MoneySavingExpert SECTION TITLE First Time Buyers’

[Pages:29]Your Free Guide to Mortgages Here's your copy of the Guide to Mortgages, sponsored by us, L&C.

If you've never bought a home before, the whole process can seem quite bewildering. And often, arranging a mortgage can look like the most complicated bit of all.

Which is why you should find this guide so helpful. It takes you through the whole mortgage process, step by step, and even starts with some basic questions that you may be asking yourself right now, like is a mortgage right for me?

A helping hand Remember, when you start your mortgage search, L&C is on hand to help. There are literally thousands of mortgage products out there. And even when you're armed with all the facts, it can be tough finding one that best suits your needs.

But when you apply through L&C we do all the hard work for you. Whether you use our online tool to see how much you can borrow and which deals you are eligible for, or speak to one of our expert advisers over the phone, we'll search right across the mortgage market to find the deal that's right for you.

Next, we'll create an electronic application form for you, prefilled with all your data - ? to speed along the process and take away the stress. We even pre-qualify your application to make sure it's accepted by the lender. In short, we'll save you time, hassle and potentially a lot of money in the long run with a great mortgage deal.

And the best bit? Our service is absolutely free for you. We make money when the lender pays us a fee for finding them a customer. None of this cost is passed on to you at any stage. So you genuinely don't pay a penny for our award winning service.

For a free no-obligation review, simply call us free on 0800 694 0444 or go online to landc.co.uk/pmf/mseftb

We hope to speak to you soon.

Phillip Cartwright Managing Director

MoneySavingExperStECTION TITLE

First Time Buyers' Mortgage Guide 2021

Written by Martin Lewis, Liz Phillips and Guy Anker

SPONSORED BY



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CONTENTS

Foreword ? Independence and integrity

Who's this guide for?

Martin's Mortgage Introduction

Chapter 1 Is a mortgage right for me?

Chapter 2

Have you got a big enough deposit?

? Help to Buy ISAs and Lifetime ISAs ? Help to Buy 2 (equity loan) ? Shared ownership ? Guarantor mortgages

Page 1 Page 2 Page 3 Page 4 Page 6

Chapter 3 Boost your chances of getting a mortgage Chapter 4 What type of mortgage to choose? Chapter 5 Mortgages for the self-employed / contract workers Chapter 6 Don't forget the fees Chapter 7 How to get a mortgage Chapter 8 Watch out for the hard sell on... Chapter 9 First time buyers' quick Q&A Chapter 10 Happy hunting

Page 15 Page 19 Page 36 Page 37 Page 41 Page 48 Page 50 Page 53

Independence and integrity

FOREWORD

"This guide is written with absolute editorial independence"

This guide is sponsored by L&C Mortgages. That's the reason we can print and distribute it for free.

So let me make something very plain.

This guide is written with absolute editorial independence. What's in it is purely dependent on my, and my team's, view of the best ways to save money and the sponsor's view on that is irrelevant.

However, the reason I agreed to allow L&C to be the sponsor is because after detailed research into those brokers that offer coverage nationwide, L&C has come out as one of the top ones for a number of years.

It's very important that this is understood and no one thinks it is the other way round, in other words, it is recommended because it sponsors the guide. Like everything with , the editorial (what's written) is purely about what's the best deal.

If L&C no longer offers the deal it currently does, and either starts charging fees or stops being independent and offering products from across the market, we'd ditch it as a pick immediately. You can check if that's happened via an up-to-date article on mortgage brokers on the site. Just go to mortgages/best-mortgages-cashback/.

A4ll information correct at time of going to press (JanuaryM20o21n).



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WHO IS THIS GUIDE FOR?

Who's this guide for?

It's for anyone who wants to buy a property and needs to persuade a financial institution to lend them the cash to make it happen. The UK mortgage market is highly competitive, but also far pickier than it used to be. So the challenge is threefold. First, you need to sort yourself out so that you're attractive enough to lenders to get a mortgage. Next you need to make sure you can get a mortgage, then you need to ensure it's one that's cheap and right for you. So this is specifically for...

New buyers

Those who don't own a property and are looking to buy one. Whether you've a small or large deposit, and whether you've got a good or bad credit history, this guide will explain your options.

Who this guide isn't for

Remortgagers

If you already have a mortgage and want to cut the cost, then there's a special guide just for you. Go to remortgage-guide to get it.

