Getting on the ladder: 10 things first-time buyers need to know before applying for a mortgage

Typical first-time buyers in London need 10 times their annual income – so how do young people in the capital manage to get a mortgage?
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David Spittles22 October 2018

The typical first-time buyer in London needs 10 times their annual income to afford an average-priced home. Yet the usual income multiple applied by mortgage lenders is just 4.5 times salary.

This explains why the Bank of Mum and Dad has become such a phenomenon, with 80 per cent of parents giving large lump sums to fund the difference between mortgage offer and purchase price, according to analysis by the Institute for Fiscal Studies. The average deposit in London is £72,000.

1. SIZE MATTERS
The bigger the deposit a buyer puts down, the better the mortgage interest rate will be. All lenders demand a deposit of at least five per cent. But if you can put down 20 per cent you will likely pay several hundred pounds less per month.

2. DON'T GIVE UP
Despite mortgage rates being historically low, lenders are obliged to “stress test” applications to ensure buyers could afford to repay in the event of an interest rate spike.

But brokers urge would-be buyers not to give up their home ownership dreams as there’s lots of competition in the mortgage market, literally hundreds of deals, mainly trackers —linked to the Bank of England base rate — or fixed-term loans, typically two-, three- and five-year deals.

3. KNOW THE BEST RATES
One of the best rates available is Nationwide’s 1.64 per cent fixed for two years, but this requires a 25 per cent deposit. Yorkshire Building Society requires only a five per cent deposit for its 2.87 per cent deal, fixed until December 2020.

Barclays is offering a two-year fix of 1.84 per cent, with a minimum 10 per cent deposit.

4. SHOP AROUND
Depending on your circumstances, the only rates available may be higher than four per cent. Shop around first by checking comparison websites such as moneysupermarket.com.

5. FIX IT
The virtue of a fixed rate is that you know exactly what you will be paying, and can budget accordingly. But remember that once the fixed-rate term is over, the interest rate reverts to the lender’s standard variable rate, which may be as high as five per cent. Borrowers then usually take out a competitive new deal, perhaps with another lender.

6. EXTEND TO SAVE
Some lenders say young would-be buyers can beat affordability restrictions by opting for a mortgage with a term length of 30 years and fixing the interest rate for five years or more, for which less strenuous stress tests apply.

First-time buyers – what you need to know when buying your first home

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7. ADD UP THE EXTRAS
Do not focus solely on the interest rate. Lenders typically charge an arrangement fee, possibly £995 or more, though this can be added to the mortgage. Sometimes there are free legal and survey fee deals. Halifax is offering £1,000 cashback.

8. CHECK YOUR CREDIT REPORT
Make yourself attractive to lenders by showing them you can manage your regular finances. Also cut back on unnecessary outgoings. Tougher mortgage affordability rules mean it’s not just what you earn that matters, but how much of it you spend. And check your credit report to make sure it’s accurate and up to date.

9. USE A HELP TO BUY ISA TO SAVE
You are more likely to get a mortgage if you have a good savings record, even if that is a modest amount each month. First-time buyers can save towards their home with a tax-efficient Help to Buy ISA.

You can deposit £1,200 in the first month and £200 a month thereafter. As well as earning interest, the Government will boost the balance when you come to buy.

10. AIM TO OVERPAY
To stretch affordability, lenders are extending the mortgage term up to 40 years, which lowers the monthly repayment.

But in the long run you end up paying back much more, and are saddled with a mortgage for almost a lifetime. So once you are up and running with your new mortgage, use any disposable income you can spare to overpay on the loan each month.

This will cut the outstanding amount and give you more equity —and buying power — when you move.

'WE BOUGHT IN DEPTFORD WITH A HELP-TO-BUY LOAN'

First-time buyers Tom Brandhorst and Amy De Klerk, both 26, were surprised to be able to step on to the property ladder years ahead of their friends and peers in London.

The couple had resigned themselves to renting until they realised that Help to Buy was an affordable way into home ownership in the capital.

The challenge was to find a well-connected, up-and-coming, cool area where prices were still relatively low. Deptford Foundry ticked these boxes.

The former ironworks in south-east London sits between two railway viaducts and the robust new architecture makes a virtue of the gritty industrial setting. The area is fast gentrifying, with micro breweries and artisan food specialists sprouting up in once-derelict arches.

Tom Brandhorst and Amy De Klerk were surprised to be able to step on to the property ladder (Franklin & Franklin Photography)
Franklin & Franklin Photography

More than 300 homes along with 70 artist studios are being built on the three-acre site, while arches are being opened up to create new pedestrian routes through to Bermondsey.

In Zone 2, Deptford has excellent train and Tube links into central London. Amy is a digital fashion editor, based in Soho, while Tom works for a sports film production company in Farringdon.

The couple bought a one-bedroom flat for £375,000 and put down £18,750. They expect to move in next January. They were delighted to discover that their mortgage repayments are lower than paying a private rent.

“Luckily my sister, based in Berlin, is an interior designer, and she says our flat will be her next project,” says Tom. Prices start at £385,000. Call 020 7526 9229.

Will Pitchers bought a one-bed flat at Woodberry Down for £510,000

'THE BANK OF MUM AND DAD HELPED TO BUY MY HACKNEY HOME'

Helped by the Bank of Mum and Dad, young father Will Pitchers was able to step on to the housing ladder at a showpiece new homes project in Hackney.

The 31-year old management consultant put down a £26,000 deposit and paid £510,000 for a one-bedroom apartment at Woodberry Down, a new micro district being built alongside two vast reservoirs, one a nature reserve and the other boasting a water sports centre.

It is a family affair in other ways. Will wanted to live in a child-friendly neighbourhood suitable for his young son Archie, who regularly visits from Birmingham.

“The outdoor facilities drew me to the place,” says Will. “It’s a great environment for kids. We’re both learning to sail and love walking around the reservoirs, watching and learning about the wildlife.

“My office is in central London but I have flexibility to work from home which is a real bonus as the apartment has floor-to-ceiling windows and overlooks the open water.

“It’s so tranquil, unbelievably so for Zone 2, and has fantastic sunsets.”

Prices at Woodberry Down start at £550,000. Call 020 8985 9918.