In this brief guide, we are going to talk about how to get on the property ladder.
How to get on the property ladder
To get on the property ladder you will need a steady job, a good credit score, a mortgage deposit of 5-20% of the property price, depending on if you qualify for a home buying scheme and that’s it.
Get a good steady job:
Mortgage lenders like to see that the people they lend to have an established income that they can rely on for the foreseeable future. Your job will determine how much you earn and this ultimately determines if you can get on the property ladder and how much you can afford to repay each month( which determines the size of the mortgage which you get).
Mortgage lenders will also take into account the type of job you do, certain mortgage lenders will not lend to borrowers who do a particular type of job as they may see it as being much more risky.
self-employed borrowers will find it hard to get on the property ladder as many mortgage lenders find it hard to work out what the true reliable income of a self-employed borrower is.
If you are a self-employed borrower then you will need to go to greater lengths in order to prove your ncome to the mortgage lender. This may involve submitting documents such as
SA302 self assessment return
Any contracts you have
Your company accounts or work accounts
Your P60 tax return
Fix your credit score
To get on the property ladder you will need a good credit score which will allow you to get a mortgage at a suitable rate.
Your credit score and history reflect how reliable you are at paying back loans.
Your credit score is determined by a number of factors such as amount of payments made late or on time, how much credit you have access to and more.
Having poor credit can affect your mortgage. It won’t make you unable to get a mortgage, but it can give you less choice compared to someone with a better credit history.
The benefit of having good credit means you are seen as more reliable, so you will have access to offers with a lower interest rate, so you pay back less each month.
If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and TransUnion.
Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.
Alternatively you can also use credit score services such as Checkmyfile and clearscore to check your credit report.
If your credit score is low then you should look at credit building tips and guides in other to build credit. This will ensure you have a wide range of mortgage options to choose from. Most government schemes which help people get on the property ladder will also insist you do not have bad credit.
You can build your credit score and history by:
Getting on the electoral roll
getting a secured credit card
getting a credit builder card
getting a credit builder loan (e.g. Loqbox)
Opening a bank account
Opening a credit account and displaying good credit behaviour (e.g. a credit card and repaying your card on time each month)
Keep your credit utilisation below 30%
Avoid making too may credit applications in a short time
Avoid getting rejected for credit
avoid closing credit account too quickly- Keep your credit accounts open for as long as possible
Save a mortgage deposit
If you plan on buying your home with a mortgage then you will need a mortgage deposit to get on the property ladder. With property prices approaching over £300,000 in the UK in some areas you will need at least £15,000. If you are buying a house in London then you will need substantially more for your mortgage deposit as house prices in London are substantially higher.
You will need to save a mortgage deposit and funds to cover costs such as stamp duty and mortgage costs. There are various government backed schemes which help you get on the property ladder faster. Most of these schemes are through a savings vehicle known as an ISA.
ISA stands for Individual savings account.
ISAs let you invest in cash, shares, and unit trusts, tax free on interest, dividends and capital gains.
You can have more than one ISA at once, but you can only invest your personal tax allowance.(currently £20,000)
Saving in one of the government backed ISAs below may help you get on the property ladder faster.
The help to Buy ISA:
The Help to buy ISA is a government backed ISA which allows you to get on the property ladder.
You pay in a lump sum, maximum of £1,200.
You pay in monthly instalments, maximum £200 a month
You receive a 25% bonus on your savings, max £3,000
You get this once you buy your first home.
The lifetime ISA is a government backed ISA which allows you to get on the property ladder.
You pay in lump sums
You receive a 25% bonus each year, max £1,000
If you take the money out for any reason other than retirement or to buy a home you will lose the 25% bonus.
You don’t need to save your mortgage deposit all on your own, some mortgage lenders will accept a gifted mortgage deposit which has been gifted to you by your family or friends. For this, most mortgage lenders will require that you have a gifted deposit letter.
How Mortgages work
Mortgages are a loan borrowers receive to buy their first home.
As a borrower you put down a deposit, this can be 10-20% of the house price or 5% with the help of some home buying schemes. The Mortgage lender will then loan you the remaining amount.
You repay this loan back with monthly payments over a specific period of time with interest.
What are home buying schemes
There are government and private home buying schemes available, most of these schemes are targeted towards first time buyers.
Each scheme serves a different purpose, some help you fund a mortgage deposit and others help you save a mortgage deposit.
How to get on the property ladder with government schemes:
There are a few government schemes which may be able to help you get on the property ladder. These schemes may either reduce the cost of the property, help you save a mortgage deposit or offer you some funds to put towards your mortgage deposit.
These property ladder government schemes include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy– allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire– similar to the above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
How to get on the property ladder with unique mortgage products:
There are also various mortgage products which may be able to help you get on the property ladder some of these include:
If you have family members or friends who may be able to help you with their savings then you may have some family deposit mortgage options such as the family springboard mortgage, they include mortgages from lenders such as the Barclays family springboard mortgage, the Lloyds lend a hand mortgage or the post office family link mortgage.
These mortgages act like a form of guarantor mortgages but they aren’t exactly. You may still be able to find some guarantor mortgages which could reduce the strain of a mortgage deposit for you.
How lenders work out your Mortgage Affordability
Lenders will look at your total income to make sure that you earn enough to afford the monthly repayments which will enable you to get on the property ladder. If you are self-employed the mortgage lender would want to see that you have regular business.
Lenders typically take the total income of everyone applying for a mortgage and multiply that figure by 4.5 (This is the mortgage multiple). This will give you a rough indication of what a lender would be willing to lend you.
How lenders view your personal costs when considering mortgages
Lenders have to make sure that taking out a mortgage on top of your existing outgoings will not put you into financial hardship. Typically they can ask to review 6 months of bank statements.
The first thing they look out for is that your existing commitments are not too high. This includes costs such as:
- Child care
- Credit card payments
- Child school fees
Secondly they look at what you could call your lifestyle costs, these are the non essentials such as vacations, gym membership and eating out.
These are looked at on a case by case basis. On one hand lenders like to see that you have available cash to have fun,
On the other hand you could look risky at managing your own cash, for example excessive spending online gambling each month.
Find a co-buyer
As house prices have increased it is becoming very difficult to afford a property on your own. If you want to get on the property ladder faster then you may want t get a co-buyer who may be able to reduce the financial commitment you face alone.
To increase your chances of getting on the property ladder you can find a co-buyer or multiple co-buyers.
This means your affordability will be assessed together taking into account your co-buyers income etc
Co-buying involves buying with a joint mortgage. This has further implications( such as the need for a declaration of trusts) and legal advice should always be sought.
Improve your Mortgage Affordability
Your eligibility reflects your whole financial landscape, your income, your expenses and your credit score.
It is very possible to improve your eligibility, but it is not done overnight. Most changes are usually seen in 3 – 6 months so it’s the consistency that matters.
Everyone is at a different stage, so to get your own personalised insights. Start our property ladder plan and we will guide you along.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
In this brief guide we discussed how to get on the property ladder. If you have any more questions please let us know in the comments.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.