Borrowing used to be based on a simple formula: lenders would take your income, then multiply it by up to five and a half times (or up to three and a half times for a joint application) to determine how much you could borrow.
This is no longer the case, and lenders have become much more cautious since the financial crisis of 2007-08. They are now obliged to assess your ability to repay the mortgage under rules brought in by the Financial Conduct Authority in 2014. This means they don’t just look at what you earn, but also your monthly expenses and how that might change in the future. Thus, there are three key areas that lenders look at when assessing what they will lend to you: your income, your outgoings and possible future developments.
How much can I afford?
One of the first things we will look at when we meet you is the money you earn and how you spend it. We do this to build up a picture of what you can afford, so we can get you a decision in principle. Later in the guide we will take you through all the costs of buying a house step-by-step.
Income: Lenders will look at your basic salary plus any overtime or bonuses. They will also consider benefits, pension income, investments, child maintenance or income from an ex-partner.
Outgoings: You’ll need to tell us about what you spend on basics like bills – utilities, council tax, broadband, phone, insurance; credit card payments; loan repayments; other committed expenditure such as gym membership and childcare; living expenses – groceries, eating out, clothing, entertainment, holidays. It is important to give an accurate picture of your outgoings as you need to submit 3 months of bank statements when you apply for a mortgage and lenders will query any large outgoings not already disclosed.
Future changes: Lenders will “stress-test” whether you could still afford to pay your mortgage if interest rates increased or you or your partner were no longer working (if you fell ill, took a career break or had a baby, for instance).
Guarantors – how they can help you borrow more If you’re struggling to take out a mortgage on your own but you don’t want to get a traditional joint mortgage, there is another option – a guarantor mortgage.
This means that you take out a mortgage – everything is in your name and you own your property – but you have someone else there as a backup. That person will underwrite your home loan. In practical terms, it means that if you can’t pay back your mortgage, they have to pick up the tab. Guarantors tend to be direct family members (parents, grandparents or siblings), but they can be anyone who is prepared to commit to paying your mortgage should you be unable to. The lender will look at their financial situation as part of your application, allowing you to borrow more than you could on your own.
If you have no deposit or are on a low income, it can be difficult to take that first step onto the property ladder without help. You may not have the option of buying a property with family or friends, or you may choose not to involve them in your financial decisions. There are several Government schemes available that can help boost your home-buying potential, making your first home purchase much more achievable.
Government Help to Buy Scheme
Please note, the Help to Buy Scheme changes often, and the loan amounts and specific details of the various schemes can vary depending on your location and circumstances. To ensure you’re getting the most up-to-date information, it is best to check with us and we will be able to provide more information.
Help to Buy is a government scheme, which can help first time home buyers get a new-build property with just a 5% deposit. They will loan you 20% of the purchase price (40% in London), meaning you only have to find a mortgage for 75% (or 55% in London) of the property price. You pay back the loan as you pay back your mortgage, except there is no interest for the first five years on the Government part of the loan (known as equity). It’s a good way of keeping repayments low as you find your feet on the property ladder. The scheme is available until 2021.
Help to Buy – how it works
Your deposit – 5% – £10,000
Equity loan – 20% – £40,000
Mortgage – 75% – £150,000
Total – £200,000
Shared ownership is a scheme that lets you part-own, part-rent your house. It allows you to buy a share in a house that you can then make your home, as although it is shared ownership, you live in and look after your own property. These schemes are good if you don’t earn enough to buy your own place but still want to get on the property ladder and make where you live your own. Shared ownership schemes usually require you to buy between 25% and 75% of the property, then pay a reduced rent (occupancy charge in Scotland).
For shared ownership in Scotland: www.gov.scot/Topics/Built-Environment/Housing/investment/grants/hso
For shared ownership in England: www.helptobuy.gov.uk/shared-ownership/
Right to Buy
If you have rented from your local council for more than three years and live in England, Wales or Northern Ireland, you could be eligible to buy your home at a discounted price. How much of a discount depends on where you live and the sort of property you’d like to buy. If the place you live in used to be a council property but is now owned by another landlord or housing association, you may still be able to buy it under ‘preserved’ schemes: they usually mean that your rights as a council tenant continue after someone else has bought the property. The Right to Buy scheme has now been extended to include housing association tenants in England. In Scotland Right to Buy no longer operates but there are other schemes (link to previous Help to Buy section) that could help you buy your home.
