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Buying your first home: How much can I borrow?

House with a pound coin garden pathYes indeedy, how much can you borrow?

If you’re about to take a nose around that 7-bed mansion right next door to Wayne and Coleen Rooney, hold your horses! Before you even begin house hunting you first need to know just how much money you can afford to borrow – in short, will your mortgage buy a boxy bedsit or a baroque palace?

If you didn’t know already, a home loan is called a mortgage, and banks/building societies determine how big a mortgage to lend by assessing the amount of monthly repayments you can comfortably afford to repay. You will need to provide such information as:

  • Recent payslips
  • Your last P60 tax certificate
  • Details of all regular outgoing payments
  • Trading accounts for the previous three years if self-employed

Your credit history is also a factor, as is whether you are applying on your own or making a joint mortgage application.

Typically, you will be able to borrow somewhere between three and four times your gross annual salary (staff bonuses and other income may also be taken into consideration), with the upper limit available only to those with a sterling credit history and a proven track record of financial responsibility.

However, to help first-time buyers get a foot on the property ladder, it is sometimes possible to repay over a longer period than the traditional 25-year term. The downside to this, of course, is that you will end up paying much more interest in the long run.

But remember, it’s not always wise to squeeze as much out of your lender as possible just to get a home with a garden big enough for a swimming pool or helipad. Interest rates do fluctuate and personal circumstances can change, and what you can afford to repay now may not be what you can afford in a year’s time.

Mortgage Agreement in Principle

It’s worth noting that at this stage you can’t actually arrange the mortgage as you need to find a home first before you can do that, but you can obtain a ‘mortgage agreement in principle’. This is not a solid commitment from a mortgage lender but a provisional ‘OK’ – it lets estate agents and sellers know that you’re serious about buying and that you’re not a time waster.

LTVs, Deposits and the Credit Crunch

In general, the larger the deposit, the better the mortgage deal. Also, in today’s post credit crunch world, you may be expected to accompany your mortgage application with a larger deposit than you would have just a couple of years ago.

In the carefree, easy-lending days before the credit crunch, lenders quite happily doled out high loan-to-value (LTV) mortgages – loans of, say, 90% or more of the value of a home. First-time buyers could even obtain 100% mortgages, i.e. a home loan requiring no deposit whatsoever. In fact, right up until February 2008, Northern Rock were offering a home loan deal of up to 125% of the value of a home (rather unwisely for them, as it turned out).

But since the global economic meltdown so dramatically shrivelled the fortunes of banks and building societies, they had little choice but to get tough on lending. This was bad news for cash-strapped first-time buyers, as their key to getting on the property ladder – the high LTV mortgage – was the first to disappear from the market. 

Financial analysts, Defaqto, found that in November 2007 the average maximum LTV was 89.48%, but by April 2009 the average had dropped to 74.63%. Therefore, post-credit crunch, first-time buyers had to cough up around 25% of the price of a home for the key to their first front door, whereas just two years earlier, they might not have needed a deposit at all.

On the bright side, late 2009 saw lenders loosening up on deposit requirements and an improved availability of high LTV mortgages. Yet, as the best offers are generally held back for those with the biggest deposits, it’s certainly a good idea for first-time buyers to beg, steal (no, don’t steal), borrow or save up as much cash as possible for the best chance of bagging a great mortgage deal.

Higher Lending Charge (HLC)

A higher lending charge (sometimes called a mortgage indemnity guarantee or similar) is imposed by a lender when the amount borrowed exceeds a certain percentage of the property’s value (often 75% and over).

An HLC covers the insurance cost to the lender to protect themselves against any losses incurred should the property need to be repossessed.

This charge can be paid upfront or can sometimes be added to the mortgage loan and paid off over the term. However, some lenders will pay this charge to entice first-time buyers to buy their product. See Step 5: First-Time Buyer Incentives

Next - Part 2: Additional Costs

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