How to get your first mortgage

25 May 2009

First-time buyers are returning to the property market — albeit not exactly in droves. The Council of Mortgage Lenders (CML) says that 9,400 first-timers took out mortgages in February this year — 7 per cent more than in January, but 45 per cent fewer than took out home loans in February last year. This is not so much an indication of lack of demand from those trying to get on to the bottom rung of the property ladder but of tight lending criteria, which remain a barrier to many first-timers despite the Chancellor’s move, announced this week, to extend the stamp duty exemption on properties of up to £175,000 until next year. Some strategic thinking, below, can help you on to the ladder.

Money is still tight . . .

Brokers say the situation has eased since the middle of last year but it is still difficult for many people to obtain credit. Figures from show that the number of mortgage rejections has increased fourfold over the past two years, with nearly one in ten applications that meet lenders’ basic income and credit scoring critera being rejected. “Lending criteria have become too strict,” says Louise Cuming, of Moneysupermarket. “Even applications that we would expect to be accepted without a hitch are being rejected.”

. . . but a deposit really helps The key to obtaining a mortgage is the deposit. “In recent years first-time buyers have needed a large deposit to bridge the gap between what they could borrow and the price they had to pay,” says David Hollingworth, of London & Country, the mortgage broker. “Today, the need is dictated by the withdrawal of many of the high loan-to-value products.” It is possible to borrow 90 per cent — or in some cases even 95 per cent — of the purchase price of a property, but it will cost you. “The greater the deposit you can put down, the lower the mortgage rate you can expect to pay,” says Melanie Bien, director of the mortgage broker Savills Private Finance.

Who’s lending?

If you have only 10 per cent of the purchase price to put down, go to HSBC, which recently launched a range of competitive deals available up to 90 per cent loan to value. You have to open an HSBC Plus current account (which costs £12.95 a month) in order to gain access to these deals, but it is worth it. “Other lenders who are prepared to offer mortgages to those with a small deposit charge a hefty premium because of the risk of negative equity,” Bien says. For example, Abbey is offering a five-year fix for borrowers who have a deposit of just 5 per cent, but the rate is 7.09 per cent and the fee is £2,499. By contrast, if you pay a 25 per cent deposit, you can get a two-year fix at 2.99 per cent from First Direct with a £898 fee.

Fixed rate or variable?

Hollingworth advises first-timers to opt for fixes rather than variable rates. “With base rates at just 0.5 per cent, there is little upside to taking a variable deal,” he says. “If you do take a variable deal there could be trouble ahead if rates take a turn back up.”

Whiter than white “Keep your nose clean,” Hollingworth says. “Lenders are much more fussy about who they will lend to.” Your credit score is now very important: make sure you are registered on the electoral roll, keep all your payments up to date and make sure that your credit file is accurate.

Affordability Income multiples remain important, but the amount you earn is only the start. “Lenders will take your debts and other outgoings into account as well as your income,” Bien says. “So if you have a lot of credit or store card debt, you may want to clear this first.”

Inter-generational subsidy If you are unable to obtain a mortgage on your own income, the obvious solution is to turn to the Bank of Mum and Dad, to help out with the deposit or to act as guarantors. “If they are prepared to be guarantors, their income will be taken into account when deciding how much you can borrow,” Bien says. “Bear in mind that it is a big commitment on their part as they will be responsible for paying the mortgage if you default.”

A friendly arrangement If your parents cannot help, you could buy with friends. “Some lenders will take the incomes of up to four friends into account when deciding how big a mortgage to give you,” Bien says. “You need to shop around, because criteria vary: some lenders will consider only two incomes. If you are buying with friends, get a legal document drawn up so that everyone knows exactly where they stand.”

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