Buying your first home? Here’s how to increase your chances of getting a mortgage
- Written by Alper Kara, Professor of Banking and Finance, Brunel University London
Applying for a mortgage for the first time can be a daunting task. But there are several ways you can increase your chances of having your application accepted.
The outcome of a mortgage application largely depends on your deposit size, ability to repay and credit score. These are the factors that make you more or less risky in the eyes of the lender.
As a first step, it is important that you improve your understanding of what a mortgage is[1] and how the repayments work[2].
But make sure you are also familiar with a mortgage calculator[3] to see what you can afford. Mortgage calculators are tools that give you an estimate of how much you could borrow from a lender or what your monthly repayments and other costs might be.
Save a larger deposit
The risk for lenders is lower when borrowers have a large deposit in comparison to the value of the home they are buying. Lenders also charge lower interest rates on mortgage repayments when you have more of a deposit.
A 10% deposit is often the norm, and the rest can be borrowed from the lender. However, there are also opportunities to buy a home with only a 5% deposit[13] for first-time-buyers.
This type of mortgage may increase your chances of buying a home if you cannot save for a larger deposit. But be aware that lenders charge higher interest rates[14] for low-deposit mortgages as the risk is higher for them.
So-called rental track record[15] mortgages even allow you to buy with no deposit. If you are renting at the moment and are planning to apply for a rental track record mortgage, then make sure you pay your rent on time for at least 12 months beforehand to be eligible.
However, it is important to be aware that smaller deposits mean a greater risk of you ending up with negative equity if house prices drop. Negative equity[16] is a situation where the value of your home ends up lower than the remaining value of your mortgage.
Borrow for longer
Currently, 55% of first-time buyers have a mortgage term of longer than 30 years[17]. Mortgages that last as long as 40 years[18] are also on the rise.
The longer the mortgage term, the lower your monthly repayments are likely to be as they are stretched over a longer period. This increases your ability to afford the monthly payments so again reduces the risk for lenders.
However, longer mortgages mean paying interest charges for a longer period, so they cost much more over time. For a £288,000 mortgage with a 5% interest rate, for example, you would make a staggering £161,653 in additional interest payments if you borrow for 40 years instead of 25. Check other scenarios here[19].
With many mortgage products you can make an over payment of 10% per year. Thus, another option would be to keep your monthly payments low and make bulk payments whenever you have extra savings. This will help you to reduce the duration of the mortgage.
This may not be ideal for everyone. However, buying jointly with family and friends could help strengthen your repayment capacity and credit scores. You should, of course, seek independent legal advice over the risks involved before doing so.
References
- ^ what a mortgage is (www.money.co.uk)
- ^ repayments work (theconversation.com)
- ^ mortgage calculator (www.moneyhelper.org.uk)
- ^ This article is part of Quarter Life (theconversation.com)
- ^ If you get your financial advice on social media, watch out for misinformation (theconversation.com)
- ^ Future graduates will pay more in student loan repayments – and the poorest will be worst affected (theconversation.com)
- ^ Four environmental red flags to watch out for when buying your new home (theconversation.com)
- ^ £32,000 (www.forbes.com)
- ^ cost of living crisis (www.instituteforgovernment.org.uk)
- ^ credit score (www.moneysavingexpert.com)
- ^ credit reference agencies (www.experian.co.uk)
- ^ Fabio Balbi/Shutterstock (www.shutterstock.com)
- ^ only a 5% deposit (www.ownyourhome.gov.uk)
- ^ higher interest rates (www.moneysavingexpert.com)
- ^ rental track record (www.skipton.co.uk)
- ^ Negative equity (www.moneyhelper.org.uk)
- ^ longer than 30 years (www.ukfinance.org.uk)
- ^ 40 years (www.ftadviser.com)
- ^ here (www.moneysavingexpert.com)