INTRODUCTION

Martin's Mortgage Introduction

Getting a mortgage is one of the biggest financial commitments you're ever likely to make so it should be taken seriously. However, while it may feel scary, it needn't be difficult. As we'll explain later, there is a lot of help available. You can, and often should, use a mortgage broker to go through the options with you. They have access to information you don't -- such as lenders' credit and affordability criteria -- so a good broker should help match you to the right deal. See You may ask: "Why bother writing a guide, if I'm just going to get a broker to do it for me?" The answer is simple: mortgage brokers are advisers, not teachers. Ultimately, it's you who makes the decision and you who'll feel the impact of that decision. Even though you're taking advice, asking the right questions and understanding exactly how mortgages work is the best weapon possible. So see this free guide as a way to tool up your knowledge to put you in a confident position to make the right decision. By the end of this guide, I hope you'll not only understand how to get a mortgage, but how to get the best MoneySaving mortgage possible.

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CHAPTER 1

Is a mortgage right for me?

In the mid-noughties, you only had to catch a mortgage lender's eye for it to throw a mortgage deal at you. You could borrow whatever you wanted, sometimes shockingly even more than the home you were buying was worth. Time and the credit crunch have changed things radically.

These days people still struggle to get mortgages, so much so the Government has even launched a range of schemes such as Help to Buy to try to push lenders to offer more.

So the starting point for first timers is no longer about choosing the mortgage that's right for them. It's about ensuring you'll be chosen for a loan by a mortgage company at a rate that is affordable for you.

Can you really afford a mortgage?

First things first. This is a numbers game so before you do anything else, have a good look at your finances. Use to overhaul your finances and work out what you can realistically afford to pay every month. Do your homework to find out what's available.

It's important you do this before lenders do. You can use mortgagecalc to see how much your mortgage is likely to cost you each month. Think carefully about whether you can afford it, and what would happen if interest rates went up. The mortgage needs to be within your financial comfort zone; don't push too hard, you just risk future unaffordability and that can be catastrophic.

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CHAPTER 1

How much will they lend you?

Historically, lenders simply multiplied your income to work out how much to lend you. Typically, a single person could borrow four times their single salary while a couple would be offered four times their joint salary.

Now it's all about affordability. Lenders look at your income compared to your outgoings (bills and other debts) and work out how much spare cash you have each month.

This can get tricky. Some lenders are so picky that even when you've paid debts off -- say, on a credit card -- just before applying, they factor in how much available credit you have. Or they may see you as a higher risk if you're using more than half the credit available to you. They'll also factor in all your credit card and loan repayments.

Even once they've done the maths, they'll want you to have a cushion in case mortgage rates rise, and to ensure you're not right on the edge of your finances. As a result, mortgage lenders will `stress test' you on a higher mortgage rate, typically 7-8%, to check if you could still afford to repay.

Martin's Mortgage Moment

Renting isn't a dirty word

"Must own, must own, must own," has become a mantra of our age. I remember meeting a 21-year-old couple while filming who were upset they weren't on the housing ladder yet.

Let's make this plain. Owning a house is great, but not a necessity. As the credit crunch showed, house prices can and do go down, both in the short term and the long term. True, over the very long term it's unlikely, but no one can predict the future.

If you're buying a house to live in, the fact you won't need to pay rent really does help the equation. Yet don't starve to do it.

Your overall finances are more important, so make sure you can afford the house and definitely don't overstretch yourself -- if you think it may be a little much, take a step back and pause. Not owning is better than getting repossessed. Better to wait a little until you're secure. Remember, renting isn't a crime. In some circumstances it's worse, but if house prices drop, it's often the winner. No one really knows, so don't panic.



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CHAPTER 2

Have you got a big enough deposit?

The coronavirus pandemic has made it more difficult than ever to get a mortgage. You're going to need to get a substantial deposit together to boost your mortgage chances.

The deposit not only proves that you're solvent and have financial discipline, but it also means the mortgage loan is less of a risk for the mortgage company. That's because a mortgage is a secured loan (in other words, if you can't repay, it gets your home) so by lending the money it's taking a gamble on house prices.

If you've a 20% deposit, then house prices would need to drop by 20% before it wouldn't be able to recoup the full amount of the loan if you couldn't pay it back. So the bigger the deposit, the more it's protected.

There's no easy shortcut to getting the cash -- it may come from saving up (see moneymakeover for tips to help), money from parents or grandparents, selling your car, cutting back on everything or getting an inheritance. But the fact remains -- no deposit = no mortgage.

Q. How big a deposit will I need to get a mortgage?

A. These days, in light of coronavirus, you'll likely need a minimum deposit of 10% to get a mortgage. Yet to get a good mortgage interest rate, you'll often need more than 20% of the home's value as a deposit and more than 40% for the kick-butt market-leading deals.

The golden rule is quite simple. The bigger the deposit, the better the interest rate, the lower your monthly repayments, the cheaper the mortgage. The difference between a 5% and 10% deposit is huge; the next big jump's at 20%, then 40%. So if you have any chance of pushing yourself up a band (or perhaps asking parents to help), do it.

