Looking for your first mortgage? Totally Money can help.
With house prices rising in the UK, finding your way onto the property ladder can seem impossible, particularly if you are stuck in the renting cycle, with no extra money left at the end of the month to put towards a deposit.
However, a major requirement of a strong property market is a continuous supply of new buyers entering the market; as result, lenders are making more and more products available that are specially geared towards helping first time buyers purchase their own home.
100% Mortgages
100 percent mortgages have become more common in recent years, and are very popular with young first time buyers who are unable to save a reasonable deposit while renting. 100% mortgages require zero deposit, allowing you to borrow the entire value of the property.
However, the risk to the lender associated with applicants who have little or no deposit is much higher than that associated with applicants with a substantial deposit; in order to provide insurance against this risk, many lenders charge a Higher Lending Charge when the loan to value ratio of the property is very high – usually if it surpasses 85-90%. This is combined with higher interest rates on the loan in order to alleviate the risk to the lender that the borrower will default on repayments. Some lenders allow borrowers to add the HLC onto the mortgage amount so that it does not need to be paid upfront - however this will result in your paying interest on the charge.
Guarantor Mortgages
A guarantor mortgage allows borrowers to borrow more than they would otherwise be eligible to, by having a legal guardian act as guarantor to a set percentage of the property value. A guarantor mortgage is held in the name of the primary borrower, but the total borrowing potential is calculated by considering the guarantor’s income, minus any current commitments - such as their own mortgage.
In the event that the primary borrower is unable to meet the monthly repayments the guarantor becomes responsible for them, and can be legally pursued by the lender. The percentage of the property value that the guarantor is responsible for decreases gradually, in line with primary borrower’s increasing income, so that they eventually become the owner of the property in its entirety.
Guarantor mortgages are popular among first time buyers who whose current income would make them unsuitable mortgage applicants; however it is a big commitment on the behalf of the guarantor. Guarantor mortgages are highly complex, and should be discussed with an Independent Financial Advisor for individual advice.
Graduate/Professional Mortgages
Most graduates are now leaving university with high amounts of debt, putting the housing market even further out of reach. The increase of Graduate, or Professional mortgages available are providing an affordable borrowing solution for graduates to enter the property market. Graduate mortgages are usually open to applicants either within a certain amount of years from graduating from a recognised UK university, or before a certain age, depending on the lender.
Often graduate mortgages require no deposit, so they are similar to a 100% mortgage; but with a graduate mortgage you may be eligible to borrow more than 100% of the property value in order to help cover fess and the costs associated with buying and moving. The most important aspect of the graduate mortgage is that lending is organised on a case by case basis, and your potential earnings will figure strongly in your total borrowing potential as opposed to your current income. This is sometimes called ‘affordability lending’, as the future earning potential of a graduate with strong career prospects becomes more significant to lenders than what may currently be only a modest graduate salary. The rise of your earnings also influences the interest rates offered on the mortgage; as the interest will usually be stepped, gradually rising as your income increases, allowing your introduction to the property ladder to be as smooth as possible.
Buying with Friends
When buying property, your income in assessed as one of the most influential factors when determining your potential borrowing power. Although it varies from lender to lender, borrowing potential generally follows as:
This puts single borrowers at a distinct disadvantage to couples when it comes determining your potential to repay the mortgage, even if you know that you could afford the repayments. As the general population is waiting longer before choosing to marry or co-inhabit, this is leaving many potential sole buyers unable to secure a mortgage amount high enough to buy a suitable property.
As a result of this, many people are choosing to buy with friends, in what is generally termed a ‘tenants in common’ mortgage. A ‘tenants in common’ mortgage allows up to four people to be jointly named on the mortgage, with potential borrowing power determined by a calculation of combined incomes. With a tenant in common mortgage, all people named on the mortgage are jointly responsible for the entire value of the mortgage; so if one tenant dies or disappears, the other three tenants become responsible for the whole amount, not just their share, and can be legally pursued by the lender.
The main difference between two friends buying property as tenants in common, rather than as joint ownership as would a couple, is that with joint ownership you both own the whole property, and in the event of your death your partner would take legal ownership of the whole property; meanwhile, tenants in common own a share of the property each, and each share can be left to whomever they choose in the event of their death, rather than automatically passing to the other tenants.
Buying property with friends is a lot more complicated than simply renting together, and in the interests of your finances, a contract should be drawn up at the commencement of the mortgage for each applicant’s protection – even if you are best friends or siblings. Points to cover in the contract include:
State the percentage of the property that is owned by each person;
State what would happen to your share of the property if you died – each tenant should draw up a Will to legally name benefactors;
State what would happen in the sale of the property; such as, whether one person can force the sale of the entire property, refuse the sale, or sell their share.
State what would happen if you wished to retain ownership of your share but vacate the property and rent our your room;
Payment of bills, rates, taxes etc.
Let Totally Money help you
If you are considering a mortgage and don’t know where to begin, visit our mortgage page and fill out the form, and Totally Money will connect you with an independent mortgage expert for advice tailored to your personal circumstances.
Please note: this website, and the articles and information within it are based on journalistic research. It does not and should not be construed to constitute financial advice. Any information should be considered in regard to specific circumstances. All tips are followed at your own risk and should be followed up with your own research. For more please refer to our terms and conditions of use.