Before you can put in an offer on a property, you need a mortgage lender to confirm that it is prepared to lend you the money. This is called a mortgage or decision ‘in principle’.
To get assurance on what you can realistically borrow, you need to complete a mini application with your mortgage advisor to submit to a lender. The lender will take the following factors into account:
How to get a Decision in Principle
The first step is to meet with your mortgage advisor. They will ask you about your circumstances, including your incomes and expenses, your credit history and the deposit you have available.
The advantage of using an independent mortgage advisor is that they can use the information provided by you to them search through the whole of the market and find the best deals available for your circumstances. There are over 10,000 different mortgage products available, so it’s great to have some help in narrowing down the field. If you were to speak to a bank or building society, they would only be able to offer you products from their own product range, usually only 5 to 10 different mortgages.
The options will be narrowed further once you decide on the type of mortgage (link to mortgage types) you would like to take out.
What if my DIP gets declined?
First of all, don’t worry, there are many reasons why a DIP may be declined, and it does not mean you can’t get a mortgage from another lender. Some of the most common reasons for a DIP to be declined are:
A DIP is not a guaranteed mortgage
It is important to realise that having a DIP is not a guarantee that the lender will offer you a mortgage for the same amount. The most common reasons for this are:
How long does a DIP last for?
Each lender has their own rules for the mortgages in principle, but most DIPs are valid for a period of 60 to 90 days. It is usually possible to request that the agreement is renewed, but this may involve a new soft credit check being carried out.
If you’ve already been to see us, you’ll have a good idea of what you can afford and how much you’re able to borrow. However, the mortgage and repayments are only the beginning – there are many different costs involved in buying a home, and you need to take all of them into account when budgeting for a home purchase. To give you a more complete view of the financial elements, we’ve broken them down into: upfront costs, mortgage costs and maintenance costs.
Upfront costs (what you pay before you move)
This is quite possibly the most important payment in the property buying process, as it is your contribution towards the price of the property you are buying. You typically need to put down at least 5% of the purchase price to get a mortgage – but the more you can afford to put down as a deposit, the better. A higher deposit generally provides lenders with more comfort over your borrowing circumstances and can allow them to offer better rates. With deposits of 40% of the property price or more, interest rates for borrowing the rest of the money become much lower. Stamp Duty / Lands and Building Transaction Tax .
If you spend more than £125,000 (£145,000 in Scotland) on a property, then you will be taxed on that purchase. In England and Wales this is called Stamp Duty Land Tax (SDLT), commonly referred to as “stamp duty”. In Scotland, it is called Lands and Building Transaction Tax (LBTT) but is also referred to as stamp duty. You don’t have to pay it before you buy your home, but you do need to know you have enough saved to pay it once you own your property: you have 30 days from the time you’ve bought your property to pay it. The tax is between 2% and 12% of what you paid for your property, so will vary depending on the purchase price.
Once you have a Decision in Principle (DIP), your lender will check that the property you’re buying is worth the price you’re paying. They may use the valuation carried out in the Home Report produced by the seller, or, more likely, they will arrange a mortgage valuation (which you will pay for). You can then decide if you want to get your own surveys to find out what sort of condition your future home is in and how much it might cost to repair any areas that aren’t up to scratch.
Your options are:
A Home condition survey – the cheapest and most basic survey, suitable for new-build and conventional homes, but not useful for spotting any issues with the property.
A Homebuyer’s report – a more detailed survey looking thoroughly inside and outside a property. It also includes a valuation. You might be able to get the valuation and homebuyer’s report done at the same time to cut costs. Building or structural survey – the most comprehensive survey suitable for an older building or one that’s not a conventional build – such as a timber construction or a house with a thatched roof.
You will normally need a solicitor or licensed conveyancer to carry out all the legal work when buying and selling your home. In Scotland, you’ll need a solicitor to put in an offer on a property; elsewhere you do this through an estate agent. Solicitors are responsible for negotiating and checking the contract, organising the transfer of the Title and money and conducting searches on your property (which basically means checking for any local plans or problems that might affect your property). Legal fees are typically £850 – £1,500 including VAT at 20%. You also need to add on fees for searches which cost around £250 – £300.
We recommend using a solicitor from our Property Law Centre (your advisor can provide more information on this).
Electronic transfer fee
The electronic transfer fee covers the lender’s cost of transferring the mortgage money from their account to the account of the seller’s solicitor. It usually costs around £50.