The effect of having a bigger deposit

Deposit Interest rate Loan amount Monthly cost Total cost over 2 years

10% 3.24% ?180,000 ?876 ?21,500

20% 1.76% ?160,000 ?660 ?17,536

25% 1.19% ?150,000 ?578 ?16,074

40% 1.19% ?120,000 ?463 ?13,314

Based on the best value, fee-free two-year fixed rates for a first-time buyer with a house purchase price of ?200,000 on a capital repayment basis over a 25-year term.

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The table on the previous page shows the effect of having a bigger deposit, as the rates get better the more you have (rates correct in Jan 2021).

It's worth noting that back in 2012, it would have been almost impossible to get a mortgage with anything less than a 10% deposit. The big change to the market has been the growth in the number of 5% deposit mortgages, primarily due to the Government's Help to Buy scheme (more on this later).

Yet while they're available, the rates are still high compared to having a bigger deposit. So you should do your affordability maths carefully before plumping for one.

Q. In the best buy tables it says "LTV", not deposit -- what does that mean?

A. This is a figure lenders often use to indicate how big a deposit you need and you'll see it in best buy tables. LTV stands for the loan-to-value ratio (LTV), which is the percentage of the property value you're loaned as a mortgage. In others words, it's the proportion that you're borrowing.

To calculate this, simply subtract your deposit as a percent of the property value from 100%. So if you've a ?20,000 deposit on a ?100,000 home, that's a 20% deposit, meaning you owe 80% -- so the LTV is 80%. Just in case you're struggling or scared of maths, here's an easy table...

LTV

95% 90% 85% 80% 75%

Equals deposit of

5% 10% 15% 20% 25%

LTV

70% 65% 60% 55% 50%

Equals deposit of

30% 35% 40% 45% 50%

The reason it's expressed this way is so the same term can be used for those getting a first mortgage and those who want to remortgage (changing your mortgage deal later on). Once you have a mortgage, you no longer have a deposit, so it becomes all about what proportion of the property's value you're borrowing.

It's worth thinking about LTVs for a moment. They're not just affected by the amount you put into a property, but also by house prices. This is crucial -- by buying a property, you're investing in an asset where the price moves.



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A practical example... let's say you have a ?10,000 deposit on a ?100,000 house -- that means you owe ?90,000 at the start. That's an LTV of 90%.

After a few years you'll have paid a little off and now owe ?85,000. If you came to remortgage (get a new deal) and the house's value is the same, your LTV becomes 85%.

Yet if the house is now worth more, say ?120,000, then your LTV is about 70% (as it's ?85,000 divided by ?120,000 multiplied by 100). This means you'll be likely to get a much better mortgage deal. Equally, if the house's value had dropped to ?80,000, you'd now owe more than it's worth (which is called negative equity) and be unable to remortgage to a new lender.

Q. OK. I think I've got it. So for a 90% LTV mortgage I need a deposit of 10% of the property price?

A. Big picture yes, correct, but it's not quite that simple. You've made an offer on a property. The seller has accepted your offer. The mortgage company will now do a valuation of the property before it commits to lending you the money. The lender will base the LTV calculation on the lower of the purchase price or the valuation. So if the lender values the property at less than you've agreed to pay for it, it'll only lend you 90% of the value it has placed on the property. This could mean you need a larger than expected deposit.

An example will help.

You're buying a house and you agreed a ?200,000 price with the seller and have a ?20,000 deposit. Yet the mortgage valuation says it's only worth ?190,000. For a 90% LTV mortgage the company will only give you a ?171,000 loan (90% of ?190,000), so now you'll have to put up a ?29,000 deposit to make it up to ?200,000. You'll have to find a further ?9,000 to buy the property, which works out as a 14.5% deposit.

If that happens to you (don't panic, it doesn't happen to everyone) it's worth contacting the seller and seeing if they're willing to renegotiate on price.

Q. What about Lifetime ISAs or Help to Buy ISAs?

A. If you're a first-time buyer saving for a mortgage deposit, the Lifetime ISA (LISA) -- launched by the Government in 2017 -- is worth considering. The Help to Buy ISA, while closed to new applicants, can also be used by first-time buyers who opened one before the deadline.

Lifetime ISAs

The LISA is designed to help you buy your first home or save for retirement. You must be aged 18 or over but under 40 to open one.

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CHAPTER 2

The LISA lets you put up to ?4,000 in it each tax year. It can be as cash savings -- so you get interest -- or stocks and shares investing -- so you get share growth (or loss).

Here are the basics...

- Save up to ?4,000 in it each year. The state will then add a 25% bonus on top.

- The max bonus is ?33,000 (unless rules change), if you open it at 18 and max it out until you hit 50.

- You can use your LISA to help you buy your first home if the property costs ?450,000 or less.

