Marc Da Silva’s series of weekly interviews takes a different tack this week and next, as he speaks at length with Kevin Blount, director at Reach Financial Services, about how homebuyers can best obtain a mortgage and the points they should consider before making a decision.
How much of a deposit do I need to save to buy a property?
In the current residential market, you’ll need a deposit of at least 5% to 10% of a property’s value to get a mortgage, with the balance of between 90% and 95% of the property’s value being supplied by the mortgage lender. So, if you wanted to buy a £150,000 property you would need to save up at least £7,500 and borrow £142,500.
There are lots of different reasons for why you would be better off with a bigger deposit, including cheaper mortgage repayments, less risk to the borrower of negative equity, more attractive mortgage products available, and the higher likelihood of obtaining a mortgage. This is applicable to clients with no adverse credit recorded against them.
In cases where they do have adverse credit registered this will increase the deposit to be saved from 5% up to as much as 25%, dependent on the recorded adverse history.
The government has recently launched schemes to assist buyers to enter the market. These are called Help to Buy schemes, and can be applied for through lenders and builders who participate in the scheme.
For a buy-to-let landlord, lenders typically want rent to cover 125% of the mortgage repayments and many demand 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees.
Are there any other costs?
Additional costs are part and parcel of any planned property purchase, regardless of whether that’s for a residential property or buy-to-let. These could be for associated conveyancing related costs, mortgage lender costs, surveyors, insurances and other professional fees and stamp duty.
Why is now a good time to consider taking out a mortgage?
Experts all agree that the next six months could be the best time in history to take out a mortgage, with interest rates at record lows. Homebuyers could get a mortgage rate of around the 1% mark, but would require a big deposit, potentially 40% of the value of the planned purchase.
Average mortgage rate data from the Bank of England shows the average two-year fixed rate for a borrower with a 25% deposit is now 2.01% - down from 3.11% in January 2013.
The average five-year fixed-rate mortgage for someone with a 25% deposit currently stands at 3.09%. For those with smaller deposits the average rate on a 10% deposit mortgage stands at 3.79%, while the average rate on 5% deposit home loans is higher at 4.79%.
The buy-to-let market, on the other hand, is expected to see a growth of 20% over the coming year. With it experiencing a mini-boom while deposits of 25% are standard, the demand for rental properties is increasing.
How much can I borrow?
Each lender will have its own lending criteria. The criteria are the detailed rules that the mortgage underwriters will follow when they assess a mortgage application.
They traditionally use a multiple of a client’s sole or joint income, dependant on the total amount and its source. Again, this is at the discretion of the individual underwriter with the prospective lender and based on a client’s individual circumstances, covering employment, credit history and other factors.
The majority of buy-to-let providers work out the borrowing capacity based on the rental income for the property, which is then often confirmed by the surveyors’ comments on the valuation or supported by the rental agreement in place. The majority of the lenders expect the rental to be at least 25% higher than the planned mortgage payment.
What else will lenders want to know?
Lenders will need to know a varied amount of information as part of the application process for a residential mortgage, including full name, date of birth, residential addresses covering at least three years, the number of applicants, the location of the property, term of the loan and repayment method, any existing mortgage loan or buy-to-let property, solicitor details, employment details covering history and income. They will also look at the client’s credit history, the source of the deposit, and, if gifted, additional proof may be required.
With buy-to-let applications, the following criteria may be applied: term of the loan, loan purpose (e.g. purchase/remortgage/capital raising and purpose), property details, tenant details, rental income, personal income, source of deposit (if the applicant is a first-time landlord) and solicitor details. There may be additional areas at the discretion of the lender.
To be continued...
You will find the second part of this interview in our news section on Thursday 18 June.