Before you start the process of looking for your dream home, you’ll need to find out how much you can borrow for a mortgage first.
Before applying for your mortgage, you’ll need to assess your finances and work out whether you can afford the monthly repayments.
During the application process, mortgage providers will take a look at your income, your outgoings and your lifestyle choices, to make sure you’re able to pay the monthly sum, should interest rates rise.
In this article, we’ll guide you through the process of getting a mortgage, and explore the assessments lenders will carry out when agreeing how much you can borrow.
This depends on a whole host of factors, from your income and outgoings, to your lifestyle and even your credit score.
In the past, lenders based the amount you could borrow solely on your income. For example, if your annual income was £50,000, you could borrow three, four or even five times this amount – up to £250,000. This was known as the loan-to-income ratio.
Now, thanks to changes made by the Financial Conduct Authority in 2014, the mortgage application process will require your lender to ask you a series of questions to determine your spending habits. You may even be required to show evidence of this by providing copies of your bank statements and any other finance products you may have. This is what’s called an affordability assessment.
Some lenders go even further and will carry out what’s called a ‘stress test’, where they will assess your ability to cope financially in the event of redundancy, or other financially challenging circumstances like having a baby.
Following the assessment, your lender will send all of the information off to their underwriting team, who will assess everything in detail and provide what’s called a ‘mortgage in principle’. This will give you a clear idea of how much you can borrow, and will allow you to start the process of looking for a suitable home (some estate agents won’t let you look at properties until you have a mortgage in principle from a reputable lender).
You may find that the amount your chosen lender is willing to lend you is less than you hoped. It’s always worth shopping around, using comparison sites such as Money Saving Expert and Money Supermarket to get the best possible rates, and to find out whether there is any flexibility in the amount you’re able to borrow.
Note: your mortgage in principle is merely an indication of how much your chosen lender may be willing to lend you and is not guaranteed.
Once you’ve had an offer accepted on a property – congratulations! It’s now time to apply for your mortgage.
Taking the figure provided in your mortgage in principle, your lender will then start the application process specific to your new home.
Much like your application for a mortgage in principle, the mortgage application itself will require you to answer a series of questions about your deposit, your financial history and your spending habits. This application will likely be more detailed than the process of obtaining a mortgage in principle, so prepare to answer all questions openly and honestly. Your lender will provide a list of the types of information they’ll need from you prior to your application. Take as much information as possible and any proof of earnings, finance products and bank statements for both applicants along with you. This will help to speed up the process.
During the application process, your mortgage advisor will take you through the mortgage products available to you.
There are hundreds of different mortgage products on the market designed for all sorts of buyers and sellers.
The job of your mortgage consultant will be to explain these to you clearly and make recommendations to you based on your unique set of circumstances.
That said, mortgages typically fall into two main categories:
a. Fixed mortgages. This is where the amount you pay each month is fixed, even if interest rates go up and down. This is the best type of mortgage for those looking for a clear idea of their outgoings each month. This type of mortgage is also recommended if finances are likely going to be stretched in the first few years of your mortgage. Some fixed mortgages with the best rates will have a fee attached to them, however, this could save you a significant amount of interest in the long run.
b. Tracker mortgages. This is where the amount you pay each month fluctuates depending on the interest rate at the time. While this affords many applicants the flexibility to change their mortgage mid-way through the term, perhaps to make a lump sum, or to switch to a better rate, there is a lot of uncertainty with this type of product. Interest rates have been known to exceed 15% in the past, so make sure you’re able to keep up with your payments should this happen.
While details of your finances are one of the key factors taken into consideration during your mortgage application, your lender will also need to assess the property you plan to purchase, to ensure it’s a solid investment for the bank.
Following your interview with the lender, your mortgage advisor will then be in touch to organise a survey of your new home. Here, a qualified surveyor will visit the property, and look at things like signs of subsidence, cracks in the walls and roofing, leaks and damp.
In some instances, your lender may reduce the amount they’re willing to lend you based on the age and condition of your home. In some extreme instances, you may find your lender refuses your application altogether. If this happens, it’s nothing too major to worry about – you simply will have to start your search for a home all over again!
In most cases, however, and particularly when purchasing a new-build property, your survey will go smoothly and your application can continue.
The whole application process can take anywhere from a week up to two months, so you will need to be patient while you wait for the application to complete.
You do not need to worry about getting hold of the borrowed funds – this will be handled by your solicitor.
Your solicitor will liaise with the estate agent, the seller and your lender to coordinate the transfer of money on the day of purchase. This is called an ‘exchange’. Once money has changed hands, you will then be able to ‘complete’ – the day you’re handed the keys to your new property.
It’s common knowledge that the process of buying and selling a property can be extremely costly.