- If you're buying with someone who is also a first-time buyer you can both use your LISA savings and bonus.

For full info on LISAs see savings/lifetime-ISAs.

Help to Buy ISAs

Help to Buy ISAs are now closed to new applicants. But for those who got in on time, it's still possible to get a better rate by changing provider or transferring your Help to Buy ISA to a LISA.

For full info on how to do this -- or even if you just need reminding of how Help to Buy ISAs work -- see savings/help-to-buy-ISA.

Wondering which wins out of a Help to Buy ISA and a LISA? See savings/help-to-buy-ISA/#tip13 for more info.

Q. What are shared ownership schemes?

A. You may be eligible for one of the many shared ownership schemes available across the country. As the name suggests, here you're not buying the whole property outright, just a cut of it.

They are usually run by housing associations, and borrowers typically buy a share of a property worth between 25% and 75%, and pay rent on the rest. Later on, if you can afford it, you've a right to increase your share of the property.

There are no simple rules for who will qualify for this scheme. The housing association will decide, based on how much you earn (?80,000 or less outside London, or ?90,000 in London) and the cost of local housing. Earn too much and you won't qualify, earn too little and you won't either. It can even take into account whether you have children or not -- some areas prioritise families.

There is also additional help for `key workers' such as nurses, teachers, military personnel and police officers, although the eligibility criteria varies according to local priorities.



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These are usually offered by local authorities. When selling, be warned that the housing association will have a say where it still owns a share.

If you're considering it, it's a very different type of deal to the mortgages in this guide, and you will need a specialist mortgage, which will be harder to find. Read more at sharedownership and .uk/affordable-home-ownership-schemes, or contact your local authority and/or housing association.

Q. What about the Help to Buy equity loan?

Help to Buy equity loans are an increasingly popular means of getting on to the housing ladder, with more than 236,000 used since the scheme's inception in 2013.

By using an equity loan, you'd be restricted to buying a new-build property, and there'll also be a house price cap depending on where you live.

With an equity loan, the Government lends you up to 20% of a property's value, something which beefs up your deposit and gives you access to cheaper mortgage rates.

The scheme is aimed at people struggling to save for a mortgage, but you'll need at least a 5% deposit to be able to apply. In the case of a ?200,000 property, you could put down a ?10,000 (5%) deposit, take out a ?40,000 (20%) equity loan, and only need to apply for a ?150,000 (75% mortgage).

But be wary -- while an equity loan might mean you'll get a better mortgage rate initially, the equity loan can end up costing you ?1,000s or even ?10,000s more than what you first borrowed.

For more on how the scheme works, and the potential risks, see mortgages/help-to-buy-equity-loans.

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Q. Any other schemes I should look at if I'm struggling to afford a mortgage?

A. There are, but be careful. Getting a mortgage isn't the be-all and end-all. Ensure your finances are suitable. Don't push it too hard.

There are a few further options available but they can be costlier, and it might be harder to get them in light of coronavirus...

Asking family/parents to act as a guarantor

Many first-time buyers rely on help from mum and dad for their deposit. But parents can be much more directly involved. There are a number of mortgages that incorporate parental finances in one way or another. It's a big topic, so if you need this it's worth talking it through with a broker (see chapter 7).

A number of deals will take parental income into account as well as the child's income, as long as the parents can still cover their own mortgage -- this can help you get a bigger mortgage as it's worked out on a higher income. To avoid tax complications the parents are not listed as owners, but guarantee to cover the mortgage if you can't so they are liable for repayments and arrears.

It's also possible (although much rarer these days) for parents to guarantee just the extra portion of the mortgage above the amount covered by their child's income, or to undertake to cover repayments should the child default.

Parents can also help their children without surrendering their cash. There are some offset mortgages (more about these later) which will use parental savings to reduce the child's mortgage, while still allowing them access to the cash if necessary.

Mates' mortgages

There's a growing trend for friends (or siblings) to club together to buy a property -- some lenders allow up to four people to get a joint mortgage.

Clearly, the pooled salaries increase your buying power, but remember you'll need a bigger property, which could take you into a higher price and stamp duty bracket. See stampduty.



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CHAPTER 2

You need to consider what would happen if one of you lost your job or wanted to sell your share. It's not something to be done lightly. Once you take on a mortgage together you're financially linked -- your friend's credit rating will now affect yours.

Don't do this without sorting a legal contract between you covering all the `what if' possibilities and what your rights are. Too many people arrange it thinking "we're good friends" or even "we're lovers" and don't think about what could go wrong, causing a nightmare.

It's better to have the discussions when you're still friendly than to be fighting later if it all goes wrong. A shared debt, especially a large one such as a mortgage, ties you down almost as much as marriage does.

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