Why should I budget for my mortgage?Houses cost a lot of money, so you need to make sure you’ve got enough in the bank, firstly, to put down a deposit, and then once you’ve got your mortgage, to meet your monthly payments. It’s a big commitment but ultimately a satisfying one, knowing that the house you live in is your own. The best way to make sure you’re not going to get in over your head and run into debt is to work out a budget. This means looking at what money is coming into your household each month and what’s going out. It’s important you tot up all your outgoings, including bills, food, transport, childcare and monthly memberships like the gym or Netflix. By keeping a spreadsheet of your income and outgoings over a few months you can build a picture of how much money you have and what you’re going to need to meet your monthly mortgage payments. To get an idea of how much you’re spending each month and how much you can save for your deposit, check out the government’s Money Helper Budget Planner.
How much deposit do I need?
Generally, the bigger your deposit, the more options you’ll have when it comes to getting a mortgage. Most people put down at least a 10-15% deposit. First time buyers in Wales can take advantage of the government’s Help to Buy Equity Loan scheme. For this you’ll need at least a 5% deposit, and the government gives you a loan to top up your mortgage, which is interest free for 5 years. The only catch is that this can only be used on new build properties.
Deposit Unlock is a recent scheme that some lenders are starting to offer which allows people who aren’t first time buyers to buy a new build property with a 5% deposit.
With both schemes you need to meet certain criteria. At Dupree & Co we are happy to explain the schemes and let you know if they might work for you.
How much should I borrow for my mortgage?Make sure that whatever mortgage you are accepted for is a workable monthly payment that won’t put you under stress. Mortgage payments used to be cheaper than rent, but now this isn’t always the case. You can work out what your mortgage payment might be each month using a mortgage calculator. The length of the mortgage will have an impact on your payments, for example, a 30-year mortgage over a 20-year mortgage will lower your monthly payments, but you’ll pay more interest over the long term. If your mortgage payment is too high, you risk going into debt and defaulting on your mortgage.
How do lenders decide if I’m suitable for a mortgage?
A lender won’t just look at your income and your deposit, they’ll look at the state of your overall finances when considering your mortgage application. For example, if you’re always in the red at the end of the month you might be deemed a higher risk. It could be useful to look at your finances and your monthly outgoings and get them into shape a few months before you start the mortgage application process.
To avoid lending too much to people who can’t pay it back, lenders tend to only loan up to 4.5 times your annual income. This means that you’ll be able to get a bigger mortgage if you’re buying with someone else, as you can combine your two incomes.
What other expenses do I need to consider when budgeting for a home?
Good question! As well as your deposit and monthly mortgage payments, you’ll need to cover the fees and charges associated with buying your home. This includes things like solicitor and conveyancing fees, potentially a valuation fee, tax, land registry fees, estate agency fees (if you’re selling) and any mortgage product fees.
Solicitor / conveyancing fees
You need to pay your solicitor for all the legal fees associated with buying a home. This is typically around £1,000. You’ll also need to pay for searches, which is when your solicitor/conveyancer looks into the area and the property you want to buy, assessing things like flood risks, water supply and sewage, and local planning proposals. You can expect to pay around £300-£400 for this.
Your lender may charge this to review the property you’re buying to check how much it’s worth – as this may differ from how much you’re paying for it. They do this for security, in case you default on your payments and they have to resell it, so that they have an accurate valuation. Even if the lender offers a free valuation you might prefer to pay for a more detailed survey to make sure you are happy with the condition the property is in.
Wherever you live in the UK there is tax to pay when you buy a property over a certain threshold. The rate you pay depends on the price of your property. If you’re a first-time buyer in England and Scotland reliefs are available. In England first time buyers pay no Stamp Duty on properties costing up to £425,000. If the property is worth more than that Stamp Duty is paid on the difference. Keep in mind if the property is worth more than £625,000, first time buyer Stamp Duty relief does not apply.
Land registry fees
When you buy a property from someone else, the Land Registry charges a fee to transfer their register entry into your name. This fee’s dependent on how much your property is worth but expect to pay between £200-£300. Again, your solicitor will pay this on your behalf.
Estate agency fees
These only apply if you’re selling a house and not if you’re buying for the first time. If you’re selling, you’ll usually pay between 0.75% and 3.5% of the selling price of the property you’re moving from to your estate agent.
Also known as an arrangement or booking fee, this is a one-off cost you pay to your lender to secure your mortgage deal. The lender will usually offer you the option to pay the arrangement fee upfront, or you can add the fee to the mortgage. If you choose the latter, you’ll be charged interest on it.
When you take out a mortgage, it is a condition of your mortgage that you take out buildings insurance if you are buying a freehold property. In many cases it is advisable to take out other insurance to protect you and your loved ones in the event of ill health and death, so if your circumstances change you don’t have the worry of potentially losing your home.
These additional costs are easy to forget in the excitement of getting a mortgage, so we’ll sit down with you and talk you through all your expenses, so there are no nasty surprises when it comes time to buy.