Not only will you need a healthy deposit to purchase a property, you will also need to factor in stamp duty (no longer applicable to first-time buyers) estate agency fees and legal fees. We recommend having a minimum of £5,000 put to one side to cover the cost of the move itself.
If the process of buying or selling your home still seems a little daunting, get in touch with the friendly team at ZeroC. We’ll take the time to understand your requirements and will be able to answer any questions you have about the mortgage process.
With interest rates at record lows, many savers are looking to invest their money to gain a better rate of return. But investing is much more complicated than saving. With investing, savers are faced with a choice of bond funds, exchange-traded funds, mutual funds, individual stocks, and of course property.
So in this article, we are going to focus on how to invest in the property market. Property along with shares and bonds are one of the three most popular types of investment. But property differs from other forms of investment because investors realise gains in two very different ways.
Firstly, the value of your underlying investment increases as property values rise. And secondly, you earn income from rental payments from the tenants. Investors have the choice of using these rental payments to pay off a mortgage, which will reduce the rate of return, but allows investors to leverage the amount of capital they have to invest.
One final point before we move on… investing in property doesn't have to mean buying a portfolio of expensive properties. There are a number of ways you can invest in the property market and they don’t all require large amounts of capital. So don’t be discouraged if you only have a few thousand pounds to invest.
Property investment can take many forms including buy-to-let investments and property funds. Each of these has its own pros and cons so we’ll look at each of them individually. This will help you choose the right investment vehicle for your specific requirements and your available capital.
Buying a property directly is an investment in itself. You will benefit from the capital appreciation of the property even if you have to borrow funds to purchase it in the first place. In theory, capital appreciation will outweigh interest payments on a mortgage, but this is not always the case.
- Gives you full control of your investment
- You can search for properties which represent good value and benefit from capital appreciation as property prices increase
- Buying a property direct incurs a range of fees such as conveyancing and stamp duty
- Your capital is tied up for a long period and capital appreciation can be slow
- Your property is at risk if you don’t keep up repayments on a mortgage
- You will need to find a large deposit. Most lenders require a minimum of 10%
Buy-to-let investments have become popular over the past decade since low-interest rates mean cheap mortgages. Specialist buy-to-let mortgages are available which allow investors to create portfolios of properties which they can rent out. However, this strategy is fraught with risk which many new buy-to-let investors don’t fully appreciate.
- Allows you to benefit from both the appreciation of the property and rental yields
- Interest on mortgage payments can be offset against tax
- You are dangerously exposed to interest rate risk. If interest rates start to rise, rental yields won’t cover mortgage repayments.
- You are responsible for the upkeep of the property
- The cost of advertising your rental property can eat into your returns
- You will have to cover mortgage repayments when you don’t have a tenant
- Stamp duty is more expensive for buy-to-let properties
- You will need a large deposit. Most lenders require between 15-25% for buy-to-let mortgages
Property investment funds are one of the easiest and most popular ways of investing in property. They operate in a similar way to equity funds, with the fund manager purchasing a portfolio of properties and selling shares to individual investors. You make money from rental yields and capital appreciation of the underlying portfolio.
- Allows you to invest in property without tying up large amounts of capital
- Shares in the fund can be bought and sold easily and at low cost.
- The fund spreads the risk across a number of different property types providing a degree of diversification
- Property prices can be volatile which makes for a bumpy ride
So how should you invest in property? The answer to this depends on how much capital you have to invest and how involved you want to be in managing your portfolio. To find the answer to this start by looking at your available funds and decide what percentage of them you want to allocate to a property portfolio.
You shouldn’t invest all your available funds in a single investment class. This will leave you dangerously exposed should property prices crash. The world’s greatest investor, Warren Buffet, recommends a portfolio of 90% equity funds and 10% short-term government bonds such as Gilts or Treasuries.
This is a very cautious approach however, you can diversify this portfolio further by adding a small allocation of property investment funds or building your own property portfolio. Whichever approach you take, most financial advisors recommend you limit your property exposure to between 5-10% of your overall portfolio.
So if you have £100,000 to invest you should allocate no more than £10,000 to a property fund or portfolio. Now you know how much you have to invest you can choose which of the three options above makes the most sense. And don’t forget you can still benefit from the property market even if you have as little as £1000 to invest.
One word of warning, as with all investments, there is a risk the value of your property investments will fall. Should this happen, take legendary investor John Bogle’s advice and don’t try and outsmart the market.
It is inevitable that property prices will fall at some point, so when this happens don’t lose your nerve and sell your portfolio. Weak property prices mean good value, so this is the time to buy not sell. The property market in the UK is very resilient and prices always rebound to a higher level than before. Remember this and you will slowly but surely build a nice little property portfolio for your retirement.
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