First Time Buyer
Getting on the property ladder is an exciting time for everyone, but is equally as daunting. As a first time buyer, it’s usually the largest financial commitment we make and you want to be sure you know what you’re doing.
How Much Can You Borrow?
This is usually first question every first time buyer has. Once you know how much you can borrow, it gives you an idea of what kind of property you can buy. The amount you can borrow is usually provided as a decision in principle (DIP) and acts a guide for what a lender will offer you, subject to a full assessment. Each case is different, but broadly speaking, a lender will offer you 4-5 times the applicant’s annual salary. This hinges on a number of factors, including the salary, the number of applicants and their credit rating.
A deposit is the amount of money you put down against the property up front. Deposits are important, as the greater the deposit, the more likely you are to be accepted for a mortgage. The size of the deposit you need depends mostly on the price of the house you want to buy. There are government schemes available where you need only 5% deposits, but in most cases you need at least 10%.
Understanding Loan To Value (LTV)
The loan to value (LTV) is a percentage showing how much of the property value is covered by a mortgage.
So assuming you look at a property value of £150,000 and you have a deposit of £15,000, that’s a 10% deposit and therefore a 90% LTV.
LTV is important as many lenders will offer better interest rates for lower LTVs (a smaller loan against the value of the property). This is because for the lender, the risk is lower as they’re putting less money forward against the total value of the property.
Interest rates are often set in brackets. So for a 90-95% LTV you will be offered a higher interest rate. This interest rate will be lower for the 80-89% LTV bracket, lower again for the 70-79% LTV and so on.
The Ideal First Time Buyer
There’s no ideal profile for a first time buyer. Typically lenders will want you to have a regular income, a good credit history and deposit in excess of 10% of the property value. Lenders are looking to minimise their risk. So anything that displays that you are going to pay regularly and that lending to you would be a good investment, it makes you an ideal applicant.
If you’re struggling to raise a large enough deposit for the property you want, there are Government schemes available. The Help-to-Buy scheme allows you to buy a house with just a 5% deposit. Additionally, Key Worker Mortgages are available for Government workers who qualify, typically teachers, doctors and members of the armed forces.
Shared ownership can also help you get a foot on the property ladder if you’re struggling for a deposit. Shared ownership helps first time buyers buy letting them buy a percentage of a property, with the remainder owned by either the developer or housing association. You own a percentage of the property, so should it increase in value, the value of your stake increases too.
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