How much do you need to borrow?

As a first-time buyer it can be difficult knowing exactly where you are with your finances.

Before you start to look at properties, you’ll need to know exactly how much you’ll be able to borrow. And even though it may seem fairly straightforward applying for a mortgage to cover the cost, you mustn’t forget all the other costs associated with purchasing a property.

We’ve put this simple guide together to let you know what to expect.

Working out how much you can afford to borrow

Okay, let’s start at the beginning – there’s no point looking for your dream first home if you don’t know how much you are working with.

To get an indication of how much you could borrow it may be worth trying a simple mortgage calculator.

Mortgage Calculator

You’ll need to bear in mind that most mortgage calculators are for illustration purposes only – they use your salary to calculate how much you’ll be able to borrow but the truth is, the actual science behind a real mortgage application is much more complicated.

This is why it’s also wise to go through an affordability check with a lender or mortgage adviser before you start your property search, so that you’re not left feeling disappointed.

You actual mortgage is not only based on your salary and other income, but the lender also takes into consideration your committed expenditure such as regular credit card payments, car finance and childcare costs. If you can pass their strict affordability criteria then you’re on your way to a successful mortgage application.

What’s the affordability check?

The lender wants to make sure that you’ll be able to comfortably afford your monthly mortgage payments. This of course protects the lender's own interests, but it also offers protection for you so that you aren’t saddled with sky-high payments that you can barely afford to pay. If you default on your payments because you can no longer afford them, you could be at risk of losing your home.

A mortgage calculator may tell you that because you earn £40k a year, you can afford a mortgage of £160k. However what this doesn’t take into consideration is the monthly repayments that you’d be expected to make.

Say the monthly payments are £800 per month. But by the time you’ve paid off your childcare bills, your outstanding credit card debt and your car finance payment, you’re only left with £800 to spend on a mortgage. It may work on paper, but in the real world it doesn’t add up to a sensible financial solution.

A mortgage lender would prefer you to have a buffer of funds available each month, so that you aren’t left to struggle financially – if that means reducing the amount you can borrow in order to make your payments more affordable then that is what they will do.  

Finding a deposit

However much you can borrow, you’ll need to provide a deposit. This down payment gives you instant equity in the property, and offers security for the lender.

In the past, mortgage lenders were willing to offer 100% mortgages to first-time buyers, but since the economic crisis lenders have tightened up, and this risky practice was one of the first things to go.

Typically first-time buyers are expected to put down a deposit of at least 10% in order to secure their mortgage. So if you were thinking of buying a property worth £150,000 you would need to find at least £15,000 as a deposit.

There are affordable housing schemes available that allow first-time buyers to put down a 5% minimum deposit.

As a general rule of thumb, the more money you offer as a down payment, the better rates of interest you are likely to get. This may mean saving for longer in order to increase your deposit, but the savings may be worth it in the long run, so it’s worth doing some calculations based on different deposit sizes.

Stamp Duty

If you buy a home over the value of £125,000 you’ll be subject to pay Stamp Duty, a government tax. As a buyer, it’s your responsibility to pay Stamp Duty, although some sellers may offer to cover the cost as an incentive but you should always take the cost into consideration if looking at properties over the £125k price bracket. How much you pay will depend on the exact value of the property.

Stamp Duty Calculator

Associated Costs

Setting up a mortgage will usually incur an arrangement fee – this can be paid upfront or it can be added onto the total cost of your mortgage, however bear in mind that with interest charges, the latter option could see you paying much more than you had anticipated. Some lenders may offer deals that have no fees – when comparing mortgages, make sure you add in all the relevant costs and look at the total cost of the mortgage over the term as this will give you a better idea of where the best deals are to be found.

Compare Mortgages

Survey

Many mortgages and home sales are agreed upon, subject to valuation. This is a safety net for you, allowing you to pull out of the process if the valuation or survey brings back some unwanted results but also lets the mortgage provider know that they’re lending on a safe bet, and would be able to recoup all their costs in the worst case scenario.

Mortgage providers may offer a free valuation, but it’s worth noting that this is a very basic check and will not offer you any insight into potential problems with the property (unless they are blindingly obvious). If you are concerned, it may be advisable to have a homebuyer's survey or if the property is very old, paying extra for a full structural survey. Yes, you may lose a little money if the survey uncovers some damning information, but in the long run it will ensure that you’re not ploughing your money into what could essentially be a money pit.

Legal Fees

How quickly the home moving process takes will often depend on the buyer and seller, and whether or not there are any complications in the pipeline. A typical, uncomplicated house move can take around 6-8 weeks. Much of this time is taken up by all the various legal processes that need to take place. As a buyer, you won’t need to do anything more than instruct a solicitor to work on your behalf but of course this will cost you.

Solicitors tend to charge a set fee for their services but others may charge a percentage of the house price so always check to make sure you are comfortable with the price that you have to pay. The charges will cover their time as well as land registry and search fees that need to be paid.

Buildings Insurance

If you have a mortgage on your property, you will be expected to have buildings insurance in place by the time you complete on the sale in order to protect the lender’s interests in case of any damage to the property. You may be offered buildings insurance by the lender when taking out your mortgage but although it’s a compulsory insurance, you don’t have to automatically take it with them.

As with any insurance product, always make sure you shop around to make sure you find the best deal. And if you’re in the market for contents insurance too (you’d be wise to think about it in order to protect your belongings) you can often get a good deal by buying the two products together.

Compare Home Insurance

Post-move

We’ve discussed the essential costs that you’ll need to cover when buying a home, but as most homeowners know, the spending doesn’t stop there.

Depending on your circumstances you may want to think about life insurance or income protection as a way of ensuring your mortgage is covered should anything happen, and you’ll most certainly want to think about saving money on your household bills such as gas, electricity, phone and broadband.

Not to mention the cost of furnishing your property and making it feel like home.

It may seem to be a never-ending list but as always, SoSmart Money is here to help.