These will vary depending on how much you must move and the location of your new home. As a guide, an average house move costs between £300 and £600. You may be able to get better rates, however, if you move during the week rather than on a weekend.
Mortgage costs (which you can pay up front or over time)
As well as the monthly repayments, there are several costs to consider when arranging a mortgage. These might include a booking fee of £99 – £250, an arrangement fee of up to £2,000 and a mortgage valuation fee (typically £150 or possibly more).
It’s best to pay these upfront rather than adding them to your mortgage, otherwise you’ll be paying interest on them for the life of the mortgage.
Maintenance costs (what you pay to look after a home)
If you’ve been renting before and this is your first home, you will need to budget for additional items that you may not have needed to consider before. Decorating is usually a top priority for first time buyers – the average spend of new homeowners in the first year is £10,000 (Source – Aviva survey 2015). The first and most important ongoing payment is your mortgage: if you’ve chosen a fixed rate product then you’ll know what to budget for each month. However, if you are on a variable rate it might be wise to put a little extra aside each month in the event that interest rates rise.
Beyond paying your mortgage and regular maintenance and repairs, there’s council tax, utilities, phone and broadband, plus any leasehold fees if these apply.
It is also essential to invest in insurance for both the property and its contents, and protection for you and your income. Life is unpredictable, and it’s better to have peace of mind, knowing that you don’t need to worry should a major change come along.
* Some mortgages have an arrangement or booking fee, some don’t. We will talk you through any fees and what they mean. If there is an arrangement fee it is possible to add it to your mortgage so you don’t have to pay a lump sum up front, but you will then pay interest on it.
** Some solicitors offer a fixed fee so you can budget and know up front how much you need to pay.
*** The cost of registering your property varies depending on where it is, how much it cost, and what sort of property it is.
Now the fun part can begin – you know how much you can afford to spend on a property, you’ve budgeted for the whole process and you have your support team in place – the search is on!
Step-by-step guide to buying a property in England, Wales and Northern Ireland.
1. Have a mortgage/decision in principle in place.
Once you’ve talked to your mortgage adviser and gone through your budget and aims for a mortgage, you’ll leave with a mortgage (or decision) in principle. This is a confirmation from the lender of how much they will lend to you. It’s a guide for you as to what you can afford and reassurance to a seller that you have the funds available to purchase their property.
2. Make an offer through an estate agent.
Once you have found a property you like, you will need to make the seller an offer through their estate agent. Make the offer over the phone or in person and follow up with the offer in writing. You can make your offer subject to survey (STS) which means that it might change following a survey that identifies problems requiring work. You can also make your offer subject to contract (STC), which means that the final sale will only take place when lawyers have exchanged legally binding contracts.
If your offer is accepted, ask for this to be confirmed in writing and for the property to be taken off the market straight away. This prevents it from being viewed by other potential buyers who may then make a higher offer (known as gazumping).
3. Arrange surveys and secure a solicitor
This stage of the process is all about checking your property – its value, its condition and its paperwork. For the legal aspects, you need a solicitor or licenced conveyancer; and for the practical aspects, you need a surveyor. All the legal work that happens between an offer being accepted, through the exchange of contracts and then the completion of the sale, is known as conveyancing. Most solicitors offer these services, but its best to work with one that specialises in property, or comes recommended for its conveyancing work.
Solicitors, or conveyancers, complete all the legal tasks related to the purchase or sale of a property. They draw up and assess contracts, provide legal advice, deal with the Land Registry, sort out payment of Stamp Duty and oversee the transfer of cash to buy a house. They also conduct searches on properties to make sure there are no planning or local issues that might affect the value of the property.
Surveyors help you find out about the condition of your property and, if they identify any problems, give you the evidence you need to re-negotiate the sale price or ask the seller to fix the issues prior to the sale. Most surveyors offer four different kinds of survey:
a mortgage valuation survey, a condition report, a HomeBuyers report and a building survey. The HomeBuyers report tends to be the standard as it looks at both value and condition. Mortgage valuation survey – This is normally required by the lender to check that the property is worth what you are proposing to pay for it. They will request it and you will pay for it, but some mortgage deals offer a free valuation survey. This survey won’t tell you anything about the condition of the property, just what it is currently worth.
