best to treat it as money spent. If you end up spending your entire savings, you’ll be forced to change to a different mortgage. Only consider withdrawing from an offset mortgage account in case of a serious emergency.
Government Schemes for First-time Homebuyers
The government offers programs to assist first-time buyers in affording homes. They provide financial aid and grants for deposits. If you have limited funds and a short credit history, consider the following schemes:
Help to Buy Equity Loan
The equity loan scheme finances the purchase of newly built houses. You can borrow a minimum of 5% and a maximum of 20% (40% in London) of the property’s full price. As a requirement, you must make a 5% deposit and obtain a mortgage to shoulder 75% of the loan. The house must also be bought from a builder recognized by the program. As an advantage, interest is not charged during the first 5 years of the equity loan. For more information on this government scheme, visit the Help to Buy equity loan page.
Help to Buy Shared Ownership
Under the shared ownership program, you can purchase a share of your home and pay rent on the remaining mortgage balance until it’s cleared. This enables you to purchase between 25% to 75% of your property’s full price. To be eligible, you must be a first-time homebuyer, or you used to own a house but now have limited income to afford one. This scheme is also available for current shared owners planning to move. It also imposes required incomes limits. To qualify, your annual household income must be £80,000 or less outside of London. If you reside in London, your annual household income must be £90,000 or less. To learn more about the Help to Buy shared ownership scheme, visit their official site.
Right to Buy
Under the right to buy scheme, qualified council and housing association tenants have a chance to purchase the home they are renting. Tenants in England can buy their home with a discount of up to £112,300. If you intend to buy a house outside of London, the discount is up to £84,200. To be eligible, you must be a secure tenant for at least three years to purchase the property. It must be your primary residence and must be a self-contained home, which means you cannot share rooms with other people outside your household. Moreover, you should not have legal issues with debts. To learn more about the right to buy scheme, visit their official website.
Lifetime Individual Savings Account (ISA)
You can take advantage of a Lifetime ISA to purchase your first home or build savings for your retirement. This government scheme is open to individuals who are 18 years old but not over the age of 40. It allows you to contribute up to £4,000 each year until the age of 50. The government adds 25% bonus to your savings and up to a maximum of £1,000 each year. The account also allows you to hold stocks and shares to boost your savings.
Account holders are allowed to withdraw from their Lifetime ISA under the following conditions:
- If you’re buying your first house.
- If you’re 60 years old and above.
- If you’re terminally ill with less than 12 months to live.
On the other hand, if you make any unauthorised withdrawals, are required to pay a withdrawal charge. The current withdrawal charge is 20% but is scheduled to revert back to 25% on April 6, 2021. You may visit the official Lifetime ISA page for more details.
Starter Homes Scheme (Discontinued in 2020)
The starter home scheme began in 2015 to provide affordable homes for new homebuyers. It aimed to build 200,000 discounted starter houses and sell them at 20% discount. However, the government program was scrapped as it came under scrutiny from public agencies. As of December 2020, it will be replaced with a new scheme. The Guardian published a report about its cancelation:
“[The Starter Home scheme] was formally scrapped this year without a single home being built. But £173m was spent buying land, a damning report by the Commons public accounts committee said. It is now on course to deliver only 6,600 homes and is being replaced by a new scheme.
The influential committee highlighted the abandoned scheme as a waste of time and resources as part of a broadside against government housing policy, which it said has been “stringing expectant young people along for years” with housing policies that “come to nothing as ministers come and go with alarming frequency” – there have been 19 since 1997.”
Robert Booth, Social affairs correspondent
A Final Word
Before applying for a mortgage, prospective homebuyers must get their finances in order. Expect lenders to scrutinise your credit score and credit history, income, and your employment records. Lenders also assess your monthly expenditures and debt-to-income ratio before mortgage approval. To be eligible, you must satisfy these mortgage affordability assessment factors, including a financial stress test. Furthermore, save enough deposit. First-time homebuyers are usually required to make a 5% deposit based on the home’s price.
It’s important to have a good credit score and maintain a clean financial background. Make sure to pay your credit cards on time and minimise any large balances. This will help increase your credit score, which improves your chances of securing a favourable mortgage deal. Homebuyers with higher credit scores receive more competitive rates than those with poor credit. If you don’t have a substantial credit history, start building it now. Just make sure to pay your balances on time and keep your credit card balances low.
Mortgage lenders generally offer between 3 to 4.5 times your annual income. To determine how much you can qualify for, use the above calculator. While it is not an official amount, it will give you an idea how much home you can afford.
If you’re a first-time homebuyer with limited funds, the government provides schemes that help people purchase homes at favourable terms. This includes the Help to Buy equity loan scheme, the shared ownership scheme, and the right to buy scheme. Finally, be sure to compare lenders and shop for rates before taking a mortgage. Comparing rates will help you secure the most favourable deal, which maximises your interest savings.
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