Threshold Mortgage Advice

Home buying guide, part 1: Establishing affordability

Buying your first home is undoubtedly an exciting milestone and there are few feelings as euphoric as the first time you turn your key in the lock of the home you now own. But as rewarding as house buying is, the process of purchasing can also be one of the most stressful, often compared with major life events like death and divorce (just ask anyone who’s been through it).

But, while the path to buying a new home can throw up the occasional hurdle to contend with, with the right support the process doesn’t have to overwhelm you. So, to help you on your way, we’ve pulled together a handy five-part guide to house buying that tells you exactly what to expect at each key stage of the journey.

In this first instalment we’ll look at the affordability process, the very first place you need to begin if you’re considering purchasing your own home.

What will I need if I want to buy my own home?

When you decide you’re ready to get on the property ladder it can be tempting to jump straight to browsing Rightmove listings in your search area, but before you can even begin looking at properties you first need to establish what you can afford.

Now, unless you’ve recently won the lottery or come into a substantial inheritance, the likelihood is you’ll need a mortgage to purchase your first home – this is a loan from a bank or building society that you repay with interest. However, a lender won’t just hand over any amount you ask for. They need to be confident that you can afford the monthly mortgage repayments and to establish that they’ll assess your earnings, savings, spending, credit history and any outstanding debts you owe.

Finding out how much you can borrow

Most banks or building societies will offer some form of free online mortgage or affordability calculator where you can run through some basic figures and get a general idea of what you might be able to borrow.

The problem with these calculators however is that they rarely take into account the whole financial picture, nor do they tend to cater for more complex circumstances (such as if you have multiple income streams or you’re both employed and self-employed simultaneously).

The simplest way to get an accurate picture of what you might be able to borrow is to speak to a mortgage broker. As a professional mortgage specialist a broker acts as a mediator between you and a panel of lenders. They’ll be able to run through all the information lenders will ask for, and give you a realistic figure for what you can afford. And, the best part is, you’ll only have to run through this information once.

Do I need savings to buy a home?

The answer to this question is yes, you do need some money set aside if you’re planning on buying a property. This is what’s known as a deposit and most lenders require a deposit of around 10% of a property’s purchase price.

There are some instances where a lender may accept less than a 10% deposit, but this will likely narrow your pool of lenders (the number of banks or building societies willing to loan to you) and may result in higher monthly repayments. This is something your broker will be able to discuss with you in more detail.

What information will a mortgage broker ask me?

A mortgage broker will ask you a range of questions about your financial circumstances – and require you to submit evidence to back-up your answers. The main things they’ll need to know in order to calculate your affordability are:

  • Your annual salary
  • How much (if any) rent you currently pay
  • The value of any service charges you’re liable for
  • How much your bills (utilities/broadband/mobile) come to each month
  • What size deposit you have
  • How much council tax you pay
  • If you have any credit cards
  • Any debts you owe (including student loans)
  • Whether you have any dependents (for example children)
  • How much you spend on essentials like food each month
  • Any other monthly repayments you make

You’ll also need to provide proof of some of the above, such as your most recent payslips and bank statements (normally three months’ worth) or your last three years’ SA302s and Tax Overviews if you’re self-employed. These are needed to get you what is known as an AIP (Agreement in Principle). This is a document from the lender, confirming that they have agreed (in principle) to loan to you. It isn’t legally binding, but it is the first positive step towards securing a mortgage.

You’ll still need to complete a full mortgage application once you have an offer accepted on a property, but an AIP allows you to begin viewing properties, knowing what you can afford. It’s also important to have an AIP before you begin viewing, as you won’t be allowed to offer on a property without one

In part 2 of our house buying guide we’ll cover the viewing process in more detail and explain what you should take into account when offering on a property. In the meantime, if you’re thinking about buying a home and you’d like to know what you could potentially afford, contact Threshold today.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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