Condition report – This is the most basic ‘full’ survey. It gives an overview of the property’s condition and highlights significant issues but doesn’t go into any detail or offer any guidance on how to address issues. This is generally suitable for relatively new properties.
HomeBuyers report – This is a good halfway house between a simple condition report and a thorough building survey. It highlights any major problems and gives advice on repairs and maintenance. However, it only looks at the surface condition of the property – no lifting floorboards or moving furniture is involved. This is a good choice for properties in reasonable condition.
Building survey – This is the most thorough survey there is and provides a comprehensive analysis of the structure and condition of the property. It lists defects and looks at recommended repairs and how much they might cost. It will look at every aspect of the property, not just what’s on the surface. This is most suited to properties that are more than 50 years old or in poor condition.
4. Finalise the offer and mortgage
Once the survey is complete you may choose to go back and renegotiate the price with the seller. This may be because the property valuation is lower than the price you have agreed to pay, leaving you with a shortfall. Or it could be because the survey revealed problems that are expensive to fix.
You now need to make your full mortgage application. It’s this stage in the process that can be quite stressful and it’s where using a mortgage advisor becomes most valuable. Your advisor will handle the communication between the mortgage lender, the solicitor and the estate agent, taking the stress away from you. However, there are sometimes unavoidable obstacles that may set you back – a seller could withdraw their property from the market or accept a higher bid from another buyer.
5. Exchange contracts
Once surveys are complete, the mortgage approved and contracts have been negotiated, you will be able to exchange contracts. This is the swapping of signed contracts between the solicitors representing the buyer and the seller. You will probably have to pay a holding deposit on the property at this stage. Exchanging contracts means that you are now committed to the sale and no-one can back out of the deal.
This is a good time to make sure you have insurance arranged for your new home.
6. Completion and final steps
The last steps in buying your home are to complete the sale. Completion is when you pay the seller the remaining money (via your mortgage lender) to buy the property. You will usually agree on a completion date when you exchange contracts; it’s also the date you’ll take ownership of your property if funds are transferred without any problems. If you are using a mortgage advisor, they will be working to make sure everything is in place and your completion goes without a hitch. There are several payments to make at this stage of a property purchase. You will be charged for the transfer of money from your solicitor’s account to that of the sellers and most likely for further administration charges on your mortgage account. Your solicitor will handle and then charge you for registering your property at the Land Registry and paying Stamp Duty.
Step-by-step guide to buying a property in England, Wales and Northern Ireland
1. Have a mortgage decision in principle in place
Once you’ve talked to your mortgage adviser and gone through your budget and aims for a mortgage, you’ll leave with a mortgage in principle. This is a confirmation from the lender of how much they will lend to you. It’s a guide for you as to what you can afford and reassurance to a seller that you have the funds available to purchase their property. It is advisable to have proof of how much you can spend before you put in an offer on a property in Scotland.
2. Research your property
When you have found a property you like, you will need to find out as much as you can about it before you put in an offer. The sellers Home Report is the best place to start.
Anyone putting a property on the market must have commissioned a Home Report first. This sets out all the key information about the property. The only exceptions to the rule are new builds, converted properties and Right to Buy houses. The Home Report includes the following:
Survey – an assessment of the condition of the house, what repairs are needed and a valuation of the property.
Energy Performance Certificate – detailing how energy efficient the property is and what could be done to make it more efficient.
Property questionnaire – giving information such as what council tax band the property falls into, any history of flooding, available parking, what improvements have been carried out by the sellers and details such as the utility suppliers.
Most offers in Scotland are made unconditionally so it pays to find out as much as possible about a property first. If the Home Report has flagged any areas of concern, it may be worth considering commissioning a further detailed survey into these areas. However, there is a risk that you will commission a survey and then not win the bid on the house.
3. Make an offer
If you see a property you like, your solicitor will register a notice of interest on your behalf. This means that you will be kept up-to-date on anything relating to the sale of the property, such as when a closing date is set. Properties in Scotland are usually marketed as ‘offers over’ or fixed price and the process is usually for interested parties to register their interest with the seller’s solicitor.
It may be possible to make an offer on the property through your solicitor and agree on a price with the seller quickly. However, if there is a lot of interest in the property the seller is likely to set a closing date. All interested buyers are required to submit a sealed bid before the closing date. The seller will then review all the offers received and decide who they will sell to.
