Podcast: Don’t be afraid of mortgages! Difficult properties to mortgage & first-time buyers tips
Welcome back to a new season!
Welcome back to season 3 of the ESPC Property Show - a podcast for property enthusiasts and home hunters across Edinburgh, the Lothians, Fife and the Scottish Borders.
In this episode, hosts Paul and Megan are joined by two ESPC Mortgages mortgage advisors Paul Demarco and David Lauder to discuss and debunk the mortgage market including how much cash first-time buyers need to buy, what properties are more difficult to mortgage, why overpaying your mortgage is a good idea and the best mortgage term to pick.
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Key Insights
How is the 2024 mortgage market currently?
The current 2024 mortgage market appears to be experiencing heightened activity with a significant number of inquiries and agreement in principles. David notes that there has been a surge in interest since the turn of the year, with many individuals keen to enter the market, possibly driven by New Year's resolutions. While some of these inquiries have not yet translated into actual purchases, there is a mix of both new inquiries and completed transactions.
Regarding mortgage rates, David mentions that they have been slowly decreasing, although there have been recent indications of stabilization with a mix of increases and decreases in rates. However, he emphasizes that the current rates, particularly around 4%, are still favorable for individuals looking to enter the property market.
Paul DeMarco speculates on the future direction of interest rates, suggesting a possibility of decreases in fixed rates dependent on decisions made by the Bank of England governor. The conversation also touches upon upcoming events such as policy committee meetings and potential influences on inflation, indicating a cautious approach given the current economic landscape.
Overall, the tone suggests a dynamic mortgage market with favorable rates and a sense of cautious optimism regarding future trends.
How much cash do first-time buyers need to secure a mortgage?
First-time buyers typically need a minimum deposit of 5% of the purchase price or the home report value, whichever is lower. This means that if a property is valued at £200,000, a first-time buyer would typically need a deposit of at least £10,000 (5% of £200,000).
However, there are some lenders, like Skipton Building Society, who offer 100% mortgages. While this option exists, it's subject to strict terms and conditions and may come with higher interest rates, possibly in the late 5% range.
In addition to the deposit, first-time buyers also need to consider other expenses paid in cash. These include solicitors' costs, which are necessary for the legal aspects of purchasing a property, and stamp duty/Land & Building Transaction Tax (LBTT). LBTT is compulsory for properties priced above £175,000, with a tiered system for higher-priced properties. You can work out how much LBTT is due on a property using our calculator.
Furthermore, first-time buyers should budget for moving costs, including expenses related to hiring a van or professional movers and potentially purchasing new furniture or appliances for their new home.
What are some of the barriers to getting a mortgage?
Property type
Certain property types, such as those located above commercial premises like pubs or takeaways, or those with specific construction materials such as concrete or certain types of cladding, may pose challenges in securing a mortgage. Lenders may have varying preferences and criteria for such properties, which can limit options for potential buyers.
Financial factors
Financial considerations, including low income coupled with a small deposit, significant debt, or high childcare costs, can impact mortgage eligibility. Expenses such as childcare costs, maintenance payments, and school fees may be treated as debts by lenders, affecting a borrower's ability to afford mortgage payments.
Credit history
Both having too much debt and having no credit history can be barriers to obtaining a mortgage. Heavy credit debt can negatively affect a borrower's credit score, while lacking a credit history may raise concerns for lenders, particularly if the borrower has a small deposit or income.
Employment status
Employment status, including factors such as being on a short-term or zero-hour contract, can impact mortgage eligibility. Lenders typically prefer borrowers with stable employment history and income. Self-employed individuals may face additional scrutiny, especially if they have been self-employed for less than two years.
Documentation and address history
Lack of documentation or irregular address history, such as not being registered on the electoral roll, can make it difficult for lenders to assess a borrower's creditworthiness. It's essential for borrowers to maintain accurate and up-to-date records to facilitate the mortgage application process.
Additionally, other factors such as childcare costs, maintenance payments, and school fees can also impact mortgage affordability and eligibility. Childcare costs, in particular, may be treated as debts by lenders, affecting a borrower's debt-to-income ratio. It's crucial for potential buyers to consider all financial obligations when assessing their ability to secure a mortgage.
Ultimately, navigating the mortgage application process requires careful consideration of various factors, including property type, financial status, credit history, employment status, and documentation. Seeking guidance from a qualified mortgage advisor can help individuals overcome these barriers and improve their chances of securing a mortgage.
What is the mortgage process once you have a property offer accepted?
After having your offer accepted on a property, the mortgage process typically involves several steps. First, you engage with your mortgage advisor to discuss your priorities and obtain an agreement in principle. Once you find a property and have a verbal offer accepted, you contact your advisor again. They will provide you with a standard email requesting purchase details, deposit information, home reports, and a list of documents including passports, pay slips, and bank statements.
Your advisor will then search the marketplace for the most suitable mortgage options based on your needs. Once you agree on a mortgage product, you gather the necessary documents, and your advisor submits the application. This entire process usually occurs within the first week after your offer is accepted, provided your case is well-packaged.
Upon submission, if everything is in order, you can expect a mortgage offer from the lender within a couple of weeks. Once you have the mortgage offer, the solicitor takes over to handle all legal matters related to the property purchase, allowing you to proceed with the next steps in the home buying process.
Should you make overpayments to your mortgage?
You should consider making overpayments on your mortgage, as it can bring several benefits. Overpaying on your mortgage helps reduce your outstanding debt faster, leading to a decrease in the total interest you'll pay over the term of the loan. This can result in substantial savings in the long run. Additionally, if you lower your loan-to-value ratio through overpayments, you may qualify for better interest rates when you remortgage, potentially saving even more money. However, it's important to exercise caution and not allocate all your funds to overpayments. It's advisable to maintain a savings cushion for unexpected expenses related to homeownership. Additionally, some lenders offer offset facilities where you can link your savings account to your mortgage, reducing the interest you pay on the loan. Overall, making overpayments can be a prudent financial strategy to build equity in your home and save on interest costs over time.
What length of mortgage term should you pick?
When choosing the length of your mortgage term, it's essential to consider various factors, including your stage of life, affordability, and retirement plans.
Ultimately, the decision on the mortgage term should align with your financial goals, income stability, and ability to manage repayments responsibly. It's essential to weigh the benefits of shorter terms, such as saving on interest, against the potential higher monthly payments and vice versa. Discipline in managing finances and regular review of your mortgage terms can help optimize your repayment strategy over time.
Advice for remortgaging in 2024
Don’t panic! Understand that interest rates have risen since August 2022, but it's essential not to panic. Despite the increase, there are still options available, and rushing into decisions may not be beneficial. If the current payments are becoming unmanageable, consider extending the term of your mortgage. Increasing the term, for example, from 20 years to 25 years, can reduce monthly payments to a more manageable level. Consult with mortgage advisors or financial experts who can provide personalized advice tailored to your specific situation. They can help you navigate the complexities of remortgaging and make informed decisions.
The initial consultation with an ESPC Mortgages adviser is free and without obligation. Thereafter, ESPC Mortgages charges for mortgage advice are usually £395 (£345 for first-time buyers). YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOANS SECURED AGAINST IT.
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