First Time Buyers face a perfect storm right now of mortgage rates at 10-year highs and house prices, relative to earnings, at a level not seen since Queen Victoria was on the throne. So, what can prospective home buyers do to make their mortgage more affordable?
Buying a home for the first time is now, arguably, harder than it has been for nearly 150 years. The average home in the UK now costs nearly nine times the average salary. You have to go all the way back to the mid-1870s to find a comparable earnings/house price ratio. A time when only the rich owned property and the vast majority of ordinary people rented their homes.
Today, First Time Buyers are having to borrow more and spend longer repaying their mortgage in order to secure their first home, making the total cost of borrowing for new homeowners arguably more expensive than it has ever been before. Here are five strategies a first-time homebuyer in the UK could use to secure a lower mortgage interest rate and reduce their mortgage outgoings:
1. Improve your credit score
Lenders assess creditworthiness based on your credit score. A higher score indicates a lower risk, making you eligible for better rates. You can improve your score and help secure a better mortgage deal by paying off existing debts where possible, making sure you are up-to-date with any repayments and avoiding taking out new credit in the months leading up to your mortgage application.
There are three credit reference agencies – Equifax, Experian and TransUnion. They will all hold credit information on you and you can check your records for free. It’s important to do this not only to check your score but also to spot and correct any errors in your records that could affect your creditworthiness.
2. Increase the size of your deposit
Although it is possible to get a 100% (i.e. deposit-free) mortgage, they are quite rare and lenders do tend to prefer borrowers to put down a deposit. And the bigger the deposit, the better the mortgage deal you can secure. In fact, the difference between the best rates offered for a 5% deposit compared to a 40% deposit can be around 1% or so, which can make quite a difference to your repayments.
The average deposit being put down by First Time Buyers in 2022-23 was £53,414 according to data collected by USwitch. Finding a larger deposit is of course easier said than done. There are specialist savings products like Lifetime ISAs that can be used for this purpose. Increasingly, people looking to buy their first home are helped by parents or grandparents releasing equity from their homes to fund the deposit.
3. Consider shared ownership
Shared ownership can be thought of as being somewhere between renting and full house ownership. It’s a way of reducing your mortgage costs and making house purchase more affordable because you are only buying part of the home, typically between 25% and 75%.
Shared Ownership Schemes are usually run by housing associations with the association owning the remaining share of the property and are aimed particularly at First Time Buyers. You will pay rent to the housing association based on this share alongside your mortgage repayment on the share you own. You will also be allowed to increase your share of the property, up to 100%, in a process called ‘staircasing’.
4. Choose a fixed rate mortgage
Fixed rate mortgages are very popular with people who want certainty over their mortgage repayments. While two, three and five year fixed rates are very common, increasingly it is possible to get even longer terms. Terms of 10 years are now widely available and there is even a lender that offers fixed rates for the entire term of your mortgage.
The longer the fixed rate term, the lower the rate. However, you will need to take into account that if mortgage rates decrease in the future, you may be locked into a much higher rate of interest and unable to switch to a better deal without incurring early repayment charges.
5. Use an expert mortgage adviser
While all of the above points can help you save money on your mortgage repayments, nothing beats consulting with an expert adviser, like Advice Guru. Mortgage advisers can not only source and recommend the best value deal and help you navigate the application process, they can also use their close contacts with lenders and their underwriters to help fight your corner and persuade lenders to accept an application that might have been rejected if you had applied directly.
If you need help securing your first mortgage and a step on to the property ladder, get in touch with us today.
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