It pays to save when it comes to your first home
HOME ADVICE With Alex Neill of Which? The more you can put down up front, the lower your interest rate when you sign that mortgage
First time home buyers are saving for up to ten years for the deposit that’s essential for getting that first step onto the housing ladder. This research, from Which? Mortgage Advisers, also shows more than two out of three save for at least two years while 37 per cent were helped financially by their family – usually parents.
Some lenders insist on 25 per cent – virtually all demand at least five per cent.
But whether it’s your first purchase or not, there’s a simple rule – the bigger your deposit, the lower the interest rate.
Here’s how it works with one major high street lender on its four year fixed rates.
If you’ve got 40 per cent of the purchase price, you could pay 1.79 per cent. If you have 30 per cent, it goes up to 2.04 per cent, with a 15 per cent deposit, you pay 2.29 per cent, save up a tenth of the price and you’ll pay 2.55 per cent, while someone with a minimum five per cent has to pay 2.79 per cent.
Over the four years, you would pay roughly £ 4,000 extra in interest on the minimum deposit with this bank rather than the 40 per cent for each £ 100,000 borrowed. That’s £ 1,000 a year or about £ 20 a week.
There are literally thousands of mortgages from hundreds of lenders – ranging from high street names to firms only specialist financial advisers have ever heard of. And while the numbers vary, the principle that the more you save, the less you pay holds true.
But there’s a second hurdle to jump before you can get that money.
Home loan companies have become fussier over who they will lend to. This sounds tough but it protects you as well as them – they don’t want to offer money to someone they think they might have to repossess.
These mortgage lending criteria vary in detail but a typical high street bank will insist on at least three years’ residence in the UK, at least three months in your current job plus at least a year in continuous employment, or three years’ worth of accounts if you are self employed, or evidence that a a series of contract jobs will continue.
They’ll probably be happy with investment income or pensions as long as they’re regular.
All lenders will add your partner’s income to your own – only some will allow you to add friends, but others are fine with close family members.
They’ll also pay close attention to outgoings – credit cards, car loans, other debts, transport charges and childcare.
Some are even said to have asked if you have expensive hair styling!