This is the second part of Marc Da Silva’s interview 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. You can find the first part here.
Can I buy with someone else to keep costs down?
Yes, you can apply with a partner or friend for a residential mortgage, but the application will be assessed on all applicants. Often lenders will allow up to four borrowers on a mortgage application. The advantage will be your individual cost to the loan will be potentially be less, as the overall cost will be shared. You need to ensure that all parties to the application are committed to the plans for the property, as this may cause problems further down the line, if one wants to sell or be bought out, and legal advice is highly recommended around the setting up of deeds.
You can apply for a buy-to-let in single or multiple names. Often, prospective owners set up limited companies to purchase the property, both for tax and liability reasons. Again, it is imperative that legal advice is sought prior to entering any transaction.
Can I get an interest-only mortgage?
Interest-only mortgages are now heavily restricted with lender criteria across the marketplace. Rarely will a lender look to set up this type of payment basis, though there are exceptions. Clients’ individual circumstances will be examined and proof of repayment vehicles, such as an ISA, pension, endowment, or sale of property or holiday home, will be requested and verified.
For a buy-to-let, however, an interest-only mortgage is the most tax-efficient way of setting up a buy-to-let mortgage, as it is a business transaction and the interest-only potion of the loan will be offset against rental income received. You need to be properly advised not only by your mortgage broker but also by a suitably qualified accountant to ensure any income liabilities are dealt with correctly.
Fixed or variable - what type mortgage should I go for?
A fixed rate is an insurance policy against hikes and therefore gives peace of mind. That has to be factored into the equation, but how much that peace of mind costs you is important too. Someone who can only just afford their mortgage repayments should not be gambling with interest rates. They'll benefit much more from a fixed rate as it means they'll never be pushed over the brink by a rate increase during the term of the fix. Those with lots of spare cash over and above the mortgage may choose to head for a discount or tracker, and take the gamble that it will work out cheaper in the long run.
With buy-to-let mortgages, it depends on the deposit used, the mortgage raised and the rental income received, as to whether you utilise the potential benefits of fixing the product rate or gambling on the current low rates being maintained by going for a discounted or tracker rate. This is a business decision.
How long should my mortgage run for?
Traditionally, mortgages were set up on 25-year terms. However, a mortgage is as individual as the applicant, and the term will be heavily dictated by the income, deposit and property purchase price. You should factor all areas into account based on these areas.
The buy-to-let mortgage, often set up on interest-only, may be traditionally applied for on a 25-year term with a lender, but it will also be set up with the aspirations of the applicant in mind. They may view it as a long-term project or part of a portfolio of properties. Again, discussions with the lender, mortgage broker and applicant will allow this to be factored in.
What schemes are available to help first-time buyers?
The number of 90-95% mortgages for residential properties is on the increase, so provided you meet lenders’ affordability criteria if you have a 5-10% deposit, it may be possible for you to get a mortgage.
So for a £200,000 house you would need to have £20,000 in savings for a 90% mortgage or £10,000 in savings for a 95% mortgage. However, 100% mortgages, where you don’t need any deposit, are virtually non-existent unless you have additional financial help from your family.
There are also two government schemes aimed at helping people with small deposits to buy a house. Through Help to Buy and NewBuy schemes, buyers with a deposit of between 5-20% can purchase property using either special mortgages or using an interest-free Help to Buy equity loan. Whether you will be better off with an ordinary mortgage or using one of the government schemes will depend on your individual circumstances. Additionally, there are other schemes, such as Rent to Buy, and Save to Buy that are available through major building societies, banks and housing associations.
There are limited options for first-time buyers with buy-to-let mortgages. The criteria are very restrictive, with larger deposits, minimum income requirements, and the fact that most lenders require the applicants to have a residential mortgage of their own. However, bespoke lenders often dip their toe into this market, so research should be carried out first.
Could I still qualify for a mortgage if I have had previous debt problems?
Yes, there are lenders who are not readily available on the high street who specialise in providing mortgages for clients with impaired credit. Dependent on the credit history recorded, the rate on offer will vary, and criteria will vary with all lenders as it does with all high street residential mortgage providers. Certainly the deposit required will vary from applicant to applicant based on their credit file.
Buy-to-let mortgages are available with clients with adverse credit history recorded, but this again will be at the discretion of the lender and criteria in place, in addition to the applicant’s current financial situation.