If your offer is accepted, the seller’s solicitor issues a qualified acceptance, which means that the property will be yours if contract details can be worked out. The solicitor will also hand over information about the property such as the title deeds and any planning papers.
Go through everything you receive with your solicitor as they may raise queries about the paperwork. Neither you nor the seller is committed yet.
Agree the contract
Contracts and queries about the contracts will now go back and forth between solicitors. The two solicitors exchange letters, known as ‘missives’, where both parties negotiate on the terms of sale. Once all the terms have been agreed, this is the ‘conclusion of missives’, and the purchase becomes a binding contract. Both parties are now legally committed to the sale.
No money is paid at this stage unless it’s a new-build property, in which case a deposit may be required. Your solicitor will check the title deeds and talk you through any ‘title burdens’ – conditions attached to owning the property ranging from where you can park to more serious restrictions on how the property can be used and altered.
Solicitors and searches
Solicitors, or conveyancers, complete all the legal tasks relevant to the purchase of a property. They make offers for property on your behalf, draw up and assess contracts, provide legal advice, deal with the Land Registry, sort out payment of Lands and Buildings Transaction Tax and oversee the transfer of cash to buy a house. They also conduct searches on properties to make sure there are no planning or local issues that might affect the value of the property. They can do this before you make an offer, although some solicitors will charge for these regardless of whether you are successful in your bid or not.
Completion of the mortgage and the sale
If everything has gone to plan, your mortgage advisor will contact the lender and finalise the mortgage. You will also transfer your deposit funds to your solicitor a few days in advance of the sale.
On the date of entry that has been agreed in the contract, your lender transfers the mortgage amount to your solicitor. The solicitor then pays the whole of the purchase price to the seller’s solicitor, and you’ll be given the keys to the property and the ‘disposition’ document transferring ownership to you. This is known as ‘completion’ of the purchase.
There are several payments to make at this stage of a property purchase. You will be charged for the transfer of money from your solicitor’s account to that of the sellers and possibly for further administration charges on your mortgage account. Your solicitor will handle and then charge you for registering your property at the Register of Scotland and paying Lands and Buildings Transaction Tax.
We’re here to take you through every step of applying for a mortgage and will do all the paperwork and administration on your behalf. All you need to do is bring in your supporting documents!
Here’s a step-by-step guide to what that process looks like, what you need to prepare, and why (and what happens in a mortgage application):
Meeting 1 – get a decision in principle
At you first meeting we will ask you about your personal circumstances and expectations: what sort of property you’d like to buy and how much you can afford to spend on one. We’ll take you through a budget planner to look at what you earn and what you spend, what deposit you have and your credit history. Using all of this information, we can find the best deal based on your individual needs. You’ll leave with a decision in principle – this is basically an assessment of what a lender is prepared to give you – so that you and any sellers know exactly how much you can spend on a property.
You look for a property, we look for a mortgage
After your initial meeting, you and us both start searching – you for your home, us for the deal that’s going to help you buy it. We will search the market for the most suitable mortgage for your needs and send you recommendations.
Second meeting – get a mortgage
Once you have found your property and had an offer accepted, it’s time to apply for your mortgage. You can contact us at any point to ask for advice and help – all for free. You’ll need to bring several documents (listed below) with you to your second meeting, and we will provide you with a handy checklist to make sure you bring everything we need. At the meeting itself, we will take you through the application process step-by-step. As we have researched the lender and prepared for the meeting beforehand, it should be a straightforward process, and barring any complications, you’ll leave with a mortgage in place.
Preparing your documents – what you need to bring with you
You’ll be sent a list of documents to take with you to your second appointment when we will take you through the mortgage application process itself. These will include:
– proof of your income from the last three months (payslips or business accounts, bank statements and income tax accounts)
– proof of identity, such as a passport or driving licence
– proof of address, such as a recent bill – last three months bank statements
What happens next?
At Border Mortgage Services, relationship doesn’t end once you have moved into your home. We’ll keep an eye on when your mortgage deal expires and be in touch with you prior to the expiry to arrange your next mortgage deal. If you’re on a fixed rate deal, your lender will usually return you to their standard variable rate at the end of the term, meaning you’ll pay more each month. By contacting you before this happens, we can ensure you move on to a more suitable package matching your needs and financial circumstances.
We can also offer advice on early repayments, payment breaks and any charges on your mortgage and what they mean. When you are ready to move on from your first home, we will be on hand to help, give advice, and find you the best deal possible.